For the Henry P. Kendall Foundation 

Boston, Massachusetts

Dr. Jan Hamrin, 

Dr. Edward Vine & 

Amber Sharick

May 24, 2007

The Potential for 

Energy Savings 

Certificates (ESC) as a 

Major Tool in 

Greenhouse Gas 

Reduction Programs
This research was sponsored by the Kendall Foundation in view of its interest in 

understanding cost effective ways to increase the amount of energy efficiency and other 

effective climate solutions. 
i

THE POTENTIAL FOR ENERGY SAVINGS CERTIFICATES (ESC)1

AS A MAJOR TOOL IN GREENHOUSE GAS REDUCTION 

PROGRAMS 

Dr. Jan Hamrin, Dr. Edward Vine2 and Amber Sharick 

Center for Resource Solutions 

EXECUTIVE SUMMARY 

James Hansen, Director of the Goddard Institute on Space Studies and one of the 

foremost experts on climate change, has said that man has just 10 years to reduce 

greenhouse gas (GHG) emissions before global warming reaches what he calls a tipping 

point and becomes unstoppable.3

 Energy efficiency is a critical means to meeting a 

variety of policy goals - from increasing energy security to improving the standard of 

living of the poor to decreasing the human impact on the environment. Moreover, many 

 

1

 In Europe, Energy Savings Certificates are also referred to as “White Tags.” However, because the term 

“White Tag” is trademarked in the United States, only the term ESC is used in this paper. 

2

 Consultant to the Center for Resource Solutions 

3

 CBS News, “Rewriting the Science: Scientist Says Politicians Edit Global Warming Research,” produced 

by Catherine Herrick and Bill Owens, and aired March 19, 2006. 

Energy Saving Certificate (ESC) is an instrument issued by an authorized body 

guaranteeing that a specified amount of energy savings has been achieved. Each 

certificate is a unique and traceable commodity carrying a property right over a certain 

amount of additional energy savings and guaranteeing that the benefit of these savings 

has not been accounted for elsewhere. The ESC represents the environmental and 

social attributes associated with the energy saved, just as a renewable energy 

certificate (REC) represents the environmental and social benefits associated with 

generating electricity from renewable energy. 

Energy Efficiency Portfolio Standard (EEPS)* is a program that sets a specific 

target for energy savings to encourage more efficient generation, transmission, and 

use of electricity and natural gas. These targets may be achieved through a marketbased trading system. EEPS programs often include a list of eligible energy saving 

measures that can be used to meet the savings target and may carry a fine or other 

penalty for non-compliance. 

* These programs are also referred to as Energy Efficiency Resource Standards (EERS). 
ii

scientists and policymakers think that the best short-term strategy for making significant 

and rapid GHG reductions is to launch a massive program in support of energy 

efficiency.4

 Although energy efficiency has been a top agenda item for energy regulators 

and policy decision-makers for decades, it has not fully met its promise to deliver the 

level of reductions that experts believe could be realized. 

Unfortunately, GHG cap and trade programs by themselves do not generally stimulate 

either energy efficiency or renewable energy for several reasons. For example, there is 

the widely held view that energy efficiency measures are unreliable, unpredictable, and 

unenforceable. One solution for overcoming some of these problems is to institute strong 

energy efficiency measurement and verification methodologies along with a credible 

tracking system that guards against double counting and identifies measures that meet 

additionality criteria.5

 Energy savings certificates (ESC) may be the necessary tool to 

make this link. ESCs may be particularly useful to attract investment in hard-to-reach 

sectors (such as rental buildings, and weatherization in low-income communities) as well 

as to attract investment in energy efficiency measures with long paybacks that have been 

slow to enter into the market. 

In considering energy savings certificates, there are four primary ways that ESCs might 

be included as part of a GHG reduction program: 

• As a method for verifying compliance with an energy savings target (such as 

an Energy Efficiency Portfolio Standard (EEPS) program); 

• As a trading device (allowing ESCs to be bought, sold or traded) for parties 

required to meet an energy savings or GHG obligation; 

• As a mechanism to demonstrate eligibility for tax incentives, subsidies or 

carbon offset programs; and 

 

4

 “Energy End-Use Efficiency,” Amory Lovins, InterAcademy Council, September 19, 2005. In this white 

paper presented to the InterAcademy Council (Amsterdam), a consortium of 90 national academies of 

science, Lovins’ summarizes knowledge gained in the past three decades about using energy far more 

efficiently. Among the surprising insights: “very large energy savings can often cost less than small or no 

savings.” This paper is available online at: http://www.rmi.org/sitepages/pid171.php#EnergyEff. 5

 Additionality is a criterion applied to GHG projects stipulating that project-based GHG reductions may 

only be quantified if the project or project activity “would not have happened anyway” (i.e., the project 

would not have happened under business as usual). 
iii

• Incorporating all of the above, wherever ESCs can be created and traded 

within a larger allowance, certificate or project credit trading regime where 

the ESC benefits are equal to or exceed their incremental costs. 

Energy savings targets can be included as part of a GHG cap and trade program or as a 

supplement to such a program. When used as a supplement, energy savings targets can 

be part of a separate parallel program (e.g., energy efficiency portfolio standards) as they 

are in Europe and Australia, or incorporated as a distinct target within a renewable 

portfolio standard (RPS) as is the case, for example, in Connecticut. Moreover, energy 

efficiency savings that meet additionality standards and have not been claimed elsewhere 

could be sold/traded in the voluntary GHG emissions market. 

However, because the use of energy savings certificates, especially in Europe, is most 

closely associated with control strategies requiring compliance with energy efficiency 

targets or meeting energy efficiency portfolio standards, this paper particularly looks at 

the ESC and EEPS programs. 

Some of the major barriers to utilizing energy savings certificates include the problem of 

transaction costs. Instituting a rigorous system of energy savings evaluation, 

measurement and verification (EM&V) introduces additional costs, while at the same 

time, there are also benefits associated with greater certainty of the energy savings results 

that give these programs greater credibility. Though reporting and accounting costs can 

be perceived as a significant issue, one means of reducing them is to piggy-back on the 

automated computer systems currently in use for electric generation information, such as 

renewable energy certificate (REC) tracking systems or Generation Information Systems 

(GIS).6

 Since the incremental cost of adding additional fields to these tracking systems is 

relatively low, this could help lower accounting and reporting costs. 

 

6

 For example: the New England Generation Information Service (NE/GIS); PJM Generation Attribute 

Tracking System (PJM GATS): Midwest Renewable Energy Tracking System (M-RETS); Electric 

Reliability Council of Texas tracking system (ERCOT); and the Western Renewable Energy Generation 

Information System (WREGIS). 
iv

Because of the transaction costs associated with more rigorous EM&V, our investigation 

finds energy savings certificates might be most beneficially used for: 

• Programs that require high levels of credibility such as: 

o Efficiency or GHG reduction targets that include significant penalties for 

non-compliance; 

o Programs where significant amounts of money are at stake such as, tax 

credits for capital intensive efficiency measures, carbon credits or GHG 

taxes; 

• National or large regional programs where the use of ESCs for compliance 

purposes would significantly offset the administrative costs that would otherwise 

be required; 

• Large, market-based programs that focus on the use of a trading scheme as a key 

compliance tool; 

• Efficiency programs where the primary goal is obtaining as much energy savings 

as possible as rapidly as possible—including market transformation programs 

where the ultimate goal is to have everyone energy efficient; 

• Measures with high initial costs such as new motors, processes and newer process 

technologies in the commercial and industrial sector, or whole building 

improvements, such as weatherization for low income ratepayers, or 

improvements for rental property, where third parties might be enticed into 

providing investment capital in exchange for the ESCs that might be produced. 

A potentially significant negative aspect to ESCs is that they make energy savings a 

marketable commodity (rather than a public service or public good). As a commodity, 

the dictates of the market will tend to direct investment towards energy savings measures 

with the lowest cost, thereby deterring investments in projects that may have greater upfront costs, or longer payback periods, but would achieve potentially greater or broader 
v

energy savings.7

 These issues can be addressed through the careful design of an ESC 

program somewhat similar to the UK program that is reviewed in the full paper. 

Our research and analysis found that the design of an effective energy efficiency program 

that uses ESCs must have the following elements: 

• Transparent rules and procedures: 

In developing their rules and procedures, including any subsequent modifications or 

revisions, each of the ESC schemes that we examined made a concerted effort to 

make relevant materials available, usually via the Internet, and provided a process 

for the general public to review and comment. Based on public comments, drafts 

were reviewed and revised prior to issue. In addition, the results of audits and other 

program findings were also made available to the public. 

• Little or no proprietary information is withheld from the public: 

We are not aware of any concerns over the release of proprietary information. 

• A measurement and evaluation system that ensures real, measurable, 

verifiable, and additional energy savings: 

All ESC schemes that we reviewed provided a flexible approach for calculating 

energy savings for groups of measures (e.g., deemed/stipulated savings, or energy 

monitoring – Italy provides a good example). These approaches are based on 

international methods that have been tested in the field for over twenty-five years. 

• Independent third-party auditing for verification and compliance:

All ESC schemes that we reviewed included a third-party verification system to 

ensure credibility and accountability. For example, the Independent Pricing and 

Regulatory Tribunal of New South Wales conducts audits for verification and 

compliance. 

• A process for issuing and tracking certificates that avoids double counting: 

 

7

 One example is a home weatherization program for low-income households. Though no one has yet tried 

using ESCs as a way of attracting financing for these types of challenging applications, the authors believe 

this could be a very creative and fruitful use of ESCs. 
vi

All the ESC schemes that we reviewed included a process for issuing and tracking 

certificates. For example, the regulators in Great Britain and Italy -- along with the 

market operator -- are responsible for issuing and tracking the ESCs.

• A system for detecting and penalizing noncompliance: 

All ESC schemes that we reviewed incorporated penalties for noncompliance in 

their programs. For example, France and New South Wales had fixed penalties 

while the penalties in Italy and Great Britain varied depending on the circumstances.

