WAKING THE SLEEPING GIANT

Transcription

1 WAKING THE SLEEPING GIANT NEXT GENERATION POLICY INSTRUMENTS FOR RENEWABLE HEATING & COOLING IN COMMERCIAL BUILDINGS (RES-H-NEXT) Prepared for the IEA Implementing Agreement for Renewable Energy Technology Deployment (IEA-RETD) February 2015

2 ABOUT IEA-RETD The International Energy Agency s Implementing Agreement for Renewable Energy Technology Deployment (IEA-RETD) provides a platform for enhancing international cooperation on policies, measures and market instruments to accelerate the global deployment of renewable energy technologies. IEA-RETD aims to empower policy makers and energy market actors to make informed decisions by: (1) providing innovative policy options; (2) disseminating best practices related to policy measures and market instruments to increase deployment of renewable energy, and (3) increasing awareness of the short-, mediumand long-term impacts of renewable energy action and inaction. For further information please visit: or contact info@iea-retd.org. IEA-RETD is part of the IEA Energy Technology Network. DISCLAIMER The IEA-RETD, formally known as the Implementing Agreement for Renewable Energy Technology Deployment, functions within a Framework created by the International Energy Agency (IEA). Views, findings and publications of IEA-RETD do not necessarily represent the views or policies of the IEA Secretariat or of its individual Member Countries. COPYRIGHT This publication should be cited as: IEA-RETD (2015), Waking the Sleeping Giant Next Generation Policy Instruments for Renewable Heating and Cooling in Commercial Buildings (RES-H-NEXT), [Veilleux, N., Rickerson, W. et al.; Meister Consultants Group], IEA Implementing Agreement for Renewable Energy Technology Deployment (IEA-RETD), Utrecht, Copyright IEA-RETD 2015 (Stichting Foundation Renewable Energy Technology Deployment) P a g e ii IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.

3 ACKNOWLEDGEMENTS The authors would like to thank the following IEA-RETD RES-H-NEXT Project Steering Group (PSG) members for their guidance and support throughout the project: Joe Sousek, UK Department of Energy and Climate Change, PSG Chair Kristy Revell, UK Department of Energy and Climate Change Oliver Sutton, UK Department of Energy and Climate Change Adam Brown, International Energy Agency Kristian Petrick, Operating Agent Team, IEA-RETD David de Jager, Operating Agent, IEA-RETD LEAD AUTHORS Neil Veilleux, Meister Consultants Group Wilson Rickerson, Meister Consultants Group CONTRIBUTING AUTHORS Andy Belden, Meister Consultants Group Gregor Hintler, Meister Consultants Group Chad Laurent, Meister Consultants Group Caroline Palmer, Meister Consultants Group Lisa Young, Meister Consultants Group STRATEGIC ADVISORS Veit Bürger, Oeko-Institut e.v. (Institute for Applied Ecology) Christiane Egger, OÖ Energiesparverband (Energy Agency for Upper Austria) Les Nelson, International Association of Plumbing and Mechanical Officials (IAPMO) This report shall be cited as follows: IEA-RETD (2015), Waking the sleeping giant - Next generation policy instruments for renewable heating and cooling in the commercial sector (RES-H-NEXT), [Veilleux, N., Rickerson, W. et al.; Meister Consultants Group], IEA Implementing Agreement for Renewable Energy Technology Deployment (IEA-RETD), Utrecht, P a g e iii IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.

4 EXECUTIVE SUMMARY Is a renewable transformation of heating and cooling in the commercial sector possible? Yes, but it requires the implementation of new and innovative (next generation) policies. Renewable heating and cooling (RES-H/C) is the sleeping giant of renewable energy. Across the globe, it is estimated that thermal energy comprises approximately 50% of total global final energy demand (across the residential, commercial and industrial sectors). The majority of heat demand in buildings over three quarters is served by fossil fuels or traditional biomass. Modern (high efficiency, low emission) renewables are estimated to serve only 10% of thermal energy demand. This report focuses on the commercial building sector, a significant user of thermal energy, especially in OECD countries. A number of country-level analyses make clear that the commercial building sector is a significant source of carbon dioxide (CO 2) emissions (e.g. 18% in the UK), due to the heating and cooling load of buildings. It is furthermore expected that commercial building sector and energy use will increase in the future, with the IEA estimating that the floor area of commercial buildings will almost triple by 2050 and the World Energy Outlook estimating that commercial building energy demand will be the fastest growing energy sector. Addressing heating and cooling in the commercial sector will be necessary to achieve a renewable energy transformation, and many analyses estimate that it will not be possible to achieve long-term climate, security, and energy goals without increasing the use of RES-H/C. Despite its importance, there has historically been a lack of innovation and commitment to RES-H/C policy. RES-H/C technologies, especially within the commercial sector, receive a disproportionally small share of policy support (i.e. relative to renewable electricity technologies). Only a few jurisdictions primarily located in Europe have taken proactive steps to encourage widespread RES-H/C market development. As a result, the RES-H/C market in the commercial building sector has been slow to develop. This has been true even while the broader renewable energy market has experienced significant growth. What can awaken this sleeping giant? What can policy makers do to accelerate market growth? There is a clear need to develop and implement next generation policies to rouse RES-H/C markets. The figure below (see next page) illustrates next generation policies that could be implemented in jurisdictions across the globe. Next generation policies have the potential to drive market development along the deployment curve, from the early-stage (i.e. inception) to mature (i.e. consolidated) market phases. Some of these policies have been implemented to support RES-H/C (such as mandates) but have been limited in ambition or not sufficiently enforced. Other policies have seen widespread implementation in the energy efficiency (EE) or renewable electricity (RES-E) sectors, but have not been widely adapted for RES-H/C in the commercial sector (e.g. performance based incentives). Many of the next generation policies described here could address market barriers across all building types (i.e. residential and commercial). Section 3 of the report though pays special attention to how RES-H/C market barriers play out in the commercial sector and how next generation policies could address them. P a g e iv IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.

5 This includes, for example, the role of direct incentives and financing programs to address corporate investment and decision-making barriers; the potential for building mandates to address the split incentives between commercial landlords and tenants; or how third-party ownership models could address the lack of RES-H/C training among commercial building managers. In order to drive RES-H/C market development, it is recommended that policymakers: Develop long-term plans and policy commitments. Policymakers should develop long-term plans to guide market development efforts for RES-H/C. This may include the creation of credible and ambitious targets that provide investors a clear idea of market size and opportunity. Especially in early stage markets, clear plans are needed to generate confidence among industry players. As markets progress along the deployment curve, it will be important for policymakers to update plans in order to address new market, technology, emission reduction, and cost developments. Establish RES-H/C mandates for existing buildings or utilities. Strong regulatory requirements such as building or utility mandates can drive widespread adoption of RES-H/C, especially for existing buildings. For building mandates, policymakers can establish a mandate trigger (e.g. sale, lease, or renovation of the building) to overcome market barriers ranging from landlord-tenant challenges to low building refurbishment rates. In early-stage markets, it may be important to mandate RES-H/C in public buildings or new construction in order to demonstrate the viability of RES-H/C technologies to commercial real estate building owners. In take-off and consolidation markets, such mandates could be extended to existing buildings. Both utility and building mandates can be implemented in conjunction with performance based (or other) incentive programs to support compliance. Design and implement performance-based incentives for RES-H/C. Incentives are often necessary in inception and take-off market phases to improve the return on investment of RES-H/C and drive market development. Upfront financial incentives such as rebates have historically supported RES-H/C market growth, though in the future it will likely be necessary to transition to PBIs, especially as policymakers place a higher priority on ensuring that energy production is maximized. In inception markets, it will be important to develop heat metering guidelines, so that useful heat production can be properly measured and rewarded. As markets develop, incentive levels should be revised downward via degression mechanisms. For regions that are served by district heating systems, policymakers have a unique opportunity to create new tariff and regulatory frameworks that could enable policies similar to net metering or feed-in tariffs for heating and cooling. Drive down soft costs for RES-H/C. Policymakers also need to focus on implementing programs to drive down the cost of RES-H/C systems. A significant portion of installation costs for RES-H/C systems are soft costs, which are non-hardware costs such as installation labor, permitting, or customer acquisition costs, among others. In a few jurisdictions, policymakers have already implemented information and awareness campaigns for RES-H/C, but there are opportunities for more focused soft cost programs. Administrative and permitting processes should be streamlined, especially in inception markets. Across all market deployment phases, it is essential to regularly assess the current costs of RES-H/C in order to identify how best to drive down soft costs and/or price incentives. Develop innovative financing and business models. Policymakers should develop enabling policies that support innovative financing. Third-party ownership models, for example, could provide heat as a service to commercial and institutional building owners, thus reducing the hassle and risk associated with RES-H/C. To succeed, however, these models will require lender and contractor outreach and education programs, especially in the inception and takeoff phases. P a g e v IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.

