Appendix A: Analysis and Assessment of Individual Measure

1.6 ecoENERGY Retrofit Initiative

Table 9: Summary of Analysis for ecoENERGY Retrofit Initiative

Summary of the Initiative and Emissions Projections

The ecoENERGY Retrofit Initiative offers subsidies to owners of homes and small- to medium-sized businesses upon completion of retrofits that verifiably improve the energy-efficiency rating of the building. The Plan projects reductions resulting from this program of 440 kt in 2008 up to 1 Mt in 2012, or roughly 250 kt per cumulative-program-year of emissions savings. These estimates have increased from those published in the 2007 and 2008 Plans. The additional emissions reductions are expected due to an allocation of additional funds under the 2009 federal budget, but the estimation techniques rely on the same methodology.

Analysis

Reductions are calculated based on differences between the forecasted energy consumption with and without all retrofits financed through the program. According to information provided by NRCan for the purposes of this evaluation, forecast energy savings are based on realized energy audits from past programs that are then converted to emissions savings using emissions factors.

Free-ridership is the key source of concern with the forecasted effects of this policy. The retrofit grants explicitly fund any Canadian who chooses to undertake a qualifying renovation and who is willing to pay for the initial and final energy audits. This decision would be made on the basis of whether the expected subsidy payment is large enough to justify the cost and inconvenience of the audit. NRCan has stated that "when designing its ecoENERGY programs, NRCan addressed free ridership by setting hurdle rates for program participants and requiring significant investment on the part of the individual. These program requirements substantially reduce the potential for free ridership."[44] This condition actually increases the probability of free-ridership. If a program only pays for a very small part of a home renovation, it is unlikely that the subsidy drives the renovation, but rather it rewards the decision after the fact. If a homeowner has to undertake a $15,000 renovation to obtain a $1000 grant, it is unlikely that all renovations are the direct result of the grant program.

The way in which emissions reductions are calculated for the ecoENERGY Retrofit Initiative highlights the issue of free-ridership. While a substantial portion of the retrofit is financed by the homeowner, the energy savings are calculated on the basis of energy audits performed before and after all renovations are complete. While the grant only provides a portion of the funding, all of the savings are attributed to the grant — effectively a leveraged buyout of the emissions reductions. The implicit assumption is that none of the improvements would have happened absent the incentive program. While not ideal, a potential way to improve these estimates would be to look at the total cost of all renovations undertaken in order to qualify for grants, and pro-rate the emissions reductions to account only for the proportion of the total renovation (or the proportion of specific components) paid for by the grant. It will be difficult to come up with a measure of the degree of free-ridership directly, as people who have received a grant cheque are unlikely to answer that it had no role in them undertaking the renovation for fear of clawbacks.[45]

In previous KPIA responses, the NRTEE has cited evidence that the level of free-ridership may lie between 40 and 80% of subsidy recipients. To avoid double-counting of emissions reductions that would have occurred absent the program, an adjustment factor reflecting the amount of the retrofits projected to be incremental should be added to the estimates. For example, in estimates of the contribution of the ecoAUTO subsidies, Transport Canada accounts for the free-rider problem by assuming that 60% of forecast increases in efficient vehicle sales cannot be directly attributed to the rebates. Similarly, a survey of recipients of the U.S. Conservation Tax Credit, a subsidy designed to encourage homeowners to invest in energy efficiency, cited in previous NRTEE responses indicated that as many as 90% would have undertaken home renovations with or without the tax incentive.

An issue that was also raised in the 2007 NRTEE Response is the fact that retrofit subsidies reward efficiency, not diminished total energy consumption. In fact, they may provide an incentive to increase the intensity of use or the total number of certain energy durables (through the rebound effect). NRCan documentation states that these effects are generally small, which is true — but they are not zero either. The 2007 NRTEE Response highlighted a study by Dubin, Miedema, and Chandran (1986) that showed that, for a similar program, actual energy savings from the installation of new cooling technologies would be as much as 13% below engineering estimates on average. For heating, energy savings 8 —12% below engineering estimates were found.

Combining these two effects will likely mean that emissions reductions reported here will be overestimated. As NRCan relies extensively on its previous program evidence, it bears mentioning again (as in the NRTEE 2007 and 2008 responses) that for a previous similar NRCan program, predicted emissions savings resulting from renovations was 4 tonnes, while the average realized emissions savings was found to be 1.4 tonnes per household, or less than half of the predicted savings at the time.[46]

An issue not addressed in the 2009 Plan is the introduction in the 2009 federal budget of the Home Renovation Tax Credit. Interestingly, while this program provides an incentive for homeowners to undertake renovations (some of which will likely be incremental to business as usual), some of these renovations will likely include energy efficiency improvements that would not have occurred otherwise. The Tax Credit combined with the ecoENERGY for Retrofits and some matching provincial and municipal programs may add a compelling incentive for families to improve the energy efficiency and reduce the energy consumption of their dwellings. Both the Tax Credit and any interactions with the ecoENERGY for Retrofits and other programs should have been assessed.

Conclusions

The estimates in the 2009 Plan claim all of the energy savings from all retrofits receiving financing. The implicit assumption is that all of these retrofits occur because of the subsidy — that there are no free riders. Further, the estimates in the Plan directly translate forecasted energy-efficiency gains into emissions reductions, without explicitly accounting for rebound effects. The resulting emissions reductions will therefore likely be overestimated.

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44 Canada, 2009a.

45 Importantly, in the ecoENERGY for Renewable Power program, there are significant efforts applied at the design stage to discourage free-ridership. There are no such clawbacks or limitations on funding from the ecoENERGY for Retrofits Initiative — anyone performing a qualifying renovation is eligible to receive the subsidy.