With these elements in place, we believe that an energy efficiency program using ESCs 

can efficiently and effectively operate in the voluntary or mandatory market for energy 

savings, assist with integrated energy resources planning, and be included in a program to 

reduce GHG emissions.
vii

TABLE OF CONTENTS 

EXECUTIVE SUMMARY .....................................................................................I

I. INTRODUCTION AND BACKGROUND.......................................................1

II. ENERGY SAVINGS CERTIFICATES ...........................................................9

The European Context ............................................................................................ 9 

Italy ....................................................................................................................... 11 

Great Britain.......................................................................................................... 17 

France.................................................................................................................... 23 

New South Wales.................................................................................................. 26 

Comparison of Countries ......................................................................................32

IEA/DSM Task XIV ............................................................................................. 35 

The EuroWhiteCert Project................................................................................... 35 

III. ENERGY EFFICIENCY RESOURCE STANDARDS IN THE U.S.........36

Connecticut ........................................................................................................... 37 

California .............................................................................................................. 38 

Colorado................................................................................................................ 38 

Hawaii................................................................................................................... 39 

Nevada .................................................................................................................. 39 

Pennsylvania ......................................................................................................... 40 

Texas..................................................................................................................... 41 

Vermont ................................................................................................................ 42 

Other ESC Experiences in the United States ........................................................ 45 

IV. MEASUREMENT AND VERIFICATION (M&V) ISSUES......................47

Italy ....................................................................................................................... 47 

Great Britain.......................................................................................................... 50 

France.................................................................................................................... 52 

New South Wales.................................................................................................. 53 

V. REPORTING, TRACKING AND ACCOUNTING......................................55

REC Systems ........................................................................................................ 55 
viii

Brief history of REC Systems............................................................................... 57 

Energy Savings Certificates.................................................................................. 58 

Great Britain.......................................................................................................... 59 

Italy ....................................................................................................................... 59 

Connecticut ........................................................................................................... 60 

Combining Renewable Energy and Energy Efficiency Issuing and 

Accounting Tasks ...................................................................................................60

Double Counting/Selling ...................................................................................... 62 

VI. POTENTIAL TECHNICAL OPPORTUNITIES FOR ESCS ...................63

VII. POTENTIAL POLICY OPPORTUNITIES FOR ESCS IN THE 

UNITED STATES..................................................................................................66

VIII. ISSUES & BARRIERS ................................................................................69

Transaction costs................................................................................................... 70 

Evaluation, Measurement and Verification Costs ................................................ 71 

Eligible Projects and Cream Skimming................................................................ 72 

ESCs and Emissions Trading................................................................................ 73 

Savings Targets..................................................................................................... 74 

Integrating RECs and ESCs.................................................................................. 75 

RPS Programs ....................................................................................................... 76 

Ownership of ESCs............................................................................................... 77 

Double Counting/Selling ...................................................................................... 78 

IX. ROADMAP FOR OVERCOMING ISSUES AND BARRIERS ................81

Incorporating ESCs into Greenhouse Gas Reduction Programs......................86

Roadmap for Effective ESC Programs................................................................88

GLOSSARY............................................................................................................90

REFERENCES.......................................................................................................92
 1

I. INTRODUCTION AND BACKGROUND 

It is imperative that we take immediate action to mitigate climate change. The Stern report, 

released on October 30, 2006 by the government of the United Kingdom (UK), states that if 

climate change is allowed to continue unmitigated, the related costs could devour as much as 20 

percent of the world’s gross domestic product.8 Success in slowing carbon emissions could 

bring great savings to the world economy, possibly in the range of $2.5 trillion a year.9 

More recently, the Intergovernmental Panel on Climate Change (IPCC), an international body 

headed by the United Nation Environment Programme and the World Meteorological 

Organization, issued its assessment confirming the scientific basis for the reality of global 

climate change. Among its most important findings, the IPCC assessment noted that the negative 

impacts of the current rate of global warming will intensify and accelerate throughout this 

century, and that it is critical that actions now be undertaken to mitigate climate change’s 

negative consequences to ecosystems, habitat and population.10 James Hansen, Director of 

NASA’s Goddard Institute on Space Studies and one of the foremost experts on climate change, 

is more direct, saying man has just 10 years to reduce greenhouse gases (GHG) before global 

warming reaches what he calls a tipping point and becomes unstoppable.11 

Corporate and citizen awareness of climate change in the United States has reached an all time 

high. In the absence of clear federal policies, local and state governments and Fortune 500 

corporations now lead in promoting energy efficiency, greater use of clean and renewable energy 

 

8

 Sir Nicholas Stern, Stern Review on the Economics of Climate Change, HM Treasury, (London, October 30, 

2006), http://www.hmtreasury.gov.uk/independent_reviews/stern_review_economics_climate_change/stern_review_report.cfm 9

 Heather Timmons, Britain Warns of High Costs of Global Warming, (New York Times, October 31, 2006) at: 

http://www.nytimes.com/2006/10/31/world/europe/31britain.html?ref=world 10 The Intergovernmental Panel on Climate Change, Fourth Assessment Report: The Physical Science Basis: 

Summary for Policymakers, Paris, 2007; Elizabeth Rosenthal and Andrew Revkin, Science Panel says Global 

Warming is ‘Unequivocal,’ (New York Times, February 3, 2007), p.1. 11 CBS News, Rewriting the Science: Scientist Says Politicians Edit Global Warming Research, Produced by 

Catherine Herrick and Bill Owens, aired March 19, 2006, 

http://www.cbsnews.com/stories/2006/03/17/60minutes/main1415985.shtml 
 2

sources and other GHG emissions reduction strategies. An increasing number of businesses and 

institutions are voluntarily reducing or offsetting their GHG emissions footprint12 and a dozen or 

more states are considering market-based “cap-and-trade” programs13 as a means to implement 

GHG emissions reductions. 

In general, GHG cap and trade programs by themselves do not achieve either greater savings 

from energy efficiency or increased generation for renewable energy sources. This is, in part, the 

result of a flawed design of such programs: emissions targets and allowances are aimed 

predominantly at large emitters, and, as a result, renewable energy projects, for example, do not 

qualify for allowances or contribute to reducing the overall emissions cap.14 A recent European 

Commission paper says that “the EU ETS [European Union’s Emission Trading Scheme] by 

itself is insufficient to stimulate end-use energy efficiency and significant amounts of renewable 

energy deployment... Under these circumstances one may wish to seek additional means to get 

more energy savings.” 15

Reductions in energy consumption and emissions achieved by energy efficiency should be 

considered an important element of energy management and resource planning. Effective energy 

efficiency programs can meet a wide variety of policy goals including increasing energy system 

reliability, reducing energy use and lowering consumers’ electric bills, and lessening negative 

impacts on the environment. In the United States, energy efficiency has traditionally been a 

mandate that states place upon utilities and that are paid for by ratepayers and consumers. 

 

12 Case studies on innovative waste reduction activities that reduce global climate change are found at the U.S. 

Environmental Protection Agency’s Waste Wise, Climate Change Case Studies, (October 2004), at: 

http://www.epa.gov/wastewise/climate/pubs.htm . The following ‘Waste Wise’ partners are featured: Target 

Corporation, Eastman Kodak Company, Xerox Corporation, Pepco, Springs Industries, and Crown Holdings.

13 Such programs consist of GHG emissions being capped at or near current levels and reduced over time. In the 

case of the Northeast Regional Greenhouse Gas Initiative (RGGI), emissions allowances are issued to the large 

emitters (i.e., utilities and industrial users). Allowances can be traded. Caps are reduced over time and financial 

penalties result from non-compliance. Details on RGGI are available at: http://www.rggi.org. 14 During RGGI’s stakeholder process, the Center for Resource Solutions (CRS) raised the issue of this design flaw. 

When renewables projects were left out of the allocation plan, CRS recommended that state policymakers consider 

allowing renewables projects to contribute to emissions reductions by reducing the overall cap—effectively “taking 

it off the top.” RGGI Initiative, op. cit. 

15 Paolo Bertoldi and Silvia Rezessy, Tradable Certificates for Energy Savings, European Commission, Ispra, Italy 

(2006), pp.21-22. 
 3

Although energy efficiency has been promoted by energy regulators and policy decision-makers 

for some time, it has yet to fully meet its promise and achieve the expected level of energy 

reductions. There are several reasons for this. First, there is the widely held view that energy 

efficiency measures are unreliable, unpredictable, and unenforceable, and, therefore, energy 

efficiency cannot be relied upon as a utility system resource.16 This mistaken view has been 

around for a long time despite contrary findings by industry analysts. In fact, energy efficiency 

programs are sufficiently reliable, predictable, and enforceable to allow demand-side 

management to be incorporated as a utility system resource.17 

A second reason is that investing in energy savings is often seen as less attractive than investing 

in supply-side technologies. In part, this is due to the fact that energy efficiency measures often 

focus on facilities and systems already in place and do not involve major new construction or 

installation projects. For example, boiler insulation or installing more efficient lighting are 

nearly invisible improvements when compared to investing in a new wind farm or arrays of 

photovoltaic roof panels. 

Further, because energy savings opportunities are so diverse and often found in small 

increments, there has not been an efficient mechanism for aggregating the savings. Lastly, a 

financial tool to support the widespread selling and trading of energy savings in the marketplace 

is not yet available. In order to capture the large-scale carbon reduction savings associated with 

a major push toward energy efficiency as a key GHG mitigation strategy, these misconceptions 

and barriers would need to be overcome. 

In the past few years, however, important changes have taken place that signal opportunities for 

more widespread commitment to energy efficiency strategies: (1) The creation and rapid growth 

 

16 E. Vine, M. Kushler, and D. York, Myth #10: Energy Efficiency Measures are Not Reliable, Predictable, or 

Enforceable, Energy and American Society: Fourteen Myths, edited by B. K. Sovacool and M. A. Brown, Springer 

Press, NY. (2007, pp. 265-287). Other misconceptions that affect the support of energy efficiency are also discussed 

in this volume.