6 Similarly, incentive and other programs to reduce development costs will be important to enable thirdparty owners to be able to effectively deploy RES-H/C at necessary rates of return. As the market develops, policymakers should consider implementing programs that help industry standardize technical requirements and contracting language in order to encourage securitization and bring new capital sources (e.g. institutional investors) to the market. These are all meaningful ways for policymakers to intervene and reduce risk associated with the deployment of new financing and business models. The graph below illustrates general best practices for each policy field that can be applied to any given jurisdictions in one of the three market development phases (i.e. inception, take-off, or consolidation): RES-H/C can also be deployed to support a number of parallel building and energy policy priorities. Policymakers should examine how RES-H/C fits into other energy goals and strategies, from the deployment of district heating networks, to low energy building requirements, or the integration of RES-H/C and heat storage with electric grid management strategies. Section 5 provides an initial exploration of how RES-H/C policies interact with these broader energy priorities. A handful of jurisdictions across the globe have already pioneered the use of some of these next generation RES-H/C policies in commercial buildings. Some of these policies have been widely adopted in the RES-E or EE sectors. Where possible, these experiences are described in case studies and text boxes throughout this report, giving the reader a sense of the opportunities, challenges and needs to implement next generation RES-H/C policies. By assessing the most promising next generation policies, this report shows policymakers how they can take action in the near term and drive greater deployment of RES-H/C in commercial buildings to meet their energy and policy priorities. P a g e vi IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.

7 Table of Contents About IEA-RETD... ii Acknowledgements... iii Executive Summary...iv 1 Introduction Report Structure Methodology Overview of Next Generation Policies Definition of RES-H/C Technologies Definition of Commercial & Institutional Sector RES-H/C Deployment Status across IEA-RETD Countries Economic & Technical Country conditions Climatic Conditions The Status of Commercial BUILDING STOCK Regional District Heating Infrastructure Conventional Heating & Cooling Sources & Costs Summary: Country Conditions & Key Considerations for Policymakers Cost Effectiveness Assessment RES-H/C Barriers & Opportunities in the Commercial Sector Barriers to RES-H/C in the Commerical Sector Lack of Awareness about RES-H/C Technology Inadequate Expected Investment Returns & Capital Constraints Ownership Priorities & Decision Making Barriers Split Incentives Low Refurbishment Rates Insufficient Local Contractor Base Lack of Confidence in System Performance & Fuel Availability Operations Staff Training Requirements Opportunities for Integrating RES-H/C into Comprehensive Energy Plans RES-H/C Next Generation Policies Overview of Next Generation Policies RES-H/C Plans, Targets & Mandates P a g e vii IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.

8 4.2.1 Background for RES-H/C Plans, Targets & Mandates Background for RES-H/C Mandates Benefits of RES-H/C Plans, Targets & Mandates Policy Options for Building Mandates Policy Options for Utility Mandates Cost Effectiveness Summary for Policymakers RES-H/C Performance Based Incentives Background Benefits of RES-H/C Performance based Incentives Policy Options for RES-H/C Performance Based Incentives Cost Effectiveness Summary for Policymakers Soft Cost Reductions for RES-H/C Background Benefits of Soft Cost Reduction Policies for RES-H/C Policy Options for Soft Cost Reduction Initiatives Cost Effectiveness Summary for Policymakers Innovative Financing and Business Models for RES-H/C Background Risk and Economic Considerations for Third-Party Ownership Benefits of Innovative Financing for RES-H/C Policy Options to Support Third-party Financing Cost Effectiveness Summary for Policymakers Next Generation Policy Approaches RES-H/C & integrated energy planning Importance of Integrated Energy Planning RES-H/C & Low Energy Buildings RES-H/C & District Energy RES-H/C & Thermal Storage for Electric Grid Management Conclusion P a g e viii IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.

9 Appendix A Appendix B References P a g e ix IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.

10 1 INTRODUCTION The heating sector is the largest consumer of energy across the globe. As illustrated in Figure 1 below, it is estimated that thermal energy use comprises approximately 50% of total global final energy demand (across the residential, commercial and industrial sectors). However, the majority of heat demand in buildings over three quarters is served by fossil fuels or traditional biomass. 1 Modern (high efficiency, low emission) renewables are estimated to serve only 10% of thermal energy demand in buildings. exajoule (EJ) Global Final Energy Use (FEH) Other, 9 Industry, 78.8 Buildings, 83.7 Es mated % of Final Energy Heat (FEH) 100% 80% 60% 40% 20% Hea ng Fuel Use in Buildings other, 1% modern biomass, 10% tradi onal biomass, 33% coal, 7% oil, 16% natural gas, 33% 0 Electricity Transport Hea ng 0% Buildings Hea ng (83.7 EJ) Figure 1. Estimated Global Final Energy Use and Heating Fuel Use in Buildings (Adapted from IEA, 2014) Despite the significant opportunity for renewable heating and cooling, the RES-H/C market is relatively small and slow-growing, due in large part to the fact that RES-H/C technologies receive a disproportionally small share of policy support, especially when compared to renewable electricity technologies (Bürger et al., 2008; IEA, 2014; Rickerson et al., 2009). Only a few countries primarily located in Europe have taken proactive steps to encourage widespread RES-H/C market development. In fact, among global policymakers and industry experts, there is limited awareness of the development potential for RES-H/C. In 2013, the Renewable Energy Policy Network for the 21 st Century (REN21) evaluated renewable energy projections from 50 recently published scenarios and interviewed 170 leading experts to assess the credible possibilities for renewable heat, electricity, and transport (see Table 1 below). There was strong expert agreement that high shares of renewable electricity (RES-E) could be attained with relative ease. In contrast, RES-H/C was considered much more difficult to attain in large shares. REN21 concluded that although RES-H/C technologies have a track record of providing reliable energy, there is not widespread understanding among policymakers and experts regarding the need for, or policies necessary to support, market growth (REN21, 2013). 1 Traditional biomass is associated with deforestation and high levels of pollution. It is generally considered that it should be reduced through the deployment of modern renewables, including high efficiency, low emission biomass thermal, solar thermal, advanced heat pumps, or other renewable heating technologies. P a g e 1 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.

11 Table 1. Sectoral Shares of Renewable Energy in Recent Global Scenarios (Source: REN21, 2013). Scenario By Year Electricity Heat Transport By ExxonMobil Outlook for Energy: A View to 2040 (2012) % BP Energy Outlook 2030 (2012) % -- 7% IEA World Energy Outlook (2012) New Policies % 14% 6% IEA World Energy Outlook (2012) % 19% 14% Greenpeace (2012) Energy [R]evolution % 51% 17% By 2050 IEA Energy Technology Perspectives (2012) 2DS % -- 39% GEA Global Energy Assessment (2012) % -- 30% IEA Energy Technology Perspectives (2012) 2DS High Renewables % Greenpeace (2012) Energy [R]evolution % 91% 72% WWF (2011) Ecofys Energy Scenario % 85% 100% Notes: Transport shares for IEA WEO, IEA ETP, and BP are only for biofuels; transport share for Greenpeace includes electric vehicles; transport share for WWF is entirely biofuels. Heat share for WWF is only industry and buildings. Electricity share for BP is estimated from graphics. Electricity share for GEA is based on the central Efficiency case. Despite the lack of RES-H/C market momentum, REN21 highlights that there are a number of experts who foresee a need for a cascade of new policies for RES-H/C in order to meet a wide variety of country goals (see Text Box 1 below). Similarly, a number of recent studies conclude that it will be challenging, if not impossible, to achieve country climate, energy, and economic development goals without building local RES- H/C markets (Beerepoot & Marmion, 2012; Brown & Müller, 2011; Bürger et al., 2008; Eisentraut & Brown, 2014). To scale up RES-H/C markets across the globe, there are clear challenges that need to be addressed. There is consensus that it will be difficult for RES-H/C to reach shares higher than 25% to 30% without major transformations in the residential and commercial building and energy sector (REN21, 2013). As described in Section 3.1, the RES-H/C industry faces a number of persistent barriers to development in the commercial sector. These challenges will require an integrated approach to energy planning and the deployment of next generation policies for RES-H/C. This report seeks to build on experience with RES-H/C policy to date and identify next generation policies, focusing in particular on the existing commercial building stock. 2 The next generation policies described in this report (i) are new and innovative for the RES-H/C sector, (ii) address one or more market barrier, and (iii) could enable RES-H/C markets to achieve large-scale, cost-effective, mainstream deployment over the next several decade. 2 Although the focus of this report is on the commercial sector, many of the next generation policies and programs suggested could be adapted across sectors, including residential, industrial, or other sectors. P a g e 2 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.

