When Rhetoric Meets Reality - Implementing Policies Based On Market Failure: Some Observations From The Development And Delivery Of The UK’s Energy Efficiency Best Practice Programme

The UK’s major energy efficiency programme of the last decade, the EEBPp, has been widely regarded as the canonical example of an approach which addresses market failures that result when insufficient or inappropriate information impedes the diffusion of energy efficiency technologies and techniques to all those who have an economic interest in using such information. OECD publication on energy efficiency policy cites the UK as a leading example of such an information programme, giving as the reason for its need the low level and poor quality of information about energy efficiency technologies. However, the development and delivery of this Programme has seen considerable attention given by the civil servants required to implement it to the skills, abilities and resources that individual firms require to install, configure and operate energy efficiency technologies and techniques. While therefore “dealing with market failure” has been a popular shorthand for the model of Programme operation, in practice, the Programme managers have relied upon broadening and deepening capacities of firms and also modifying the practices of those supplying firms with technologies and techniques. Information shortages for firms appear often not to be so important for technology choice and implementation as the resources of the firms themselves. A key theoretical distinction which is made between firms’ specific and common information costs also proves to be difficult to observe in practice. The operationalization of this major piece of the UK’s energy efficiency policy therefore suggests that the notion of market failure based on in informational problems of the market, while a useful construct, is problematic. The empirical work reported here on the implementation of Energy Efficiency Best Practice programme suggests that programme managers evaded the rhetorical requirements of policy and were able to deal with the capabilities of firms. (Consequently, energy efficiency information provided by government is not a pure public good.) Introduction This paper begins by giving a review of the literature that explores the reasons why organisations fail to acquire cost-effective energy efficiency technologies. The paper then focuses upon the political and economic context in which the UK adopted the EEBPp. The paper then outlines the implementation of the Programme itself and notes differences between the principles used to justify the Programme and the way in which the Programme was enacted. The paper ends with a number of conclusions about the way in which theoretical principles guide programme implementation. Review of Literature Discussion of the role of information is a perennial theme in the study of the diffusion of technology and economics. Rogers’ (1974) analysis, which focused centrally upon information and the social channels through which the information passed has been extensively applied in the context of energy efficiency policy. A growing interest on the part of economists in the key role of information has also taken place, with a close focus upon four related questions: a) How and why do problems with the level and quality of information provision and use come about? b) What is the empirical evidence that such problems do in fact exist? – c) What other theoretical resources can be immediately and constructively applied to explain investment decisions in this context? d) What action can government take to deal with such problems and what are the characteristics of the information required? How do Information Problems Arise? That firms require information in order to undertake efficient exchange is a principle which is widely accepted across economic schools and literatures. The transactions costs model and its development by Williamson (1985) have provided a strong impetus to problems of entering into transactions, although the Williamson position, that bounded rationality, asset specificity and opportunistic behaviour lead to high costs that may ultimately prevent efficient exchange relationship, makes no specific link to the character and quality of information. Rather the need for information and the consequences of its lack have been discussed within the literatures of public goods and information economics, areas of theory linked more and more closely together within the general field of market failure. Within the earlier development of public goods theory under Samuelson (1954), it is argued that when firms are unable to exclude consumers from the consumption of a good, such a good will not be produced, even if consumption of such a good would be beneficial. Such a condition is one of market failure. Given the difficulties of excluding consumers or firms from the use of information, it is information, such as weather forecasts, which is often given as an example of a non-excludable good, although other examples, such a lighthouses have been given. The economics of information approach developed by Arrow (1985) and the insurance literature developed by Akerlof (1970) focus more specifically upon how transactions may be affected by problems of information. Differences in the amount of information possessed by buyers and sellers of energy efficient technologies, so called information asymmetries, leads to inefficient exchange within both organisational and market contexts. Howarth and Andersson (1993) argue that the market for energy efficiency technologies and techniques fails to operate in the same way as the market for second hand cars, the example given by Akerlof. Because purchasers are unable to observe the characteristics of the products they intend to buy because the technologies are to be used in complex environments where no applicable performance data can be generated. The use of warranties on equipment or trials may help to ensure that prospective purchasers are able to observe the performance of equipment. However, in relatively new markets and where the performance of technology is highly dependent upon external factors, adverse selection may continue to be a significant problem. Such conditions would seem clearly to apply to the market for energy efficiency products and dependent technologies. Kempton and Wayne’s (1994) work on the capability of domestic energy consumers to analyze their energy usage and to develop efficiency strategies shows that the users of power – in this case electricity – are limited in their capacity to understand how they use energy. Utilities, by contrast are far more able to work out how energy is used. This gives rise to an information inequality, which they argue, policy makers should address. Such imbalances in information could easily arise in commercial markets also. What is the Empirical Evidence of Market Failure? The evidence that cost-efficient technologies do exist but are not used either because there is insufficient information available in the market or that there are information asymmetries comes from studies of the rates of discount which firms routinely apply as their criteria for investments in energy efficiency technologies and techniques. These studies show that many firms could make investments in energy efficiency, but choose not to do so. Their decision not to acquire and implement is given to imply that they face costs of identifying and testing technology that count against the savings which might be made from implementation. The use of rate of return studies of energy efficiency technology adoption provides the main evidence for arguments that justify government intervention. The apparent divergence between a firm’s cost of capital and the rate of return on energy efficiency investment – the so-called efficiency paradox upon which Jaffe and Stavins (1994) focus – provides the main evidence of market failure. A long series of studies examining the evidence is well documented in DeCanio (1998). Some though, such as Sutherland, (1991) have denied the existence of the paradox, arguing that because firms profit maximise (by definition), high discount rates simply reflect firms’ actual costs of implementation and provide no empirical support for the existence of market failure. Other commentators are quite prepared to accept the existence of market failures, but believe that the presence of market failures in the market for energy efficiency technologies is no worse than in other markets. Nichols (1995) for example, states that market barriers, which are routinely cited by supporters of demand-side-management to provide the basis for policy intervention, are far from unique to the electricity market and that virtually none qualify as market failures. For him, information is imperfect in energy markets but the problems do not appear to be more significant than in most other markets. Measurement of such costs is though difficult in practice: Buckley and Chapman (1997) assert that the area of transactions costs research is one where there has been very little actual measurement. “. We have come across not one case whatsoever in which a manager involved in decisions had access to or had personally generated for their own purposes, anything like a numerically justified assessment of transaction cost issues. ” (Buckley and Chapman 1997, page 138). The difficulties of measurement and the fact that in practice, firms and managers take decisions based on perceptions which are grounded in experience and language entails a limit to what a transactions costs perspective can give to the study of organisations. Other Theoretical Approaches While the market based approaches favoured by neoclassical economics focus on the use of information within a market context made of up atomistic buyers and sellers and quanta of information, later approaches in institutional economics literature examine the relationship between the user of information and the information itself. Within the institutional tradition of economics, both resource based views which are most closely associ