17 Ibid. 
 4

of the renewable energy certificates (RECs) market in North America quantifying the benefits 

associated with renewable energy;18 (2) the creation and implementation of tracking systems to 

issue and track RECs;19 (3) improved methods for measuring and verifying energy savings; (4) 

the development in Europe of the concept and a market for “white certificates” or energy savings 

certificates (see below); and (5) the increased awareness in the United States of the threat of 

climate change, and the growing interest on the part of local and state governments, businesses, 

institutions and private citizens in taking early actions to reduce GHG emissions, including 

individual GHG footprints.20 

An Energy Savings Certificate (ESC) is an instrument issued by an authorized body guaranteeing 

that a specified amount of energy savings has been achieved.21 Each certificate is a unique and 

traceable commodity carrying a property right over a certain amount of additional energy savings 

and guaranteeing that the benefit of these savings has not been accounted for elsewhere. 

Countries implementing, or considering the implementation of ESCs, are in fact aiming to meet 

the requirements of the Kyoto Protocol, 22 and many scientists and policymakers think that the 

best short-term strategy for making significant and rapid GHG reductions is to launch a massive 

 

18 There is currently a voluntary market for renewable energy, which represented approximately 12 million MWhs 

of RECs sold in the U.S. in 2005. This has been a very robust market that has increased exponentially every year 

since it first began in 2001/2 when approximately 180,000 MWh of RECs were sold. At that time, the majority of 

the purchases were from residential customers. In 2006, the majority of the purchases were from non-residential 

customers. For more information, see Green-e Verification Reports for 2002 through 2005, Center for Resource 

Solutions, San Francisco, CA at: www.resource-solutions.org/index.htm . 19 Meredith Wingate, Design Guide for Renewable Energy Certificate Tracking Systems, National Wind 

Coordinating Committee, Green Markets and Credit Trading Work Group, (June 2004). 

20 For example, California climate change policy and programs are listed at: 

http://www.climatechange.ca.gov/policies/index.html. One example of an effort to offset individuals’ GHG 

emissions is TerraPass, which states on its website that it: “helps individuals easily and affordably balance the 

environmental impact of their driving, flying and home energy use by purchasing carbon offsets.” See 

http://www.terrapass.com. 21 The following terms are used interchangeably: white tags, white certificates, energy efficiency certificates, and 

energy savings certificates. To be consistent, the term energy savings certificates, or ESC, is used throughout this 

paper. 

22 Amory Lovins, Energy End-Use Efficiency, presentation to InterAcademy Council, September 19, 2005. In this 

white paper presented to the InterAcademy Council (Amsterdam), a consortium of 90 national academies of science, 

Lovins summarizes knowledge gained in the past three decades about using energy far more efficiently. Among the 

surprising insights: “very large energy savings can often cost less than small or no savings.” This paper is available 

online at: http://www.rmi.org/sitepages/pid171.php#EnergyEff. 
 5

program in support of energy efficiency. One approach is to institute strong energy efficiency 

measurement and verification methodologies along with a credible tracking system that guards 

against double counting and identifies measures that meet additionality criteria.23 ESCs may be 

a necessary tool in order to make this link. 

Under a scheme that uses ESCs, energy suppliers have to save a given quantity of energy, or, if 

they are short of their target, to buy ESCs from other suppliers. Likewise, suppliers who have 

achieved greater energy savings than required are allowed to sell ‘surplus’ ESCs to those who 

are short of their target. Generally, energy savings are obtained from consumers’ dwellings or 

facilities. Suppliers typically use three approaches to generate ESCs: (1) fund energy savings 

programs directed at their customers, (2) contract with appliance retailers who increase their 

sales of energy efficiency goods in exchange for funding from the energy supplier, and/or (3) use 

programs conducted by energy service companies (ESCOs). 

Among the rationales put forward in support of the use of ESCs and other market-based 

instruments are: (1) they can provide a rigorous framework for claiming energy efficiency 

savings; (2) they act as a credible trading tool that can equalize the marginal costs spent on 

complying with an energy-savings (or GHG reduction) target; (3) under certain circumstances, 

an ESC scheme creates incentives for and improves the performance of energy savings 

programs;24 and (4) ESCs may be particularly useful for attracting investment in hard-to-reach 

sectors, such as rental buildings and low-income communities, as well as to attract investment in 

energy efficiency measures with long paybacks that have been slow to enter into the market. 

Since obligated parties have different marginal costs of compliance associated with energy 

savings or GHG reduction targets, and provided that transaction costs are not excessive to 

undermine the potential benefits of the scheme, equalizing marginal costs through trading is 

expected to be beneficial:

 

23 Additionality is a criterion applied to GHG projects stipulating that project-based GHG reductions may only be 

quantified if the project or project activity “would not have happened anyway” (i.e., the project would not have 

happened under business as usual). 

24 Wingate, Design Guide, p.35. 
 6

Apart from complying with this requirement and often being more acceptable than, for 

instance, taxation, market-oriented schemes are likely to change mindsets. Harnessing 

market forces to deliver energy savings may thus focus the attention of businesses on the 

economic benefits of demand-side energy efficiency and energy services and hence 

stimulate both investments and the ESCO [Energy Services Company] industry.” 25

We have found that a significant barrier to the use of ESCs is the problem of transaction costs. 

For example, instituting a rigorous system of energy savings measurement, evaluation and 

verification introduces additional costs on the system’s participants. However, these costs are 

necessary, since the greater certainty of the energy savings results provided by ESCs increases a 

program’s credibility and trust. Therefore, for financial incentive programs and for programs 

with targets set by regulation with financial penalties for non-compliance, the benefits from 

ESCs can exceed any incremental transaction costs. Moreover, any incremental costs will be 

further offset by the added market flexibility afforded by ESCs and by providing a market 

instrument that guards against double counting/selling of the energy savings. 

A potentially significant negative aspect to ESCs is that they make energy savings a marketable 

commodity, rather than a public service or public good. As a commodity, the dictates of the 

market will tend to direct investment towards energy savings measures with the lowest cost, 

thereby deterring investments in projects that may have greater up-front costs, or longer payback 

periods, but would achieve potentially greater or broader energy savings.26 These issues can be 

addressed through the careful design of an ESC program. 

To sum up, ESCs are a subset of market-based policy instruments that are favored for their 

economic efficiency and competition benefits, for improving credibility of energy savings 

measurement and verification, for providing positive incentives for cost reduction, and for 

continuous improvement and ability to minimize costs of compliance with policy targets—the 

market is left free to identify the least-cost options. 

 

25 Ibid 

26 One example is a home weatherization program for low-income households. 
 7

In considering ESCs, there are four primary ways that energy savings certificates might be 

included as part of a GHG reduction program: 

• As a method for verifying compliance with an energy savings target (such as an EEPS 

program); 

• As a trading device (allowing ESCs to be bought, sold or traded) for parties required 

to meet an energy savings or GHG obligation; 

• As a mechanism to demonstrate eligibility for tax incentives, subsidies or carbon 

offset programs; and 

• Incorporating all of the above, wherever ESCs can be created and traded within a 

larger allowance, certificate or project credit trading regime where the ESC benefits 

are equal to or exceed their incremental costs. 

Energy savings targets can be included as part of a GHG cap and trade program or as a 

supplement to such a program. When used as a supplement, energy savings targets can be part 

of a separate parallel program (e.g., Energy Efficiency Portfolio Standard) as they are in Europe 

and Australia, or incorporated as a distinct target within a renewable portfolio standard (RPS) as 

is the case, for example, in Connecticut. Moreover, energy efficiency savings that meet 

additionality standards and have not been claimed elsewhere could be sold/traded in the 

voluntary GHG emissions market. 

However, because the use of ESCs, especially in Europe, is most closely associated with control 

strategies requiring compliance with energy efficiency targets or meeting energy efficiency 

portfolio standards (EEPS), this paper will particularly look at the ESC and EEPS programs.27

Following this introduction, the whitepaper is organized as follows: 

 

27 An Energy Efficiency Portfolio Standard (EEPS) is a program that sets a specific target for energy savings to 

encourage more efficient generation, transmission, and use of electricity and natural gas. These targets may be 

achieved through a market-based trading system. EEPS programs often include a list of eligible energy savings 

measures that can be used to meet the savings target and may carry a fine or other penalty for non-compliance. 

EEPS programs are also referred to as Energy Efficiency Resource Standards (EERS). 
 8

• Section II reviews the experience and current status of ESC and EEPS programs in 

Europe, New South Wales, and the United States. 

• Section III explores measurement and verification issues addressed in the ESC schemes 

in Europe and New South Wales. 

• Section IV examines the experience with renewable energy certificate (REC) reporting, 

tracking, and accounting systems to see if there are experiences that might be transferred 

to ESCs. 

• Section V evaluates the potential opportunities for complementary demand-reduction 

technologies, such as solar water heating, geothermal heat pumps, district heating, 

combined heat and power, and renewable thermal power (i.e., waste heat at biomass 

facilities), to be incorporated into a comprehensive GHG emissions reduction strategy. 

• Section VI discusses the policy opportunities for using ESCs in the United States to 

encourage energy savings at local, state and national levels. 

• Section VII summarizes the barriers and issues identified in the earlier chapters, with a 

particular focus on transaction costs, evaluation, measurement and verification (EM&V) 

costs, cream skimming, emissions trading, energy savings targets, integrating RECs and 

ESCs, ownership of ESCs, and double counting/selling. 

• Section VIII and Section IX are the concluding sections. Here, we discuss significant 

issues and barriers to ESC schemes and lay out a roadmap for overcoming these 

problems. We include a list of principles for governing ESCs, strategies for balancing and 

reducing transaction costs, and we present suggestions for integrating ESCs into GHG 

reduction programs. 
 9

II. ENERGY SAVINGS CERTIFICATES 

Energy savings certificates are a tool that can be used with a variety of programs. In conducting 

our review, we have identified the following features as fundamental to the use of ESCs as a 

program tool: 

1) The rules and procedures for issuing ESCs must be transparent with relevant 

information made publicly available while discouraging gaming and fraudulent 

claims. 

2) Programs that use ESCs must be as inclusive as possible (e.g., allow for broad 

participation) and support environmental justice. 