12 Text Box 1. RES-H/C and Country Policy Goals RES-H/C can help policymakers achieve a number of country goals. These may include the following: Greenhouse gas reductions. Policymakers across the globe are discussing the potential for, and impacts of. decarbonisation policies on their jurisdictions. Heat accounts for more than 50% of global final energy consumption, and one-third of global energy-related carbon dioxide (CO2) emissions (or around 10 gigatonnes of CO2) (Eisentraut & Brown, 2014). This has significant implications for RES-H/C, which is often characterized as the missing piece of carbon planning (Rickerson et al., 2009). Climate adaptation. RES-H/C technologies can provide both climate mitigation and adaptation solutions. Heat deaths are projected to increase significantly under climate change. It will be essential to develop RES-H/C policies that support building owners as they upgrade infrastructure to adapt to the changing environment, including a growing need for efficient cooling systems in commercial buildings. Energy security. Recent events in Ukraine and Russia have highlighted energy security issues related to natural gas. Maintaining reliable access to natural gas, oil, or other fossil fuel sources for heating remains a significant concern due to risks related to energy market price volatility, geopolitical security, and economic growth impacts. There is an opportunity to manage these risks by assessing and planning for RES-H/C technology deployment within a security paradigm rather than just an energy paradigm. Energy security concerns will continue to drive the need for domestic energy resources such as RES-H/C as an alternative to imported natural gas and oil. Economic development. Economic development is a consistent objective of renewable energy policy. Numerous studies have concluded that RES-H/C technologies are among the most costeffective renewable energy options for reducing fossil fuel dependency and GHG emissions (Langniss et al., 2007). RES-H/C presents opportunities for expanding local industries around innovative technology research, development, and manufacturing, thereby creating jobs and wider economic benefits. 1.1 REPORT STRUCTURE This report is structured as follows: Section 2 describes the methodology used to conduct this assessment. This includes the approach to developing next generation RES-H/C policies in the commercial sector, an overview of the current status of RES-H/C market deployment in IEA-RETD countries, and a review of the economic and technical conditions that may influence RES-H/C market development. Section 2 also describes the approach used to conduct a preliminary assessment of the cost effectiveness of next generation policies. Section 3 summarizes the market barriers that have limited wider adoption of RES-H/C technologies in the commercial sector. It also describes opportunities for policymakers to integrate RES-H/C into comprehensive energy planning processes. P a g e 3 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.

13 Section 4 describes next generation policies that can enable deployment of RES-H/C technologies, focusing on policies and practices that can be applied to new and existing buildings in the commercial sector across a range of jurisdictions. Section 5 describes key issues policymakers may want to consider with regard to long-term RES-H/C energy planning and how RES-H/C policies may fit into a country s broader energy strategy. Section 5 also takes a closer look at the potential interaction of of RES-H/C market scale-up with other emerging energy trends. P a g e 4 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.

14 2 METHODOLOGY 2.1 OVERVIEW OF NEXT GENERATION POLICIES Next generation policies for RES-H/C are defined as policies or initiatives that: Are new and innovative in the RES-H/C sector, Address one or more market barrier, and Could enable RES-H/C markets to achieve large-scale, cost-effective, mainstream deployment over the next several decades. To identify potential next generation policies, a wide cross section of RES-H/C market development policies and studies from across the globe were reviewed. This included reviews of existing policies in leading RES-H/C jurisdictions such as the State of Upper Austria, Denmark, and Cyprus; policy development programs to improve RES-H/C penetration in European Member States (i.e. the RES-H Policy project 3 ); policies and programs implemented in Mediterranean countries such as Israel or Tunisia; and initiatives in new or emerging markets such as the Commonwealth of Massachusetts in the US or the United Kingdom. It is worth noting that there is not a standard procedure to classify or categorize renewable energy policy instruments. A variety of approaches exist depending upon the goals of the analysis and criteria considered (Bürger et al., 2008). For the purposes of this analysis, global policy practices were categorized using the framework summarized in Table 2. Table 2. Overview of RES-H/C policies Policy Category New incentive mechanisms for RES- H/C Innovative financing programs Description and overview for RES-H/C Incentive policies encompass both upfront incentives (e.g. grants, rebates) as well as performance based incentives (PBIs). Jurisdictions like Germany or Upper Austria, which have a long track record of incentive support for RES-H/C, have focused almost exclusively on capacitybased incentives such as grants or rebates. PBIs are rare in the RES-H/C sector, with only a handful of countries known to have implemented them (Beerepoot & Marmion, 2012). The development and implementation of PBIs for RES-H/C are discussed in Section 4.3. Financing programs may include low-interest loan programs (e.g. soft loans) as well as turnkey financing (e.g. third-party ownership models). Government support for RES-H/C financing programs, especially in Europe, has historically focused on development of soft loan programs. Policy support to encourage turnkey financing are far less common in the commercial RES-H/C sector. These are discussed in Section The RES-H Policy project was a multimillion dollar policy development program designed to improve RES-H/C penetration in European Member States in support of implementation of the EU Renewables Directive 2009/28/EC. P a g e 5 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.

15 Policy Category Integrated product and workforce standards for RES- H/C RES-H/ regulations or mandates RES-H/C system design standards or guidelines Soft cost initiatives for RES-H/C Cap and trade, carbon taxes, and other regulatory approaches Description and overview for RES-H/C A number of different product, industry and workforce standards or certifications govern the quality of RES-H/C technologies and markets. The competitive strength of the RES-H/C industry, especially in Europe, relies upon the high quality of its products and workmanship (Sanner et al., 2011). However, for many RES-H/C technologies, there is not currently a commonly accepted international framework applicable to govern the certification and accreditation of RES-H/C installers. In addition, there is a diversity of standards that governs the quality of manufactured products across the globe. While potentially worthy of study in the future, an analysis of product and workforce standards were determined to be outside the scope of this project. Though RES-H/C obligations are becoming more common for new buildings, few jurisdictions have strong RES-H/C regulatory requirements for existing buildings. Moreover, it is notable that there are almost no policies structured to specifically promote RES-H/C in the industry and service sectors (Beerepoot & Marmion, 2012). There are a number of next generation building regulatory policies that could be developed to influence adoption of RES-H/C technologies in the commercial sector. These include RES-H/C mandates for utilities and existing buildings and are discussed in Section 4.2. When unfamiliar technologies such as RES-H/C are incorporated into the building stock, it is critical to ensure that system designs are based on proven strategies. This usually requires the development of RES-H/C design standards and/or training for industry. While it is recognized that this is important to the long-term success and widespread utilization of RES-H/C technologies, elaboration of international design standards is outside the scope of this project. There is limited data available on the hard and soft costs of RES-H/C technologies. Hardware costs consist of the mechanical equipment used in the RES-H/C system, while soft (also referred to as business process) costs make up the remaining portion of system cost. With the right data, policy-makers can implement targeted initiatives to drive down soft costs for RES-H/C and increase RES-H/C competitiveness, reduce time and hassle associated with permitting, increase public awareness, and improve market transparency for RES-H/C. Issues and options related to soft cost policies are described in Section 4.4. A variety of other policies have been successfully deployed to support RES-H/C markets, either directly or indirectly, such as carbon taxes or cap and trade. Many of these policies have been responsible for increasing the cost of fossil fuels, and thus improving the cost-effectiveness of RES-H/C technologies. It is uncertain whether these policies alone are likely to achieve the desired impact on RES-H/C market development, however, and their impact on RES-H/C has been assessed as difficult to quantify and may well be negligible (Bürger et al., 2008). After reviewing global policy practices, the next generation policies that could support continued RES-H/C deployment were identified and assessed (see Section 4), with a focus on policies relevant to the commercial sector across a range of jurisdictions. The sections below clarify terms and methodology that were used to conduct this assessment, including RES- H/C technologies (Section 2.1.1) and the definition of the commercial sector (Section 2.1.2). Section 2.2 describes the current state of RES-H/C market deployment in IEA-RETD countries, and Section 2.3 describes country conditions that may influence RES-H/C policy development in IEA-RETD countries. P a g e 6 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.

