Insights Brief: Energy Utility Obligations and Auctions

Energy utility obligations and auctions for energy efficiency are becoming an essential part of the policy maker’s toolkit. Both policies are market-based instruments that set a policy framework specifying the outcome to be delivered, without prescribing the mechanisms and measures to be used. This enables the discovery of the most cost-effective ways to achieve policy makers’ goals. Typically, they complement other energy efficiency policies, for example, by incentivising the take-up of measures that go beyond the performance levels demanded by minimum energy performance standards and building codes. Which instrument to choose: obligation or auction? Obligations require energy companies to achieve energy savings while auctions invite bids to deliver energy savings in return for funding. Both policy types incentivise the take-up of the most cost-effective measures and have been shown to be able to drive savings across different sectors and technologies. Utility obligations are funded by energy companies who pass on the costs to energy consumers through energy prices. Auctions have been funded through levies on energy bills, general taxation revenues and ring-fenced carbon market revenues. Good policy design is essential. Both obligations and auctions give freedom to the private sector to innovate and discover the technologies and delivery routes that work best in the market, putting a premium on the design of sound market regulation to ensure that policy objectives are met.