3) Programs that use ESCs must be designed in a manner that does not exacerbate lost 

opportunities (e.g., neglecting energy-efficient new construction), undermine special 

needs (e.g., avoiding investment in low-income households), or make it more difficult 

to justify longer payback energy efficiency investments (e.g., whole house retrofits). 

4) Technical provisions must ensure real, measurable, verifiable and beyond businessas-usual (i.e., additional) energy savings. 

5) A mechanism for the independent verification of the savings must be built into the 

system. 

However, despite their usefulness, ESCs are not in wide use. New South Wales (Australia) 

instituted the first program in 2003, and, since then, programs have been started in a few 

European countries: first in Italy, followed by Great Britain, and most recently in France. In this 

section, we discuss in some detail the experiences to date of these countries implementing their 

ESC strategies. 

The European Context 

The European Commission (EC) has been very active in promoting energy efficiency in Europe. 

In 2005, it published the “Green Paper on Energy Efficiency” that stated that by 2020 the 
 10

European Union could save at least 20 percent of its energy consumption in a cost-effective 

manner, listing several options to meet this goal.28 And in 2006, the Commission issued its 

“Directive on Energy End-Use Efficiency and Energy Services” promoting energy efficiency and 

the market for energy services.29 

As part of the discussion leading up to the Directive on Energy End-Use Efficiency, nongovernmental organizations (NGOs) argued that “white tags are a good scheme and should be 

supported and further implemented at the EU level.” 30 The EC staff agreed and recommended 

that the “implementation or extension of white tag schemes should be done carefully and 

consistently with existing measures, bringing added value and not duplicating.” 31 As a result, the 

Directive stated that at the end of the third year of its implementation, the Commission will 

discuss the opportunity to introduce a white certificate system at the European level. The 

Directive is expected to enter into force in 2008. 32

As a result, Italy, followed by Great Britain and France, has introduced ESCs to promote energy 

efficiency investments as a cornerstone of a sustainable energy policy.33 The programs are just 

beginning, so only very preliminary results are available. 

In Europe, the demand for ESCs has been driven by establishing compulsory national energy 

savings targets34 aimed at increasing national and European energy security, meeting GHG 

emissions reduction targets set forth in the 1997 Kyoto Protocol, and reducing the burden on the 

poor. 

 

28 European Commission, Green Paper on Energy Efficiency: Doing More with Less, (Brussels, June 2005). 

29 European Commission, Directive 2006/32/EC of the European Parliament and of the Council on Energy End-Use 

Efficiency and Energy Services and Repealing Council Directive 93/76/EEC, (Brussels, April 5, 2006). 30 European Commission, Report on the Analysis of the Debate of the Green Paper on Energy Efficiency, Staff 

Working Document, (Brussels, 2006). 

31 Ibid. 

32 European Commission, Green Paper on Energy Efficiency: Doing More with Less, (Brussels June 2005). 33 In the Flemish region of Belgium, there are savings obligations imposed on electricity distributors without the 

certificate trading option. Denmark and the Netherlands are discussing the possibility of an ESC trading system. 34 Measured in tons of oil equivalent saved [toe]. A toe is the energy content of one ton of oil. 
 11

Italy 

Italy currently has the only fully-fledged tradable, ESC system in the world. 35

It has established a goal of reducing its energy intensity (energy use per gross domestic product) 

by 2 percent per year until 2015, and then scaling up to 2.5 percent per year until 2030.36 

In 2001, the Italian Ministry of Industry established an obligation for gas and electric distribution 

companies with more than 100,000 customers in 2001 to achieve specific annual energy savings 

targets during a five-year period from 2005-2009. Italy’s Regulatory Authority for Electricity 

and Gas (AEEG) designed the program, and the Italian scheme for ESCs became operational in 

January 2005. 

In the Italian Scheme, the energy savings targets increase in stringency each year over the 2005-

2009 period. The mechanism is planned to deliver energy savings equivalent to 5.8 million toe 

(Mtoe) in the five-year target period. Total electricity savings could amount to nearly 14 TWh, 

while natural gas savings could total about 3.3 billion cubic meters. Italian targets are just for 

savings achieved each year, and do not include expected savings in the future. 

The program allows energy service companies (ESCOs) to also earn credits and sell them to 

distribution companies in order for the latter to meet their targets. Distribution companies can 

reduce energy use in several ways: (1) implement energy efficiency programs for their own 

customers or for customers of other distributors; (2) jointly operate programs with ESCOs, 

product manufacturers, installers, or financial institutions; or (3) buy ESCs from third parties. 

Projects in all end-use sectors are eligible. At least 50 percent of the target set for each single 

year needs to be achieved by reduction in the electricity and gas use supplied to electricity and 

 

35 For more information on the Italian Scheme, see: P. Bertoldi, Energy service companies and white certificates: 

The use of market forces to unlock investments in energy efficiency, presented at the International Energy 

Efficiency Conference, (London, Nov. 2, 2005); and other sources cited in the text and in the References: Bertoldi 

and Rezessy (2004, 2006), Bertoldi et al. (2005), International Energy Agency (2006), Malaman and Pavan (2002), 

Pavan (2002, 2004, 2006b), and Rezessay et al. (2006).. 

36 In Italy, as in other countries, reductions in energy intensities are seen as one metric for reducing GHG emissions. 
 12

gas users. This stipulation is commonly referred to as the “50 percent constraint.” The remaining 

target share can be achieved by primary energy savings in all of the other end-use sectors. 

The trading of certificates represents the market-based component of Italy’s energy efficiency 

efforts. As discussed earlier, the certificate is a market instrument that carries a property right 

over a certain amount of saved energy and ensures that the benefits of these savings have not 

been accounted for elsewhere. While the energy savings targets are annual targets, under Italy’s 

trading system, ESCs are valid for up to 5 years.37 If the obligated parties fall short of their 

targets, they must pay a penalty for non-compliance. However, the penalty only avoids one year 

of non-compliance, not the full five years for which measures must be maintained. Therefore, in 

some cases, the shortfall must be made up in subsequent years. 

Based on the results of previous measurements, calculations and evaluation studies, specific 

demand savings values are recognized for specific energy-saving measures and are accepted as 

“deemed savings” values. Deemed savings measures are being steadily added to the Italian 

program. In other cases, savings can be estimated using engineering approaches developed by 

the regulators. This allows for new project ideas to be developed and submitted to regulators for 

a pre-implementation “qualitative check,” but final savings estimates must be submitted and 

approved following project implementation. 

To illustrate the Italian Scheme, we list some of the eligible measures developed by the 

Government, including measures for which deemed savings values were set by the regulator: 

• Electric motors and their applications 

• Lighting systems 

• Reduction of stand-by power38 

• Reduction of electricity consumption in thermal uses 

 

37 The Italian targets assume that measures will be in place for five years and imply an obligation to maintain the 

measures for at least five years. 

38 A surprisingly large number of electrical products -- from air conditioners to VCRs -- cannot be switched off 

completely without being unplugged. These products draw power 24 hours a day, often without the knowledge of 

the consumer. We call this power consumption "standby power." For more information, see http://standby.lbl.gov. 
 13

• Reduction of air conditioning electricity consumption 

• Promotion of high efficiency electric appliances in offices and homes 

• Substitution of electricity to other energy sources with reduction of primary energy 

consumption 

• Heating/cooling and heat recovery in buildings supplied with non-renewable fuels 

• Development of renewable energy sources at users’ premises 

• Promotion of electric and natural gas vehicles 

• Campaigns for education, information, and promotion of energy efficiency 

Only investments in energy efficiency technologies, which are referred to as “hard measures,” 

are included in Italy’s system. “Soft measures,” such as behavioral changes, are not eligible. 

Public information campaigns are eligible only if they are connected to specific hard measures. 

While the maximum lifetime of most eligible projects is 5 years, for the following measures, the 

lifetime is extended to 8 years since they are very likely to stay in place for that length of time: 

• Thermal insulation of buildings 

• Control of radiation entering through windows during the summer 

• Bio-climatic architecture 

• Passive cooling 

• Solar water heating 

Additionality is a key issue in the Italian ESC program. Only savings that are achieved over and 

above market trends and legislative requirements are counted against the Italian targets. We 

discuss additionality in more detail in Section IV. 

As stated above, the Regulator (AEEG) implements the trading scheme. Certificates can be 

issued only after authorization by the Regulator. One ESC is equivalent to 1 toe, and can be 

banked within the 5-year compliance period. ESCs can be traded bilaterally, or through an 

organized, official market managed by the Electricity Market Operator (GME) according to rules 
 14

and criteria approved by AEEG. The GME issues and registers ESCs upon specific request by 

AEEG, organizes market sessions, and registers bilateral over-the-counter (OTC) contracts in a 

Registry. Once they have been entered in the Registry, the ESCs are available for trading. ESCs 

are issued to all distributors and their controlled companies, and to energy service providers, 

including ESCOs. 

Provided that all legal and technical requirements are met, any interested party can participate in 

the spot market and have an account in the Registry to record certificates bought and sold. Each 

party must pay an annual fee that covers the costs borne by the Electricity Market Operator to 

administer the Registry, and for the market sessions where trading of ESCs occurs. There is a 

basic fee plus a variable charge for each certificate transaction, including those of bilateral 

contracts. Market sessions are held at least once a month during the year, and at least once a 

week in the four months prior to the annual compliance check. Market rules include procedures 

to ensure the integrity of the market to both sellers and buyers—each participant is allowed to 

sell only the certificates that are registered on their account, and certificates are transferred from 

the seller’s account to the buyer’s account only upon payment of the total value of the 

transaction. Aggregate data on the ESC trading scheme are published once a year in the 

Regulator’s Annual Report. 

In the Italian scheme, there are three types of ESCs differentiated in terms of: (1) electricity 

savings, (2) natural gas savings, and (3) reductions in fossil fuels due to fuel switching, but only 

if combined with energy efficiency improvements. Banking of certificates is allowed throughout 

the 2005-2009 period, and certificates issued in any of these five years can be used to meet the 

targets set for the period. Energy savings achieved by “early actions” from projects developed in 

2001-2004, the four years prior to the implementation of scheme, are considered to be market 

eligible, subject to the Regulating Authority’s approval. There are no restrictions on banking. 