16 Section 2.4 describes the approach to assess relevant cost-effectiveness considerations across countries for each of the next generation policies reviewed DEFINITION OF RES-H/C TECHNOLOGIES The RES-H/C sector includes technologies that provide a range of heating and cooling services, including domestic hot water, process heat, heat and power, cooking, and space heating and cooling. As defined by IEA- RETD, RES-H/C includes biomass (e.g. wood pellets, chips, etc.), biogas, combined heat and power (CHP), solar thermal, solar PV thermal, high efficiency heat pumps (air and ground-source), as well as a number of waste heat technologies. Figure 3 below provides a summary of the major RES-H/C technologies and applications. RES-H/C technologies have a number of features that are unique relative to EE or RES-E, and which can influence policy design. Custom sizing and installation. Unlike RES-E, RES-H/C is not usually integrated into an energy grid (unless it is part of a district heating network). As a result, RES-H/C systems must be sized and installed to meet on-site heating and cooling demand of local buildings. Because RES-H/C sizing requirements vary by technology, application, and building conditions, commercial-scale RES-H/C installations are complex and may require customized engineering solutions to ensure optimal performance. Variable production profiles and applications. RES-H/C systems have a variety of different production profiles, which may vary based on weather, time, season, and temperature. In addition, heat, unlike electricity, is not a homogenous commodity. It can vary by temperature (i.e. low, medium or high temperature) and application (i.e. domestic hot water, space heating, space cooling, or process heat) (IEA, 2014). Performance characteristics similar to both RES-E and EE. In some cases, RES-H/C technologies (e.g. ground source heat pumps or biomass heating) produce enough energy to remove the need for fossil fuels for building heating and cooling systems and/or can feed into a district heating grid, making them behave like RES-E technologies. In other cases, RES-H/C technologies (e.g. solar water heating) act more like energy efficiency technologies by significantly reducing though not eliminating the need for fossil fuel heating in buildings. In the past, this has created confusion regarding whether RES-H/C technologies should be considered energy efficiency, renewable energy technologies, or a separate category from a policy perspective. As discussed in Section 4, these unique features require policy decisions regarding metering, proper project sizing, building integration requirements, and administrative protocols that may not be necessary for RES-E or EE. P a g e 7 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.

17 INPUT RENEWABLE HEAT TECHNOLOGY/PROCESS OUTPUT SOLAR Solar Solar Solar Non-concentrating collector Low-concentrating collector High-concentrating collector Steam turbine Direct heat Direct heat Direct heat Heat and power Solid and liquid biomass Combustion or gasification Direct heat; Heat and power Solid and liquid biomass Thermal gasification Combustion Direct heat; Heat and power BIOMASS Animal manure, energy crops, sludge Anaerobic digestion Grid injection Combustion nn Natural gas grid Direct heat; Heat and power Grid injection Natural gas grid Food and fiber product residues Landfill disposal Combustion Direct heat; Heat and power Grid injection Natural gas grid Geothermal Direct use Direct heat HEAT PUMPS Geothermal and enhanced geothermal Ambient heat (from air, ground, water), waste heat) Heat exchanger Steam turbine Heat pump Direct heat Heat and power Direct heat Cooling EXCESS HEAT Renewable heat or waste heat Sorption cooling Cooling cooling low temp med temp high temp Figure 3. RES-H/C technologies and applications in the commercial sector (adapted from IEA, 2014) P a g e 8 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.

18 2.1.2 DEFINITION OF COMMERCIAL & INSTITUTIONAL SECTOR To support the policy assessment for the commercial sector, a working definition for the new and existing buildings in the commercial and institutional sector (hereafter referred to as commercial) was also developed. For the purposes of this project, the commercial building sector includes building types used for the principal purposes described in Text Box 2 below. It does not include residential, industrial, manufacturing or domestic facilities. Text Box 2. Defining Commercial Buildings (Source: US EIA, 2003) Commercial buildings encompass a diversity of building types and purposes. This may include: Education includes buildings for academic or technical classroom instruction, such as elementary, middle, or high schools, and classroom buildings on college or university campuses. Food sales include buildings used for retail or wholesale food sales. Food service includes buildings used for the preparation and sale of food and beverages for consumption. Service includes buildings in which some type of service is provided other than the sale of food or retail goods, such as carwashes, gas stations, repair shops, post offices, kennels, or copy shops. Health care includes buildings used as diagnostic and treatment facilities for inpatient care, as well as facilities used for outpatient care (e.g. hospitals and clinics). The latter includes medical offices that use diagnostic equipment. Lodging includes buildings used as accommodation for short- and long-term residents, including hotels, motels, retirement homes, or other residential care. Mercantile / Commercial includes buildings used for the sale and display of goods other than food (e.g. dealerships, galleries, etc.) as well as shopping malls comprised of multiple connected establishments. Office includes buildings used for general, professional, or administrative, bank, government, contractor, or sales offices. Public assembly includes buildings in which people gather for social or recreational activities, including social meeting halls, cinemas, or transportation terminals. Public order and safety includes buildings used for the preservation of law and order or public safety, including police and fire stations, jailhouses, or courthouses. Religious worship includes buildings in which people gather for religious activities including chapels, churches, mosques or synagogues. Warehouse and storage includes buildings used to store goods, manufactured products, merchandise, raw materials, or personal belongings, including non-refrigerated warehouses as well as distribution or shipping centers. 2.2 RES-H/C DEPLOYMENT STATUS ACROSS IEA- RETD COUNTRIES As described in Section 3.1, a number of barriers impede deployment of RES-H/C in the commercial sector. RES-H/C deployment is also affected by the maturity of the market and other country-specific conditions. Accordingly, different policies are required at different phases of market development (Brown & Müller, 2011). P a g e 9 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.

19 IEA has described three distinct market deployment phases for renewable energy technologies (Beerepoot & Marmion, 2012; Brown & Müller, 2011). The inception phase describes when the first examples of technology are deployed under commercial terms. At this stage, the market is immature, technologies are not well established, and the local supply chain is not in place. Financial institutions often perceive investments in the technology as risky. The priority for policymakers is to put in place the legislative framework to catalyze initial investment rounds. The take-off phase describes when the market starts to grow rapidly. By this stage, technology deployment is underway and the national supply chain is in place, even if not fully developed. Financing institutions have increased knowledge of the technology and associated risks. The priority for policy makers is to maintain or accelerate market growth while managing policy costs. The market consolidation phase describes where deployment grows toward saturation. Technologies are well established, the market has grown significantly, supply chains are robust, and finance and public institutions have streamlined their procedures. For RES-H/C, this means that the technologies are close to or fully competitive with fossil fuel alternatives (Brown & Müller, 2011). Using the IEA phase and deployment curve as a model, each IEA-RETD country 4 was evaluated to estimate the approximate level of RES-H/C market penetration. These estimates were derived by reviewing the percentage of RES-H/C technologies providing heating and cooling across all sectors in 2011 as well as each EU country s RES-H/C projections for 2020 as stated in the National Renewable Energy Action Plans (NREAPs). As illustrated in Figure 3, all of the IEA-RETD countries are in either the inception or take-off phase for RES-H/C. A detailed analysis of specific RES-H/C technologies within the commercial sector would reveal much greater variability in the market deployment phases across countries. However, detailed information on the state of RES-H/C in the commercial building sector the particular focus of this study is not readily available from government statistics, as noted by other studies (Eisentraut & Brown, 2014). 4 The IEA-RETD member countries include Canada, Denmark, Japan, France, Germany, Ireland, Norway and the United Kingdom. P a g e 10 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.

20 Figure 3. IEA-RETD countries and the RES-H/C deployment curve 5 As can be seen in Figure 4, Canada, the UK, and Ireland are in the inception phase of deployment. These are countries that have relatively new RES-H/C markets with RES-H/C making up five percent or less of total market share for heating. Germany and France are in the take-off phase of deployment. Currently, Germany s RES-H/C market share is 12% and France is at 17%. RES-H/C technology deployment is widespread and strong national supply chains exist. These countries have projected RES-H/C market shares of 16% and 33% by 2020, respectively under their NREAPs. Denmark and Norway are late-stage take-off markets. These countries have relatively large RES-H/C markets, where RES-H/C technologies serve over 30% of the total heating market. They are projected to have a RES-H/C market that makes up 40% and 43%, respectively, of the heating market by Unable to assess (1) Japan s and (2) Canada s placement at this time due to lack of RES-H/C data, though it appears in both cases that these countries are in the inception phase for RES-H/C. P a g e 11 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.

21 None of the countries assessed were in the consolidation phase (estimated at 50% of market share or above). As stated above, the goal of this project is to explore development of new and innovative policies that could drive large-scale deployment of RES-H/C enabling countries to move along the deployment curve. Next generation policies will help countries in the take-off phase transition into the consolidation phase and countries in the inception phase transition into the take -off phase. 2.3 ECONOMIC & TECHNICAL COUNTRY CONDITIONS The climate, the status of commercial building stock, heat distribution infrastructure, and conventional heating and cooling sources and prices are important country conditions to consider when evaluating RES-H/C policy best practices at the national level. These conditions influence the economics, feasibility, and technical potential of renewable heating and cooling technologies. Each is described below CLIMATIC CONDITIONS Buildings perform differently in cold and hot climates. It is therefore not possible to compare the heating and cooling requirements of northern European countries with the requirements of Australia or Southern India (Laustsen, 2008). As a result, each of the IEA-RETD countries were classified in one of six basic climatic zones based on heating and cooling requirements: (i) cold climate, (ii) heating-based climate, (iii) combined climate, (iv) moderate climate, (v) cooling-based climate and (vi) hot climate. The following figure illustrates at a high level the current status of these climatic conditions in each IEA- RETD country. 6 France and Japan have the warmest climates, and have both heating needs in the winter and cooling needs in the summer. These countries have been classified as combined climate countries. By contrast, Norway and Canada are the countries with the coldest climates, with heating needs nearly all year round, and fall into the cold climate category. Ireland, the UK, Denmark, and Germany, have heating needs in the winter and some cooling needs in the summer. The climates in these countries have been designated as heating-based. Figure 4. Climatic classifications for each IEA-RETD country 7 6 A more detailed analysis would reveal that climatic conditions vary across regions within a given country; however, for the purposes of this report, such a detailed analysis was not deemed necessary. 7 Climate zone classifications presented in this paper (cold climate, heating based climate, and combined climate) were sourced from an IEA information paper on energy efficiency and building codes (Laustsen, 2008). This paper suggests a simplification of the predominant P a g e 12 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.