However, because of concerns about long-term compliance borrowing of ESCs is not allowed. 
 15

Monthly trading sessions started in 2005, and the first weekly trading sessions were held in 

March 2006 and continued until the end of May; the first compliance check was made in early 

June. Trading was found to be at a level significantly more than the annual target (approximately 

1 million toe, or 86 MWh). However, while OTC trades were strong, marketplace trading was 

lower than expected with only a few thousand certificates exchanged during the sessions.39 

Because the obligated distributors had, on average, fewer certificates than they needed to meet 

their obligation, there was a larger share of trading during the second week of May, prior to the 

first compliance check. This also reflected the prevailing strategy of obligated distributors who 

have tended to rely on the market to buy certificates from third parties instead of developing their 

own energy efficiency projects. At the first weekly trading session in March 2006, the price for 

ESCs started out at 80 Euros/certificate (105 USD/certificate, or approximately $0.01/kWh); the 

most recent numbers have averaged 80-85 Euros/certificate. The compliance check with the 

2005 targets was made by the Regulator in early June 2006, as required, and found that the 

national target was met, including the 50 percent constraint, and banked certificates owned were 

in excess of the first year’s target. 40

Since January 1, 2005, AEEG has received more than 350 requests for the verification and 

certification of energy savings, drawn from 1,100 energy saving projects. The energy efficiency 

projects are expected to save, at least, 155,000 toe: 97,854 toe for electricity distributors, and 

58,057 toe for natural gas distributors. Looking more closely, about 40 percent of the projects 

submitted to the AEEG were performed by electricity and gas distributors, usually in conjunction 

with third parties (e.g., equipment manufacturers, installers, and ESCOs), while the other 60 

percent of the projects were performed directly by ESCOs accredited by the Regulatory 

Authority. This distribution reveals the potential for market and OTC trading, both prior to the 

first compliance check and in years following. 

 

39 Personal communication with Marcella Pavan, Dec. 4, 2006. 

40 Ibid. 
 16

The Regulator authorized the Electricity Market Operator to issue certificates equal in volume to 

the certified energy savings. In June 2006, the AEEG completed its evaluation and certification 

of ESCs, amounting to a total savings of about 280,000 toes.41 About 75 percent used default 

savings estimates (otherwise known as deemed or stipulated savings) established by the 

Regulatory Authority, 21 percent used engineering estimates with some metering, and only 4 

percent used monitored savings. Popular measures in the first year included cogeneration, district 

heating improvements, and public lighting projects. 

The Italian approach reflected the importance of having reliable but simplified energy savings 

calculation techniques and verification rules for starting and promoting the development of the 

scheme. 

Table 1 shows energy savings achieved from the following accredited systems/end uses: 

Table 1: Percent of Savings by Sector in Italy

System providing savings 

Percent of 

energy 

savings (%) 

Generation and distribution systems for various energy carriers (e.g., 

systems for natural gas decompression, cogeneration, district heating) 29 

Household electricity consumption (e.g., lighting systems, electric water 

heaters, small PV systems, white goods, heating pumps, air conditioning 

systems) 

28 

Heating energy consumption in households and the commercial sector 

(e.g., boilers and water heaters, wall insulation and double glazing, solar 

systems for heating water) 

20 

Public lighting (e.g., street lighting) 19 

Industrial energy consumption (e.g., high efficiency industrial motors, 

variable speed drives) 5 

Because the AEEG found that with the overall energy savings target for Italy’s electricity 

distribution sector and its natural gas sector were achieved, a surplus of ESCs could be “banked” 

for the following years. The largest part of these savings came from “early actions” (the crediting 

of energy efficiency measures that were installed prior to the start of the program – from as early 

 

41 Ibid. 
 17

as 2001). It is important to reiterate, that because the crediting lifetime for the majority of 

eligible projects is limited to 5 years, a very large amount of energy savings certificates will be 

released in the first few years of Italy’s program. Therefore, as it proceeds, the program’s 

increasing stringency of its targets will produce an increasing need for new certificates. This, in 

turn, will require more new eligible energy efficiency projects in order to obtain sufficient 

savings to meet the future targets. 

Great Britain 

In Great Britain, the Energy Efficiency Commitment (EEC) is similar to a scheme for ESCs, 42

and is broadly similar to the later phases of the Energy Efficiency Standards of Performance that 

existed in Great Britain from 1994 to 2002. 43 And, although ESC trading is not allowed in a 

fully realized form, Britain’s’ EEC serves as a good framework for examining energy savings 

certificates. 

The EEC currently runs in 3-year cycles from 2002 to 2011, and there is now a policy 

commitment to extend some form of obligation on suppliers to 202044. In 2001, the “Energy 

Efficiency Commitment” was developed by the government and passed by Parliament, requiring 

electricity and gas suppliers achieve targets for energy efficiency. The program is administered 

by the Office of Gas and Electric Markets (Ofgem – the regulator of gas and electricity markets 

in Great Britain), and the rules were developed by the Department for Environment, Food, and 

Rural Affairs (DEFRA). 

Under the program, specific demand savings values are recognized for many specific energysaving measures, based on the results of previous measurements, calculations, and evaluation 

 

42 For more information on Great Britain, see: Bertoldi, (2005), and other materials cited in the text and in the 

References: Bertoldi and Rezessy (2004, 2006), Bertoldi et al. (2005), Costyn (2002), IEA (2006), Ofgem (2004, 

2005, 2006), and Rezessy et al. (2006). 

43 Personal communication with Nick Eyre, Feb. 6, 2007. 

44 Ibid.
 18

studies. Moreover, one-half of the savings must be achieved from projects focusing on homes 

inhabited by low- and moderate-income families. 

Electricity and gas suppliers, which are primarily deregulated entities that compete against each 

other to provide services to end-use customers, operate different energy-saving programs. The 

suppliers operate these programs both directly and by contracting with third parties and they then 

track the measures installed and the savings achieved. Because energy savings can be achieved 

in homes served by other suppliers, many suppliers have contracted with housing agencies, 

appliance and boiler manufacturers, distributors and vendors, and other third parties to deliver 

energy savings. Electricity and gas suppliers are required to report their energy savings results to 

Ofgem on a quarterly basis using the standardized spreadsheet Ofgem developed. Ofgem 

periodically audits supplier processes and hires firms to inspect a sample of homes and verify 

measures are being installed as claimed. 

Although EEC regulations do not provide for certificate trading, there is some flexibility. With 

written agreement from the regulator, suppliers may trade among themselves energy savings 

achieved from approved measures, or obligations. Spot trading however, is not permitted. 

In addition, should the linkage between excess energy savings and carbon savings be formalized, 

British energy suppliers could conceivably trade achieved energy savings into the small and 

voluntary British national emission trading scheme, or into the European Union’s Emissions 

Trading Scheme (EU ETS), which is mandatory for large emitters in the European Union. 

However, as of now, the linking of carbon savings to these emission trading schemes has yet to 

be formalized. Moreover, this issue may be moot; because the value of energy savings to the 

suppliers is greater in the EEC than in either emissions trading scheme, all suppliers have chosen 

to carry over savings between cycles. 

The first cycle (EEC-1, 2002-2004) required all gas and electricity suppliers with 15,000 or more 

domestic customers to deliver a certain quantity of “fuel standardized energy benefits” by 
 19

assisting their customers to undertake energy-efficiency measures in their homes. Energy savings 

targets are expressed in fuel-standardized terawatt hours (TWh), with the number of kWh 

multiplied by an appropriate adjusting factor: 45

 Coal by 0.56 

 Electricity by 0.8 

 Gas by 0.35 

 LPG46 by 0.43 

 Oil by 0.46 

Under the ECC, projects related to electricity, gas, coal, oil, and LPG are allowed. In the first 

cycle, the overall savings target required that, when compared to 2002 levels, savings equal to 63 

fuel-standardized TWh47 must be achieved by March 2005. The target represented the 

cumulative energy savings over the lifetime of the measures discounted at 6 percent., and is 

equivalent to an annual average 1 percent reduction in carbon emissions from all households. As 

noted above, the suppliers were required to target at least 50 percent of their energy savings 

efforts to low- and moderate-income households.48 This “priority group” is about 7.7 million 

households, and includes pensioners aged 60 or over, occupants of social housing, recipients of 

disability benefits, or households receiving benefits with children under the age of 16. The 

remaining 50 percent of households are higher income consumers, and a portion of their bills 

contributes to paying some of the costs of the energy efficiency measures. 

As system administrator in the British system, Ofgem is responsible for setting each supplier’s 

individual targets based on its individual market shares; overseeing suppliers’ activity; managing 

 

45 The weighting is essentially a carbon weighting of different energy sources. Until 2006, the primary legislation 

did not allow targets to be set in terms of carbon, hence, this system of “fuel-weighted energy savings.” Ibid. 

46 LPG stands for Liquefied Petroleum Gas and is a mixture of hydrocarbon gases used as a fuel in heating 

appliances and vehicles. 

47 This equals approximately, 62 billion kWh. Energy savings are discounted over the lifetime of the measure and 

then standardized according to the carbon content of the fuel saved. 48 Defined as families receiving low income benefits or tax credits. 
 20

the project evaluation and approval processes; verifying savings; managing data; and, reporting 

progress. 

To be eligible for the regulation scheme, all energy efficiency measures must be approved by 

Ofgem. The regulator has defined a number of standard energy efficiency measures that can be 

accepted for fulfilling the obligation, for example: 

• Insulation of attics, walls, and water heaters 

• High efficiency hot water tanks 

• Window glazing 

• Lighting measures 

• Heating measures: boilers, heating controls, solar water heating, heat recovery 

ventilation, ground source heat pumps 

• Energy efficient appliances 

• Combined heat and power 

• Fuel switching 

It is possible for a supplier to use a newer and/or more innovative scheme that is not contained in 

the list of standard measures, but to do so requires independent verification. 

The energy savings achieved by the above standard measures are stipulated in a Technical 

Guidance Manual (see below). New and innovative measures that are not contained in the list of 

standard measures are still possible but require independent verification. The total energy 

savings projected over the lifetime of the energy efficiency measure are discounted and credited 

for the commitment period (e.g., savings expected over a measure with a 20-year lifetime are 

credited upfront over a 3-year commitment period).49 This allows transaction costs to be 

minimized, since nobody has to track the savings from every measure over its whole lifetime. 

This also provides maximum support to longer lifetime measures. In other words, if only three 

years of the 20 years of savings were credited, there would be no incentive for (or interest in) 

including longer lifetime measures. 

 

49 Discounting means that expected savings in future years are discounted back to the date of installation. 
 21

Ofgem produced a Technical Guidance Manual for EEC-1 that provided information on the 

factors that needed to be accounted for in quantifying energy savings from particular measures, 

and guidelines on the best practices to follow. Information is provided for each energy efficiency 

measure on the basis of the annual energy savings figures, the lifetime of the measure over which 

the energy savings can be claimed, and the technical standards for the delivery or installation of 

the measure.50

The first commitment period covered Spring 2002 to Spring 2005, and required achieving energy 

savings of 63 TWh (billion kWh).51 Twelve suppliers were given savings targets, and with the 

exception of two suppliers who stopped installing measures due to administrative problems, the 

suppliers met their EEC targets.52 While committed suppliers were allowed to trade 

commitments, no trades occurred. Finally, the requirement that 50 percent of the target savings 

efforts be focused at Priority Group households was achieved. Over the first commitment period, 

achieved energy savings totaled 87 TWh, exceeding the goal by 40 percent. Of this total, nearly 

one-half (40 TWh) was achieved in the third year of the program. 

Looking at the 87 TWh of savings achieved in ECC-1, the largest share of savings (56 percent) 

came from building insulation measures. There were numerous opportunities for such measures, 

and they were found to be the most cost-effective of all approved measures. 53 Installation of 

compact florescent lights (CFLs) accounted for a quarter of the savings achieved, followed by 

efficient appliances (11 percent), and heating measures (9 percent). And, with the installation of 

almost 40 million CFLs, CFLs were by far the largest number of projects undertaken in the first 

commitment period. Overall, energy savings were achieved at an average cost of about 0.7 pence 

per electrical kWh saved, which is less than 1.5 U.S. cents/kWh. 

 

50 Office of Gas and Electricity Markets, Energy Efficiency Commitment 2002-2005: Technical Guidance Manual, 

Issue 3, (London, 2004). 51 These figures are for lifetime energy savings for measures installed over the first commitment period. 52 Because the two companies had ceased energy trading, no penalty was imposed on them. 53 There are about 9 million uninsulated walls: most homes built in the period 1930-1979 were constructed in this 

way. Earlier homes tended to have solid walls, and more recently built homes have insulated walls. Eyre, (2007). 
 22

Because of the larger than expected savings in the first commitment period, higher goals were 

established for the second commitment period (EEC-2). For this period, a goal of 130 TWh was 

set, which was roughly double the target set for EEC-1. Importantly, in this commitment period, 

the threshold for obligation increased from 15,000 domestic customers to 50,000 domestic 

customers. This second period also included updated lists of measures and deemed savings 

values. The goal for the 2005-8 period was to achieve approximately a 2 percent reduction in 

annual UK residential energy use, which amounted to savings of nearly 0.7 percent per year. 

However, due to carryover savings from the first commitment period,54 about 25 percent of the 

2005-8 target was actually achieved before the beginning of the new commitment period. 

The evaluation of the first year of EEC-2 found that the suppliers achieved 60 percent of their 

overall target. While roughly 46 percent of overall savings was saved in the Priority Group, a 

considerable amount of these savings were from energy savings carried over from EEC-1. 

Excluding the energy savings that were carried over, only 40 percent of the suppliers’ activity 

were in the Priority Group. More savings occurred in the Non-Priority Group than the Priority 

Group because the former paid some of the costs of the measures, thus making it cheaper for the 

suppliers. 

Due to changes in the building codes, sales of efficient appliances, and operating experience with 

CFLs, and adjustments in the calculation procedures, insulation measures were expected to be 

even more important in the second commitment period, while efficient boilers, appliances, and 

CFLs were expected to account for a smaller portion of total savings. And, as expected, supplier 

activity targeting the Priority Group has promoted insulation measures. While a wider range of 

allowable measures was delivered to the Non-priority Group, the majority were also insulation 

measures. Consequently, roughly 80 percent of the total energy savings achieved to date have 

come from the installation of insulation measures. However, other measures have been widely 

 

54 Suppliers, who over-achieved their savings target in the first commitment period were allowed to transfer these 

savings to the second commitment period. 
 23

and effectively promoted: roughly 15 million additional CFLs were distributed in the first year of 

the EEC-2. 

To date, there has been little interest in trading because energy savings can only be traded once 

the supplier’s own energy savings target has been achieved. As noted earlier, rather than trading, 

suppliers who exceeded their EEC-1 target have chosen to carry their savings over to EEC-2. 

Work has just started on setting an appropriate goal for the Energy Efficiency Commitment 

2008-2011 period. Since large commercial and industrial customers are covered by other 

programs related to the UK’s commitments under the Kyoto Protocol to reduce GHG emissions, 

there is some discussion of expanding the EEC program to include small commercial customers. 

France55 

France has established the most recent ESC scheme. In July 2005, the French legislature passed a 

new energy law that included energy savings targets.56 The total energy savings target for the 

first three years is 54 TWh in final energy, cumulative over the life of the energy efficiency 

actions and discounted at a rate of 4 percent. These savings must be achieved in the three-year 

period July 2006 – June 2009, and within this period there are no interim, annual deadlines; the 

targets will be verified only at the end of the period. Overall, the expected cost of action is 

estimated to be less than 20 Euro (26 USD) per MWh. The Ministry of Industry is responsible 

for establishing the scheme, allocating savings targets, administering the scheme, and issuing 

certificates. Certificates are issued and are valid for the July 1, 2006 to June 30, 2008 period; 

certificates also remain valid for four years after the current period. 

 

55 For more information on the French scheme, see: Bertoldi, (2005), and other sources cited in text and in 

References: Bertoldi and Rezessy (2004, 2006), Bertoldi et al. (2005), IEA (2006), Karl (2004), Lefebvre (2006), 

Rezessy et al. (2006), and Urvoas (2007). 

56 European Council for an Energy Efficient Economy (ECEEE), French Law to Drive Down Energy Consumption, 

(May 31, 2006), available at: http://www.eceee.org/news/news_2006/2006_05_31/
 24

Energy savings targets are set for suppliers of electricity, natural gas, domestic fuel, and heating 

and cooling for stationary applications, but not for suppliers of fuel for transport. Energy savings 

targets are shared among suppliers with annual sales beyond a fixed threshold. Small electricity, 

natural gas, and heating and cooling suppliers of less than 400 GWH in annual energy sales are 

exempted. 

A target of 54 billion kWh (54 TWh) of electricity or the equivalent for other fuels, was 

established for lifetime savings for measures implemented in 2006-2008, discounted at the rate 

of 4 percent per year. There are no annual targets – just a single, overall average three-year 

target, which for 2006-2008 is on the order of 0.15 percent of French energy use. 

The obligated actors received targets in proportion to their market sales in the residential and 

commercial sectors and their threshold depends on the kind of supplied energy: 

• For suppliers of electricity, natural gas, heating or cooling, the threshold is 0.4 TWh/year 

• For suppliers of LPG, the threshold is 0.1 TWh/year 

• For suppliers of domestic fuel, there is no threshold 

The Industry Ministry proposed the following breakdown by energy supply sectors: 

• 57% for electricity supply 

• 26% for gas supply 

• 1% for heating and cooling supply 

• 13% for domestic fuel suppliers 

• 3% for LPG 

Suppliers can either motivate customers to take energy efficiency actions, implement energy 

efficiency actions themselves, or buy ESCs from third parties for the amount of savings needed. 

As was explained earlier, ESCs are tradable certificates, specified in terms of cumulative kWh 

achieved. The savings must be additional to the business-as-usual case.
 25

In the French scheme, there is a focus on standardized actions, and standardized projects with 

stipulated energy savings are encouraged. Custom measures can also be implemented and 

savings are assessed on a case-by-case basis. 

The French Agency for Environment and Energy Management (ADEME), and an industry 

group, the technical Environment and Energy Association (ATEE), are responsible for defining 

standardized actions. The Ministry of Industry then validates these actions and issues a decree to 

make them a French regulation. A list of standardized actions has been defined and includes 

residential/commercial measures, industrial measures, and transport measures. It is important to 

note that while transport fuel suppliers do not have obligations, transport energy savings are able 

to earn certificates. Among the eligible technologies are: 

• Energy efficient lighting, appliances, boilers, and motors 

• Insulation of attics, walls, and water heaters 

• Double glazing of windows 

• Heating controls 

• Variable speed motors 

• Wood-fired heating systems for homes, district heating, or industry 

Actions conducted to meet the obligation must be additional relative to the supplier’s usual 

activity. The French scheme excludes plants that are under the European Union’s Emission 

Trading Scheme (EU ETS), fuel substitution between fossil fuels, and energy savings resulting 

only from measures implemented to comply with current legislation. 

Projects must be of a size where the achieved savings are above 1 GWh over the lifetime of a 

project. It is possible to pool savings from similar actions in order to reach the required 

threshold. The parties that are permitted to trade ESCs include all energy suppliers: electricity, 

gas, domestic fuels, cooling, and heating, as well as any economic actor who can implement 

energy efficiency projects and get certificates. 
 26

Certificates are delivered after the programs are carried out and prior to the realization of energy 

savings. Certification of projects implemented by bodies that do not have savings obligations is 

allowed. If an obligated supplier cannot submit a sufficient number of certificates to meet its 

obligations, it must pay a penalty price of 2 Euro cents per kWh (about 2.4 U.S. cents per kWh) 

of the total shortfall. French regulators plan to encourage a market in certificates by publishing a 

list of the prices of certificate sales, and possibly also publishing a list of certificate sellers. 