22 Climate conditions influence the need for specific RES-H/C technologies. For example, heat pumps to provide cooling will likely have increased importance in regions with warmer climates. In regions with colder climates, policymakers can select from a variety of RES-H/C technologies to meet the large heating needs of commercial buildings THE STATUS OF COMMERCIAL BUILDING STOCK RES-H/C deployment potential can be further influenced by the age, condition, and existing heating infrastructure of commercial buildings. For example, buildings that are poorly insulated will require greater energy input to regulate indoor temperatures. Similarly, the fact that many buildings are designed to use and distribute heat from high temperature heating systems often makes them unsuitable for heat pumps or other low-temperature RES-H/C systems without making significant changes to the building infrastructure. While a comprehensive assessment of the interaction of all building conditions on RES-H/C technologies is beyond the scope of this report, policymakers should be cognizant of the following factors when developing RES-H/C policies. Thermal end uses. Possible end uses for RES-H/C may include space heating, space cooling, domestic hot water (DHW), cooking, and process heat. Thermal load profiles in the commercial sector vary across building types, depending upon user habits and sector requirements. As a result, commercial buildings have a wide range of heating and hot water loads compared to the residential sector. Some renewable thermal technologies, like ground source heat pumps, are best suited to serve stable heating, cooling and hot water requirements such those needed for space conditioning in office buildings or education facilities. Biomass pellet systems, on the other hand, are well suited to provide variable heating loads or for combined heat and power (CHP). Solar thermal systems have a variable fuel source (i.e. the sun) and generally require back-up heating systems. Solar thermal is particularly well suited for building with high domestic hot water loads such as hospitals, car washes, or jailhouses. Building heat distribution system. Buildings may be equipped with forced air, steam, or hydronic heat distribution systems to serve thermal end uses. It is important to match RES-H/C technologies to the temperature and distribution systems in the commercial building stock. Forced air systems circulate air through a building through ducts and vents, allowing the same distribution system to either heat or cool a property. Buildings with these heating and cooling distribution systems may be appropriate for biomass furnaces and both air and ground-source heat pumps. Hydronic heating can be subdivided into low and high temperature systems. Low-temperature hydronic distribution systems, such as radiant floor heating, can effectively distribute heat at temperatures e.g. under 49 degrees Celsius (C)). Low-temperature hydronic distribution systems may be best pared with SHW and heat pump technologies. High temperature hydronic heat distribution (e.g. fin-tube baseboard heaters), on the other hand, must achieve much higher water temperatures sometimes exceeding 93 degrees C to effectively heat a building (Siegenthaler, 2013). International Climate Zone classification system, as defined by the American Society of Heating, Refrigerating, and Air-Conditioning Engineers (ASHRAE) in its own Standard 169: Climatic Data for Building Design Standards. P a g e 13 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.

23 Steam heating systems boil and condense water for distribution through building pipes and radiators. For buildings with steam or high temperature hydronic systems, biomass boiler technologies may be most appropriate (Maker, 2004). Building space. Design and installation of thermal systems also depends upon available space at building sites. Some RES-H/C equipment requires considerable space for installation, making available space in basements, utility rooms, or outside storage areas a key consideration in the design and installation. If a building uses a renewable thermal system for primary heating and relies on fossil fuel systems to provide back-up heating on the coldest days then the user must ensure they have adequate space for multiple heating units. When using multiple heating sources, then users will typically require space for hot water accumulators (e.g. tanks) to store energy from the various heat sources. Pellet and chip heating systems require basement or nearby (outside) space for fuel storage and boiler equipment. Ground conditions. The ground and drilling conditions at the building site are of particular importance for GSHPs. Site-specific conditions frequently dictate the most appropriate ground coupling technology choice, and will influence the efficiency and cost of GSHP systems (Veilleux et al., 2012). High bedrock geology typically increases the drilling costs for vertical well GSHP systems. Heat pumps that can instead use groundwater wells as the source of working transfer fluid for the heat pump can have significantly lower the installed costs. Roof conditions. For solar water heating systems, open access to un-shaded roof space is essential. The output of a solar system is proportional to the intensity of sunlight falling on the system. Greater amounts and duration of sunlight increase system performance, though systems can generate energy even on cloudy days. Rooftops must be able to structurally withstand the natural forces imposed on them (e.g. snow, wind, etc.), combined with the weight of the solar thermal system and other rooftop mechanical systems Building efficiency. The energy efficiency and thermal performance of a building can influence the sizing, upfront costs, and operation of RES-H/C systems. Renewable thermal policies should be carefully coordinated with energy efficiency programs in order to develop a whole-building approach. The integrated design of an efficient building shell with a building s heating, ventilation and cooling (HVAC) system is a vital area of focus when developing policy for energy in buildings (Taylor, 2011). Building ownership structure. Commercial property owners are a diverse group with a highly differentiated goals and priorities, and these differences should be taken into account during the policy making process. Owners can be public agencies, non-profits or commercial entities. Commercial entities can be private corporations or publicly traded. Some owners may occupy a property themselves or rent the property to tenants. Furthermore, owners of commercial rental properties may manage those properties themselves or hire third parties to run the day-to-day operations of their facilities. The financial conditions of different owner types can also vary, with some owners having substantial access to capital while others may be unable to make large-scale investments in their buildings due to financial constraints. Different owners may have different views on the desirability of investing in RES-H/C technologies. Some may be willing to take on added costs or risks in order to capture savings and/or promote sustainable energy. Others may not find the potential paybacks compelling or may not be interested in exploring investments that are not core to their day-to-day business.. P a g e 14 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.

24 2.3.3 REGIONAL DISTRICT HEATING INFRASTRUCTURE A key consideration for RES-H/C market development is whether central district energy infrastructure is in place to distribute thermal energy, or whether distributed, customized RES-H/C installations must instead be installed on individual sites. Except for Ireland, all of the IEA-RETD countries have some existing district energy infrastructure. Denmark stands out as a leader in district heating deployment among IEA-RETD nations. District heating serves 35% of non-residential building energy needs on average. In 2008, the share of non-residential buildings heated via district heating networks was as high as 65% (Klima OG Energiministeriet, 2010). Germany leads in terms of gross sales from district heating infrastructure. In 2011, Germany fed over 77,760 GWh of heat into the district heating grid, more than the combined district heating sales in Denmark, France, Norway, and Japan that same year. Based on available data comparisons, Japan leads on district cooling, selling over 3 million MWh in 2011, whereas France sold less than 1 million MWh of district cooling in the same year (EHP, 2011). District heating infrastructure will influence the type of RES-H/C technologies that can be deployed and determines whether distributed generators can feed excess energy into the grid. As discussed in Sections 3.2, 4.3 and 5.1.2, the presence and extent of district energy infrastructure can have significant ramifications on technology deployment and incentive design CONVENTIONAL HEATING & COOLING SOURCES & COSTS It is clear the cost and availability of conventional energy resources is a driver of RES -H/C diffusion. Germany and Denmark, for example, have high conventional energy costs and robust RES -H/C markets. However, commercial decision-making about RES-H/C adoption and technology diffusion patterns are less well understood. Norway and France, for example, have relatively low conventional energy costs, though a number of RES-H/C technologies are also diffusing in these countries. One of the challenges with analyzing technology diffusion is the lack of data about thermal energy use. Tracking thermal energy use across sectors (e.g. residential, commercial, industrial, etc.) and end -uses (e.g. space heating, cooling, hot water, etc.) is difficult, and there is generally not good data available on heating and cooling uses in the commercial sector (Eisentraut & Brown, 2014). Given the lack of data, it is challenging to assess the impact of conventional fuels on RES-H/C markets without conducting indepth national surveys. Nonetheless, it is clear from qualitative analyses that energy prices do have an impact on the cost effectiveness of RES-H/C deployment and is an important consideration for policymakers. While no clear correlations could be gleaned from the data for this report, this assumption is expected to be generally true across countries SUMMARY: COUNTRY CONDITIONS & KEY CONSIDERATIONS FOR POLICYMAKERS The conditions described above will be important factors influencing policymakers decisions to develop and implement RES-H/C policies. Given the diversity of commercial building types, RES-H/C technologies, thermal energy end uses, conventional energy costs, and heating infrastructure, it can be challenging to develop RES-H/C policies that create broad-based markets with multiple technology types. P a g e 15 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.

25 Policies that promote development of one technology in one building type may result in limited market growth in other commercial building types. Policymakers interested in developing a self -sustaining commercial RES-H/C market may wish to begin the policy development process by conducting a market segmentation analysis of commercial property. Such analysis can allow policymakers to calibrate incentives, regulations and goals based on specific market needs. 2.4 COST EFFECTIVENESS ASSESSMENT Cost effectiveness is an essential consideration for the implementation of any new policy or program. There are well-established methodologies to evaluate policy cost-effectiveness, which typically involve identifying a range of possible policy options, monetizing the impacts of proposed policies (where feasible), and assessing the costs and benefits for options. Table 3 below provides a brief overview of a typical cost effectiveness analysis methodology, adapted from the methodology used by policymakers in the United Kingdom. Table 3. Key Stages in Assessing Policy Cost in the United Kingdom (HM Treasury, 2003) Assessment Stage 1) Justify action Description Justifying the need to take action may include an analysis of the possible negative consequences of intervention, as well as the adverse results from a lack of intervention, both of which must be weighed and addressed to justify action. 2) Set objectives Clarify the desired outcomes and objectives of a policy intervention. This supports analysis and identification of the full range of options available to achieve goals. At this stage, specific targets may be set to help measure progress towards the achievement of specified goals and objectives. 3) Conduct options appraisal 4) Develop & implement solution 5) Evaluation The option appraisal is often the most significant part of the analysis. Initially, a wide range of options is created and reviewed from which a targeted shortlist may be crafted. Each option is then appraised against a base case, and the best estimates of its costs and benefits relative to the base case are developed. These estimates can then be adjusted by considering different scenarios. In addition, each option s sensitivity to changes can be modeled by changing key variables. Following option appraisal, decision criteria and judgment are used to select the best option, which should be refined into a solution. Consultation with key stakeholders is important at this stage, as a variety of unforeseen issues may have a material impact on the successful implementation of proposals. Evaluation is similar in technique to the options appraisal, although it uses historic (actual or estimated) rather than forecasted data and takes place after the policy has been implemented. Its main purpose is to ensure that lessons are widely learned, communicated and applied when assessing new proposals. P a g e 16 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.

26 As can be seen from Table 3 above, cost effectiveness analyses depend upon value judgments and estimates, which are based on the unique contextual assumptions and requirements of a specific jurisdiction. Because this project is global in nature and does not focus on any one country or jurisdiction it is not possible to complete a comprehensive cost effectiveness analysis for any of the next generation policies described here. However, a qualitative assessment of the types of costs and benefits that may be considered for any given policy type as well as the potential distribution of those costs and benefits across stakeholder groups is provided in the Distribution of Costs and Benefits sub-sections for each major next generation policy throughout Section 4. Key findings from representative case studies of existing policy cost-effectiveness assessments are also discussed as appropriate. P a g e 17 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.

27 3 RES-H/C BARRIERS & OPPORTUNITIES IN THE COMMERCIAL SECTOR 3.1 BARRIERS TO RES-H/C IN THE COMMERICAL SECTOR RES-H/C technologies have a lengthy track record of providing reliable energy in commercial buildings, but there are a number of market barriers that have limited wider adoption of these technologies. This section describes major barriers to RES-H/C adoption within the commercial sector based on recent literature (Brown & Müller, 2011; IEA-RETD 2011; Langniss et al., 2007) LACK OF AWARENESS ABOUT RES-H/C TECHNOLOGY Many policymakers, consumers, and commercial real estate actors (e.g. architects, real estate agents, builders, etc.) are unfamiliar with RES-H/C technologies and their benefits, particularly in inception stage markets. A lack of awareness may be due to a number of factors, including low level of exposure to the technologies, lack of effective marketing by industries, and absence of government-led consumer education programs. Manufacturers, who may have both renewable and non-renewable product lines, may have limited resources to devote to building a base of potential customers. This difficulty may be amplified because sales staff face the dual challenge of selling their specific product while convincing customers about the renewable thermal opportunity more broadly. Independent RES-H/C installers may also have limited resources to devote to building awareness of RES-H/C technologies and educating customers. Given these challenges, government entities can intervene by creating educational, marketing, or other customer acquisition campaigns that tout the benefits of these technologies (see Section 4.4 on soft cost reduction programs) as well as cultivating innovative finance and business models (see Section 4.5) INADEQUATE EXPECTED INVESTMENT RETURNS & CAPITAL CONSTRAINTS In some countries, especially those with low fossil fuel prices and no policy support for RES-H/C, RES-H/C systems will have relatively poor economics and long payback times. In other countries, especially where conventional heating fuel prices are high, RES-H/C systems may be able to deliver significant savings and relatively short paybacks. However, many commercial customers have very low payback requirements, making it challenging to justify investment in RES-H/C (e.g. some hotels report that investments must meet a sixmonth payback threshold). P a g e 18 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.

28 In almost all cases, RES-H/C technologies are capital intensive (relative to conventional heating and cooling systems) and will have to compete for scarce internal investment dollars with other corporate or institutional priorities. This challenge is compounded by the fact that some entities may have a bias against making large capital investments that are not related to core business activities. As a result, decision-makers will often determine that the opportunity costs associated with focusing time, energy or capital on evaluating potential for RES-H/C heating systems is too great compared to potential returns (TCT, 2009). Policy makers may be able to overcome these barriers by improving project economics through direct incentives (like performance based incentives see Section 4.3) or fostering the development of innovative financing and business models (e.g. third-party ownership models see Section 4.5) that reduce the need for customers to invest their own capital in RES-H/C projects OWNERSHIP PRIORITIES & DECISION MAKING BARRIERS Property owners may have widely varying goals related to their real estate investments. Some commercial buildings owners may have long-term plans to own and occupy a property, making them more inclined to make long-term investments. Other property owners may invest in real estate with the intention of re-selling a property within a few years. These owners may have limited motivation to make large capital investments in building energy systems. Policymakers may need to tailor building regulations for existing buildings (Section 4.2) and incentive programs (Section 4.3) to different property ownership strategies for existing buildings in order to ensure commercial RES-H/C expands broadly within the commercial property sector. Additionally, internal management structures and ownership priorities may significantly influence investment in RES-H/C technologies. Building operations staff may be able to identify cost effective renewable projects, but without high-level management support for those projects, they are unlikely lead to viable installations. Internal decision making and priority setting processes within the ownership group of a commercial property can lead to underinvestment in promising, costs savings projects (Hiller et al., 2012) SPLIT INCENTIVES Split incentives occur when participants in an economic exchange have different goals or incentives. In the case of commercial rental properties, depending on lease structure, the building tenant may be responsible for paying energy costs; however, the landlord makes investment decisions related to building heating system upgrades. In such cases, the landlord is typically not incentivized to invest in technologies that potentially reduce energy cost unless system costs can be passed on to the tenants, who benefit from reduced utility bills. Additionally, tenants do not typically make large investments in energy cost saving technologies because they do not own or have control over those building assets. This split incentive has been identified as a major barrier to energy cost saving technologies in the commercial building sector and has been well documented in a number of studies (Beerepoot & Marmion, 2012; TCT, 2009). Lease structures that better align incentives have been proposed as potential solutions to this issue and efforts to promote these structures have been launched in several jurisdictions (CRiBE, 2009; Green Lease Library, n.d.; PlaNYC, 2014). Mandates for existing buildings can also provide the regulatory requirement necessary to better align landlord and tenant incentives (Section 4.2). P a g e 19 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.

29 3.1.5 LOW REFURBISHMENT RATES Commercial and institutional HVAC and water heating systems have long replacement cycles and low annual refurbishment rates. Given the significant capital expense, commercial property owners may be more inclined to make incremental repairs to older, less efficient building energy systems than to invest in new technologies. This tendency can lead to building systems that are maintained well beyond their design life. Low refurbishment and replacement rates reduce the opportunity to scale deployment of RES-H/C markets quickly. Most buildings replace heating systems only once every 15 to 30 years, and so the decisions that building owners make today will influence the RES-H/C market for the next several decades. Mandates requiring integration of RES-H/C technologies in buildings can help address this barrier (Section 4.2). Innovative financing and ownership mechanisms, such as the provision of heat as a service to building users, may also offer a solution to this challenge (Section 4.5) INSUFFICIENT LOCAL CONTRACTOR BASE In many early-stage RES-H/C markets, a lack of skilled and knowledgeable professionals with the expertise to design and install reliable, high-quality RES-H/C systems can be a significant barrier to market growth. RES-H/C technologies are often more complex than traditional heating and cooling technologies and may also require specialized training and skills to properly design and install. Improperly installed systems can damage the industry s reputation. This issue has been identified as one of the reasons for the collapse of the solar water heating market in the Unites States after several years of rapid growth in the late 1970s and early 1980s (Sinclair, 2007). A number of jurisdictions have implemented workforce training programs to overcome these challenges. Such initiatives are challenging to sustain over the long term without clear signals that significant market development will occur. While workforce training programs are not addressed specifically in this report, clear long term plans, regulations and incentives designed to sustain orderly market development can send the proper signal (see Sections 4.2 and 4.3) LACK OF CONFIDENCE IN SYSTEM PERFORMANCE & FUEL AVAILABILITY RES-H/C typically involves more perceived risk than more traditional heating and cooling technologies because the technologies are unfamiliar to investors. Commercial customers may perceive risks related to overall system performance, product quality and durability, manufacturer warranty viability, long-term fuel availability, future fuel price uncertainty, and availability of ongoing maintenance services. These and other perceived risks may hinder early stage RES-H/C market growth, but may be less of a concern as markets grow and commercial and institutional customers become more familiar with these technologies. Policymakers can foster early-stage market growth by creating programs and policies that promote RES-H/C ownership models designed to mitigate these perceived risks for end use customers. Third-party system owners are likely better prepared to both understand and mitigate the various operational risks associated with RES-H/C technologies (Section 4.5). P a g e 20 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.