The French scheme has only been implemented recently, so there is little direct program 

experience by which to evaluate its effectiveness. Decrees were adopted in May 2006, to be 

applied starting on July 1, 2006, and energy savings projects that are implemented after January 

1, 2006 are eligible. 

New South Wales 

On January 1, 2003, the first scheme in the world with an ESC trading element went into effect 

when New South Wales (NSW), the most populated state in Australia, put in place its 

Greenhouse Gas Abatement Scheme [GGAS]. 57 The GGAS was extended on January 1, 2005, 

to become a joint scheme with the Australian Capital Territory. 58

The New South Wales ESC scheme differs from those in Europe, most notably Italy’s. Under the 

2003 GGAS framework, electricity retailers and other parties are required to meet mandatory 

targets for reducing GHG emissions from the electricity they use or supply. A statewide 

benchmark for reducing GHG emissions was set at 7.27 tons of CO2e per capita by 2007, about 5 

percent below the target level of per capita emissions in the Kyoto Protocol baseline year of 

 

57 For more information on New South Wales’ ESC program, see: I. MacGill, H. Outhred, and K. Nolles, Some 

design lessons from market-based greenhouse gas regulation in the restructured Australian electricity industry, 

Energy Policy 34, (2006), pp. 11-25, and other sources cited in the text and in References: Bertoldi and Rezessy 

(2006), Crossley (2005), International Energy Agency (2006), Independent Pricing and Regulatory Tribunal (2006), 

and Sniffin (2006). 

58 While there are some slight differences in the implementation of the GGAS in the Australian Capital Territory, the 

programs are essentially the same. 
 27

1989/1990.59 To ensure continual progress towards the 2007 end target, the GGAS included 

progressively tighter annual reduction targets, from a target of 8.65 tons per capita in 2003 and 

leading to the final benchmark of 7.27 tons per capita in 2007, a level that was to be maintained 

until at least 2012. Recently, the GGAS was extended until December 31, 2021, and the per 

capita target will remain at 7.27 tons, until a final decision is reached on whether Australia 

adopts a national cap and trade style emissions trading scheme. 60 

The parties required under the GGAS to meet targets for GHG emissions are called “benchmark 

participants.” Each year, based on their contribution to the supply of electricity in New South 

Wales, the required level of reductions of GHG emissions is established for each benchmark 

participant. For example, if an electricity retailer sells 5 percent of total electricity sales in NSW, 

it is responsible for meeting 5 percent of the required reduction applied to the NSW electricity 

sector’s total benchmark. In addition, there is a non-compliance penalty of AUD 11.50 (8.9 

USD) per ton of emissions above the target levels. 61

Benchmark participants include the following: 

• Electricity retailers 

• Electricity customers taking supply directly from the Australian National Electricity 

Market 

• Electricity generators with contracts to supply electricity directly to customers 

• Other parties who consume large volumes of electricity in New South Wales and who 

elect to participate directly in the scheme 

 

59 While Australia signed both the original United Nations Framework Convention on Climate Change (UNFCCC) 

and the subsequent Kyoto Protocol, to date the Protocol itself has not been officially ratified. Australia is listed as 

an Annex I party, or a developed country with GHG emissions reduction targets based on 1989-1990 base levels, 

see: UNFCCC, Kyoto Protocol: Parties, Australia. 2007. http://maindb.unfccc.int/public/country.pl?country=AU 60 Private communication with Margaret Sniffin, (Jan. 23, 2007). 

61 Until 2009, these penalties are subject to adjustments based on the Consumer Price Index [CPI]. Starting in 2010, 

the penalty will be increased by one dollar each year for four years, and continue to be adjusted by the movement of 

the CPI. A more complete discussion is found in: NSW Greenhouse Gas Abatement Scheme, Issue 2, (2006). 
 28

In addition, organizations carrying out State “significant developments”62 and large customers63

can elect to manage their own GHG benchmarks. These entities are called “elective benchmark 

participants,” and having nominated which of their sites are parts of the scheme, they must meet 

the benchmark reduction targets for those sites. 

Under the GGAS, tradable NSW Greenhouse Abatement Certificates (NGACs) can be used by 

participants to meet their CO2 reduction targets. A NGAC represents the abatement of one ton of 

CO2, and is a transferable certificate that can be purchased by a benchmark participant and then 

surrendered when compliance reports are filed. Abatement certificates are created by parties 

carrying out GHG abatement projects accredited and pre-approved by the independent economic 

regulator for New South Wales, the Independent Pricing and Regulatory Tribunal of NSW 

[IPART]. 64 

In the Scheme, NGACs can be created through the following measures: a) Low-emission 

generation of electricity (including cogeneration), or improvements in emission intensity of 

existing generation activities; b) Demand-side abatement (DSA); c) Carbon sequestration in 

forests; and, d) Reduction of on-site GHG emissions in industry that are not directly related to 

electricity consumption. Since energy efficiency is a focus of this report, we further explain the 

five main classes of DSA measures that are allowed in the NSW scheme: (1) energy efficiency 

projects that modify existing energy consuming equipment, processes, or systems, or which 

modify energy usage; (2) energy efficiency projects that replace existing energy consuming 

equipment: (3) energy efficiency projects that install new energy efficiency equipment that 

replace similar equipment; (4) fuel switching projects, where the substitution results in reduced 

GHG emissions; and (5) on-site electricity generation that replaces supply from the grid, where 

the substitution results in reduced GHG emissions. 

 

62 So far, no organizations conducting State significant developments are elective benchmark participants. 

63 A large customer is defined as a customer other than a retail supplier that, on its own or together with other related 

entities, has an electricity load within NSW of over 100 GWh per year at one site or multiple sites owned or 

occupied by the customer, as long as one of the sites uses over 50 GWh per year. 64 In addition to accrediting abatement projects, IPART is responsible for overall administration of the GGAS, 

including conducting audits for verification and compliance, and managing the GGAS Registry. 
 29

All of the projects for creating emission reductions have to be additional as compared with a 

“before” baseline and, therefore, require the establishment of business-as-usual baselines. This 

definition of additionality is different than the criteria used for the Clean Development 

Mechanism in the Kyoto Protocol, where the project would not have been implemented in the 

normal course of business in the absence of the GGAS. 

Based on the scale and complexity of the project, audits may be required at the accreditation or 

pre-approval stage, and after energy savings are realized. As of 2006, over 150 auditors from 14 

audit firms have been trained by the Scheme Administrator. 65

The right to create and sell NGACs rests with the party liable to pay for the energy consumed at 

the site where a NGAC project is implemented. To illustrate with the earlier example of the 

electricity retailer, the retailer may then transfer the right to create and trade NGACs to other 

electricity retailers, other benchmark participants, and all end use sectors. This ability to assign 

to third parties the right to create NGACs also creates the opportunity for firms providing energy 

management services (e.g., ESCOs) to offer the creation of NGACs as an additional value-added 

service. 

NGACs can be freely traded between benchmark participants; banks, traders, and corporations 

can also participate in the trading system.66 All buying and selling of NGACs is done in the open 

market with ownership transfers performed through the GGAS Registry. Certificates and trades 

are recorded in the Registry that is maintained by a private sector contractor; the Registry is not a 

trading platform and trading is done outside of the Registry. Purchasers can self-register on the 

Registry and then buy NGACs. However, under this scheme, projects cannot create both NGACs 

and renewable energy certificates. And although some brokers are operating, most trades are 

bilateral. The government is not involved in trading. 

 

65 Crossley (2007), McGill, et al, Design Lessons (2006), NSW Greenhouse Gas Abatement Scheme, (2006). 66 The scheme also allows some large electricity customers to claim credit for reducing on-site GHG emissions from 

non-electricity related industrial processes at sites that they own and control. These large users can create Large 

User Abatement Certificates for these activities, but these certificates cannot be traded. 
 30

As of the end of 2006, 188 projects were accredited: 97 generation, 82 demand-side abatement, 5 

carbon sequestration (forestry) and 4 large users (non-electricity abatement). This represented a 

steady increase since the end of 2005 when 146 projects were accredited. 

Looking specifically at DSA projects in 2006, 36 were in the residential sector, 28 were in the 

commercial sector, 14 were in the industrial sector, and 5 were on-site generation projects.67 In 

particular, the number of DSA projects accredited in the residential sector significantly increased 

from 11 in 2005 to 36 in 2006, an increase that is also reflected in the large proportion of 

certificates being registered from this sector (98 percent of all DSA certificates). However, 

accredited parties have until June 30, 2007 to register certificates for 2006 abatement, and to date 

no certificates have been created from the industrial and commercial sectors, and only 1.8 

percent have been registered from on-site generation. 

Benchmark Statements were due by March 18, 2007 for the 2006 compliance year. It is 

expected that for 2006, all participants will comply with the Scheme and there were will be more 

certificates created than required to meet the obligations of the Benchmark Participants. The 

number of NGACs surrendered and accepted in 2006 is projected to increase by 25 percent 

compared to 2005. 68 As certificates are bankable, these are available to meet compliance 

regulations in future years. 

As noted above, NGACs are traded on the open market. The current price is 11-15 AUD (8.6 

USD-11.6 USD) per ton of emissions, a price that is effectively capped by a penalty of 11.5 

AUD per ton of emissions. The funds generated by the penalties may be used to provide 

additional revenue for abatement projects. 