30 3.1.8 OPERATIONS STAFF TRAINING REQUIREMENTS Without adequate maintenance, RES-H/C systems will not operate effectively, resulting in poor customer experiences. Large RES-H/C systems may require specialized knowledge to ensure optimal performance. Commercial and institutional entities may not wish to either hire or train employees who have with these specialized skills, preferring to invest in technologies with which are more familiar to their existing building operations staff. Increasing the knowledge and confidence of building managers to manage, maintain, and operate RES-H/C systems will be essential to support widespread technology adoption. Third-party system owners who can provide heat as a service could also be deployed to mitigate the various operational risks associated with RES-H/C technologies (Section 4.5). 3.2 OPPORTUNITIES FOR INTEGRATING RES-H/C INTO COMPREHENSIVE ENERGY PLANS The deployment of RES-H/C will be most successful if policymakers develop integrated policy approaches that address commercial building needs across the energy sectors. Policymakers should carefully consider the potential for integrating RES-H/C policies with other energy policies to better manage the development of the electric, heating, and building sectors. Section 5 explores these issues in greater detail; however, key considerations that may influence decisions regarding implementation of next generation RES-H/C policies are briefly introduced here. RES-H/C and low energy buildings. Low energy buildings are those with zero or minimal energy requirements for energy, due to highly insulated building envelopes, limited thermal loss and efficient appliances. Low energy building design for new construction has been taking on increased importance in many regions of the world, and policymakers are also beginning to consider the challenge for converting existing buildings to low energy. The trend towards low energy buildings development has important ramifications for RES-H/C. With low energy buildings, relatively small amounts of heating and cooling supply are sufficient to provide normal comfort levels in all seasons. There will likely continue to be a need for indoor climate control, especially for large commercial buildings with heat loading from electronic equipment and high number of occupants. RES-H/C technologies are often desirable to provide heating and cooling needs for low or zero carbon buildings. RES-H/C and district energy expansion. RES-H/C has been widely integrated into district heating networks in regions such as northern European (e.g. Denmark). A number of other countries such as the UK are considering district energy networks for both new and existing buildings as a means to supply wider areas with centralized renewable heat installations. District heating systems could either support or constrict the development of RES-H/C markets. Some experts consider the lack of district energy a severe structural barrier to widespread utilization of RES-H/C, as they consider it more straightforward to transition a few centralized heat generators to RES-H/C than to transition many distributed building system (Bürger et al., 2008; REN21, 2013). On the other hand, RES-H/C systems that are implemented as part of a low energy building strategy could significantly reduce building heating demand, thus causing revenue erosion for district heating operators. Such a scenario could create stakeholder conflict related to the expansion of distributed RES-H/C systems. P a g e 21 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.

31 RES-H/C and thermal storage for electric grid management. As greater shares of variable RES-E, such as wind or solar, are integrated into the electric grid, grid operators are facing new challenges to ensure flexibility and reliability of the system. There are opportunities to integrate RES-H/C and thermal storage into electric power grid planning and management in order to accommodate larger penetrations of variable generation. In particular, recent studies have shown that using CHP, heat pumps, and heat storage can provide significant balancing capability and contribute to a more flexible and efficient energy system (Hedegaard, 2013; Meibom et al., 2007; Mueller et al., 2014). P a g e 22 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.

32 4 RES-H/C NEXT GENERATION POLICIES 4.1 OVERVIEW OF NEXT GENERATION POLICIES This section describes next generation policies that can enable deployment of RES-H/C technologies, focusing in particular on policies and practices that can be applied to new and existing buildings in the commercial sector across a range of jurisdictions. The next generation policies described in this report are new and innovative in the RES-H/C sector, address one or more market barriers, and could enable RES-H/C markets to achieve cost-effective, mainstream deployment over the next several decades. It is generally expected that next generation policies will drive market development along the deployment curve, helping countries move RES-H/C markets from the inception to take-off phase, and then from the takeoff to the consolidation phase. Over the long-term, it is expected that next generation policies will enable RES- H/C technologies to compete with conventional, low-cost heating fuels. They will therefore be a key tool for countries to achieve long-term energy and climate ambitions, such as climate change mitigation, climate adaptation, economic development, and energy security. When describing next generation RES-H/C policies, this report also takes into account lessons learned from RES-E and EE sectors, the unique features for RES-H/C policy, special features of commercial buildings, and the need for integrated energy policies. Lessons learned from RES-E and EE. As noted by numerous experts, policies for RES-H/C lag several years behind the RES-E and EE sectors (Beerepoot & Marmion, 2012; Eisentraut & Brown, 2014). Some of the next generation policies described below have seen widespread implementation in the EE or RES-E sectors. Accordingly, this report draws on lessons learned from the RES-E and EE sectors and applies them to RES-H/C. The unique features of RES-H/C. While policymakers can and should apply lessons learned from other sectors to RES-H/C, it is important to remember that RES-H/C has a number of unique features. As discussed in Section 2, RES-H/C technologies have custom sizing and installation requirements, variable production profiles and applications, and, in some cases, performance characteristics similar to both RES-E and EE. The unique features of RES-H/C require policymakers to consider special metering, project sizing, building integration, and administrative requirements. Special features of commercial and institutional buildings. As noted in Section 2, the commercial and institutional building sector encompasses a wide range of building types. Commercial building types have much higher and more variable heating loads, and more complex installation requirements, than residential buildings. This may make it challenging for policymakers to develop uniform technical or regulatory requirements to govern RES-H/C technologies across all building types. On the other hand, RES-H/C policy could be more cost-effective and efficient to implement than in the residential sector because of the potential for larger systems and fewer owners. P a g e 23 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.

33 The need for integrated energy policies. As described in Section 3.2, the deployment of RES-H/C will be most successful if policymakers develop integrated RES-H/C policies, which address needs across the electricity, heating, and building sectors. Section 5 explores energy infrastructure planning and investment questions that have important implications for RES-H/C policy in the future. Table 4 below provides an overview of the next generation policies explored in this report. Table 4. Next generation RES-H/C policies for new and existing buildings in the commercial sector Next Generation Policy/Initiative Develop longterm plans, targets, and mandates Develop performancebased incentives (PBIs) for RES-H/C What Makes it Next Generation? Long-term plans serve to guide policy-making and investment decisions. They are often particularly in the case of early stage markets accompanied by formal renewable energy targets, which can send clear signals to the marketplace about future government investment and regulations. By developing clear RES-H/C plans, policymakers can encourage industry leaders and investors to make the necessary investments in infrastructure to overcome market barriers and achieve broader energy and climate goals. While renewable energy planning and targets are common in the RES-E sector, far fewer countries have established formal planning initiatives for RES-H/C. RES-H/C regulatory policies or mandates place a legal obligation to develop RES-H/C on specific entities, such as utilities, building owners (or developers), or fuel wholesalers. Mandates are often supported by penalties for non-compliance. Compared to the RES-E or EE sectors, relatively few governments have implemented regulations mandating the use or development of RES-H/C. Even fewer have developed mandates focused on existing building in the commercial sector. Mandates can be a powerful tool to provide commercial building owners with the awareness and impetus to develop RES-H/ systems. Building mandates can be developed to address split incentive barriers by requiring the installation of RES-H/C systems in new and existing buildings at the time of building sale or lease or at the time that existing heating systems are replaced. Performance-based incentives (PBIs) compensate RES-H/C systems specifically for the amount of generation or savings they produce (e.g. $/kwhth) during a certain period of time (e.g. 10 years). Few countries have developed performance-based incentives (PBIs) for RES-H/C. On the contrary, the majority of RES-H/C incentive programs are structured as grants or rebates. PBIs have been widely used in the RES-E sector, and it is anticipated that they will be an important RES-H/C incentive policy in coming years, especially as RES-H/C markets move along the deployment curve and policymakers priorities shift from catalyzing initial investment to incentivizing efficient performance. PBIs encourage generators to maximize the quality of system installation and maintain systems over time. They also help ensure that ratepayers and taxpayers receive the full economic, environmental, and social benefits from the RES-H/C systems that are provided with incentives. P a g e 24 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.

34 Next Generation Policy/Initiative Drive soft cost reductions Enable innovative financing and business models What Makes it Next Generation? There are two types of costs associated with the purchase and installation of RES-H/C technologies: hardware costs and soft costs. Hardware costs consist of the equipment used in the system, while soft costs (also referred to as business process costs) make up the remaining portion of system cost. Soft costs have not been well tracked for commercial RES-H/C systems or the RES-H/C sector broadly and policymakers have not developed targeted programs to address RES- H/C soft costs. By contrast, soft cost reduction programs have led to significant price declines within the solar PV sector. Soft cost reduction programs can help to expedite installations, reduce time and hassle associated with permitting, increase market awareness, and increase transparency and confidence in the RES-H/C market. Innovative financing and business models are strategies that address financial or behavioral barriers to RES-H/C deployment by creating value or reducing financial risk. In particular, these include turnkey RES-H/C financing and development services such as third-party ownership or other heat as a service models. Traditionally, support for RES-H/C financing has focused on low-interest (soft) loan programs through commercial banks or dedicated loan facilities. Little attention has been given to the needs, requirements, or supporting policies necessary to develop third-party financing and ownership models for RES-H/C in the commercial sector. Third-party financing models can create benefits such as simplifying the decision-making process, reducing operating risk for system hosts, reducing the need for host sites to pursue complicated incentives, facilitating financing, and driving development of professional marketing campaigns to reach new customers for RES-H/C. The following sections describe next generation RES-H/C policies for the commercial sector in greater detail. Each section provides a brief background on the next generation policies and also describes: Key policy design features, Relevant case studies, and Policy cost-effectiveness. Each section concludes with a summary of key findings and best practice recommendations. P a g e 25 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.

35 4.2 RES-H/C PLANS, TARGETS & MANDATES BACKGROUND FOR RES-H/C PLANS, TARGETS & MANDATES Long-term plans serve to guide policy-making and investment decisions in a region. They are often particularly in the case of early stage markets accompanied by renewable energy targets. By establishing a RES-H/C target, governments make a commitment to develop a certain percentage of total heating load, capacity (kw th), or total amount of energy (kwh th) from renewable thermal technologies. The creation of a RES-H/C plan with supporting targets is important to consider with a view to establishing clear objectives, identify suitable policy options, and measure progress. Targets developed during the planning process may be mandatory or non-mandatory. Mandatory targets are usually enshrined in official legislation or regulations. As illustrated in Figure 5 (next page), only 17 countries have developed mandatory targets for RES-H/C. 8 Germany, for example, passed the Act on the Promotion of Renewable Energy in the Heating Sector (EEWärme Gesetz), which established a target to supply 14% of total heating demand from a wide range of renewable energy sources (including solar thermal, biomass, geothermal, waste heat and CHP) by Other countries (e.g. Jordan, China, Algeria, Morocco, and Sierra Leone) have developed targets that focus on only one RES-H/C technology, such as solar thermal. There are no targets that focus exclusively on the commercial sector. While few countries have established mandatory RES-H/C targets, European Union and Energy Community member countries have developed non-mandatory targets as part of National Renewable Energy Action Plans (NREAPs). 9 NREAPs set forth pathways and projections for achieving EU energy and climate targets. For example, the United Kingdom estimates that it will achieve its formal target of 15% of energy consumption from renewable resources by supplying around 30% of electricity demand, 12% of heating and cooling demand, and 10% of transportation demand from renewables by In this case, the 12% renewable heating and cooling projection does not represent a mandatory commitment and could in fact be reduced or eliminated if regulators decided to instead increase RES-E (or renewable transportation) development. The projection is nonetheless a useful part of the planning process which provides investors a sense of the overall size of the market opportunity and also enables policymakers to measure RES-H/C development progress. Once formal plans have been created, policymakers employ a variety of incentive and regulatory policies to achieve them. Next generation incentive policies are discussed in Section 4.3. Regulatory policies or mandates especially those for existing buildings are described below. 8 By comparison, there are over 144 known policy targets for the increased deployment of renewable energy across the globe, the overwhelming majority of which are focused on RES-E (REN21, 2014) 9 All EU member countries are required by the EU Directive on Renewable Energy (2009/28/EC) to develop NREAPs. P a g e 26 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.

36 Solar water heating target Renewable thermal targets Solar water heating targets Algeria 490,000 m² collector area by 2020 Bhutan 3MW equivalent solar thermal by 2025 China 400 million m² collector area by 2015 India 15 million m² collector area by 2017 Jordan SHW on 30% of households by 2020 Lebanon 1.05 million m² collector area by 2020 Libya 450 MW installed capacity by 2025 Morocco 1.7 million m² collector area by 2020 Mozambique 100,000 solar heaters installed by 2025 Sierra Leone 5% SHW penetration in restaurants & hotels, 1% in residential sector by 2030 Swaziland SHW on 20% public buildings by 2014 Syria 100,000 m² collector area per year Tunisia 1 million m² collector area by 2016 Uganda 30,000 m² collector area by 2017 Yemen 230 GWth generation per year Renewable Thermal Targets Germany 14% building heat met with solar, biomass (liquid, solid & gas), geothermal by 2020 Thailand (All ktoe) 100 solar H/C, 1,000 biogas, 8,200 biomass, 35 MSW by 2021 Figure 5. National Renewable Thermal Targets Across the Globe P a g e 27 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.

37 4.2.2 BACKGROUND FOR RES-H/C MANDATES RES-H/C regulatory policies or mandates place an obligation to develop RES-H/C on specific entities, like utilities, building owners (or developers), or fuel wholesalers. Compared to the RES-E or EE sectors, relatively few governments have implemented regulatory policies requiring use of RES-H/C. Utility mandates such as renewable portfolio standards (RPS) have historically focused on RES-E. Only recently have two US states Massachusetts and New Hampshire developed comprehensive RES-H/C mandates for utilities (Section 4.2.5). RES-H/C building mandates are somewhat more common, having been used in recent years especially in EU and Middle Eastern countries to require integration of RES-H/C in new construction or building renovations. 10 Next generation building mandates described here focus on existing buildings, which are far less common. There are only a few existing examples of RES-H/C building mandates for existing commercial buildings. As illustrated in Figure 6 below, Kenya requires new and existing buildings using 100 or more liters of hot water a day to source 60% of their hot water load from solar thermal. In Germany, the state of Baden Württemberg passed a local law (Erneuerbare-Wärme-Gesetz Baden Württemberg), which requires buildings replacing central heating systems to supply at least 10% of their heat supply from renewable energy (including solar thermal, biomass, bio-oil and biogas). Though this law currently applies only to residential buildings, it is possible that the mandate will be extended to commercial buildings in the future. Lastly, wholesale fuel blending mandates have been used extensively in the United States and Europe to drive development of renewable biofuels for the heating and transportation sectors. This regulatory policy is relatively well established and not considered next generation. It therefore is not treated in detail in this report; however, interested readers should consult Mosey & Kreycik, 2008 and Kampman et al., 2013 for more information. 10 In addition, it is worth noting that the EU Energy Performance of Buildings Directive (2002/91/EC, EPBD), which requires all new buildings to be nearly zero energy by 2020, strongly encourages integration of RES-H/C for new construction projects. Though it does not explicitly mandate the use of RES-H/C, by mandating low energy building development, the policy strongly encourages builders to use air source heat pumps, solar water heating, and other RES-H/C technologies in new construction P a g e 28 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.

38 Figure 6. Examples of National and Sub-National Utility and Building Mandates BENEFITS OF RES-H/C PLANS, TARGETS & MANDATES In principle, there are a number of reasons to establish formal RES-H/C plans and implement regulatory policies (i.e. mandates) to achieve them Benefits of Plans and Supporting Targets Targets and clear long-term plans can provide the following benefits: Transform country energy portfolios. A national plan with clear objectives is an important first step to drive transformation of the national generation portfolio, position domestic industry to compete internationally, and support economic development in regions with abundant resources or chronic unemployment (Fulton & Mellquist, 2011). Because heating and cooling makes up 50% of total energy use (Eisentraut & Brown, 2014), it will be important for country leaders to establish develop clear long term plans to transform the heating and cooling sector away from fossil fuels and towards renewables to meet climate and energy goals. 11 Please see Appendix B for descriptions of each mandate above and others around the world. P a g e 29 IEA-RETD, RES-H/C: Waking the Sleeping Giant, February 2015.