The primary market for NGACs has been electricity retailers, where over 32 million certificates 

have been created to date. The surrender obligation for 2006 is estimated to be approximately 10 

 

67 IPART (2006); Sniffin, (2007), 

68 Ibid. 
 31

million certificates, effectively offsetting a portion of the GHG emissions associated with their 

electricity purchases. 69 Energy efficiency generated 5.9 million NGACs in 2006 as compared to 

1.5 million in 2005, 742,233 in 2004 and 345,141 in 2003.70 There has been a strong growth in 

residential energy efficiency projects, particularly giveaways of CFLs and low-flow 

showerheads. 71 However, while large companies are rolling out more energy efficiency projects, 

72 projects in commercial buildings represent less than 2 percent of NGACs created to date.73

While energy efficiency is recognized as the lowest cost GHG abatement option, because they 

result in small amounts of reductions, occur across many sites, involve multiple activities, and 

often involve behavioral change that cannot be easily quantified and claimed as NGACs, 

transaction costs have been perceived as a major barrier to the development of small-scale 

energy efficiency projects, Other inhibiting factors include: applicants must pay a fee of 500 

AUD (389 USD) per project for accreditation, need a good record keeping system, may pay for 

audits (the average cost of an audit is about 10,500 AUD (8,167 USD), and incur ongoing 

compliance costs. 

In 2005, 95 percent of projects using deemed factors under the Default Abatement Factors 

method. However, 2006 saw a dramatic increase in energy efficiency NGACs, increasing from 

less than 5 percent of total certificates in 2005 more than 27 percent in 2006.74 Moreover, the 

Administrator of the GGAS is trying to minimize the transaction costs and the administrative 

burden, by combining small projects with similar geographic locations, technology types, 

calculation methods, etc. 

 

69 Sniffin, (2007). 

70 IPART, (2006); Sniffin, (2007). 

71 To account for the possibility that some households will not install these products, or will delay the installation of 

these products, an Installation Discount Factor (IDF) is applied that discounts the amount of NGACs that can be 

earned from these products. Initially, the IDF was 0.8 for products that were given away, meaning that 80 percent of 

the calculated abatement delivered by these products was recognized by the regulator. However, effective August 

25, 2006, the IDF was changed to 0.4, so that it may no longer be cost effective to provide these products free of 

charge to customers. 

72 Sniffin, (2006). 

73 Sniffin, (2007). 

74 IPART, (2006); Sniffin (2007). 
 32

Today, in NSW, third parties are now seeing the benefits in bundling projects, and there is 

increasing interest from non-liable parties in buying NGACs. NGACs are now recognized as 

evidence of verified and legitimate sources of GHG abatement,. NGACs are increasingly being 

used outside of the GGAS, as for example, to provide GHG emission offsets for events or 

products, to channel environmental funds to GHG abatement, and for use in other emissions 

reductions schemes that allow project-based offsets. 

Comparison of Countries 

Table 2 summarizes the key features of the New South Wales and the three European ESC 

systems in place. 

Table 2: Features of White Certificate Systems in Europe and New South Wales 

Italy France Great Britain 

(EEC-2, 2005-

2008) 

New South 

Wales 

Description Sets specific energy 

savings goals that 

must be achieved 

each year 

Sets specific energy 

savings goals that 

must be achieved 

over a 3-year 

period 

Sets specific 

energy savings 

goals for each 3-

year period 

Sets specific 

GHG emission 

reduction goals 

that must be 

achieved each 

year 

Unit of target Toe, annual TWh75 TWh fuel 

weighted energy 

benefits 

Ton of CO2e.

Duration of 

current phase 

2005-2009 2006-2008 2005-2008 2003-2020 

Targets 230 PJ76 total 194 PJ total 

(54 billion kWh (or 

equivalent) 

discounted lifetime 

savings) 

468 PJ total 

(130 billion kWh 

lifetime savings) 

No energy 

targets; 5% 

below per capita 

CO2 emissions 

% of Annual 

Demand 

0.5% 1% 1% N/A 

Sector coverage for 

eligible projects 

All consumers All consumers Residential 

customers only 

All consumers 

Restrictions on 

compliance 

50% from reduction 

in own energy sector 

(electricity and gas) 

None 50% from priority 

group (low income 

consumers on 

social benefits) 

None 

 

75 1 TWh (terawatt hour) is 109 kWh, or one million MWh. 76 1 PJ (petajoule) = 1015 J (Joules); since 1 kWh = 3.6 106

 J, 1 PJ = 2.78 108 kWh 
 33

Obligated parties 

and thresholds 

Electricity and gas 

distributors above 

100,000 customers 

served 

Retail electricity, 

gas, LPG, heat, 

cold and heating 

fuel suppliers above 

energy sales of 0.4 

TWh/year 

Retail electricity 

and gas suppliers 

above 50,000 

residential 

customers served 

Electricity 

retailers; 

electricity 

customers taking 

supply directly 

from the grid; 

electricity 

generators with 

contracts to 

supply electricity 

directly to 

customers; 

other parties who 

use lots of 

electricity in New 

South Wales and 

who elect to 

participate 

directly in the 

scheme 

Trading Certificates are 

traded; spot market; 

OTC trading 

Certificates are 

traded; only 

bilateral exchanges 

allowed 

No certificates; 

obligations can be 

traded; savings can 

be traded after 

own obligation 

met; no spot 

market; one-way 

trade in national 

emission trading 

scheme 

Certificates are 

traded; only 

bilateral 

exchanges 

allowed 

Institutional 

structure 

Energy regulator 

(AEEG) plus 

electricity market 

operator (GME) 

Ministry of 

Industry and French 

Agency for Energy 

Management 

(ADEME) 

Energy regulator 

(OFGEM) 

Energy regulator 

(IPART) 

Measurement & 

Evaluation 

Three M&V 

approaches: (1) 

deemed savings; (2) 

engineering with 

field measurement; 

and (3) energy 

monitoring (direct 

measurement). 

Ex-ante energy 

savings based on 

standardized 

engineering 

estimates. 

Ex-ante energy 

savings based on 

standardized 

engineering 

estimates. 

Monitoring only 

affects energy 

savings accredited 

in future schemes. 

Emission 

reductions 

estimated using: 

(1) project impact 

assessment 

method; (2) 

metered baseline 

method; (3) 

default abatement 

factors method; 

or (4) generation 

emissions 

method 
 34

Penalty Fixed by the 

Regulator, taking into 

account the actual 

possibility to meet 

the target (i.e., 

number of certificates 

issued as compared 

to the annual target), 

the magnitude of the 

noncompliance, and 

the state of affairs of 

the non-compliance 

party. 

0.02 Euro (0.025 

USD)/kWh 

No specific 

guidance on how 

penalty would be 

calculated; the 

penalty can be up 

to 10% of the 

supplier’s turnover 

AUD 11.50 (8.9 

USD) per ton of 

emissions above 

the targets 

Among the key differences among the four countries are: 

• Between the Great Britain and Italian approaches, Britain allows for trading of individual 

obligations, while the Italian scheme only allows for trading of savings achieved through 

ESCs. 

• The Italian model does not account for comfort taking, the so-called “rebound effects”,77

but Great Britain does. 

• Great Britain calculates savings with reference to what annual savings will be by 2010 

(i.e., savings in future years are discounted and calculated for each commitment period) , 

whereas Italy uses a five-year time scale (i.e., any savings beyond five years are 

excluded). 

• New South Wales includes ESC trading as part of its overall GHG emission reductions 

scheme; in the European ESC trading schemes, GHG emissions reductions are considered 

one of the benefits of achieving energy savings. 

Recently, there have been other European ESC-related activities: 

 

 

77 Energy efficiency does not always result in energy savings because of the “rebound” effect (also referred to as 

“snapback” or “take back”). For example, some occupants of buildings might raise their thermostat settings for 

winter heating due to lowered incremental energy costs resulting from improved insulation. There is some debate in 

the literature regarding whether snapback is a significant factor for many efficiency measures. See Edward Vine and 

Jayant Sathaye, Discussion of Issues and Methodologies and Review of Existing Protocols and Guidelines,

Lawrence Berkeley National Laboratory, Berkeley, CA, LBN-40316, 1997. 
 35

IEA/DSM Task XIV 

The International Energy Agency (IEA)’s Implementing Agreement on Demand-Side 

Management Technologies and Program, recently supported “Task XIV”, a project on market 

mechanisms for ESC trading. The objectives of the Task were: (1) to assess the experience of 

existing ESC schemes and their effectiveness in reducing energy consumption and CO2

emissions, (2) to detail ESC implementation problems, and (3) to evaluate how ESCs could 

interact with other environmental benefits schemes. The Task started in June 2004 and published 

its final report in June 2006.78

The EuroWhiteCert Project 

The EuroWhiteCert Project was established in April 2005, to support the conceptual and 

technical development of tradable ESCs. The project involves a critical evaluation of the 

experience with already established European ESC schemes. In addition, the project hopes to 

explore the practical implementation of an ESC scheme by developing a uniform measurement 

and verification methodology, certifying existing projects, and identifying a set of alternative 

market participants. The measurement and verification methodology will be tested by verifying, 

certifying and compiling a database of recent energy efficiency and renewable energy projects in 

different European Union Member States, and in different sectors, as well as in terms of 

competing technologies, to ensure that it is applicable in each of the member states, and within 

the framework of a European certification scheme. 

The EuroWhiteCert Project is expected to last until April 2007. In 2006, they published two 

papers: “White Certificates: Concept and Market Experiences,” and “Interaction and Integration 

of White Certificates with Other Policy Instruments: Recommendations and Guidelines for 

Decision Makers.”79

 

78 International Energy Agency, (2006). 

79 These papers are available at: http://www.ewc.polimi.it/ 
 36

III. ENERGY EFFICIENCY RESOURCE STANDARDS IN THE U.S. 

Although no energy savings certificate programs comparable to those in New South Wales or 

Europe have been implemented in the United States, several states are promote energy efficiency 

by developing Energy Efficiency Portfolio Standards (EEPS). In this section, we examine 

various state efforts to develop EEPS80 and consider whether the successful implementation of 

EEPS could motivate states to create energy savings certificates.

There are clearly considerable similarities between an EEPS and the Renewable Portfolio 

Standard (RPS) many states are adopting. The marked exception is that the EEPS pertains to a 

required level of efficiency savings, while the RPS’ requires a level of renewable energy 

purchases. It is important to note, however, that because of these similarities, some states are 

combining a EEPS and a RPS into a comprehensive energy policy. Connecticut recently 

provided for energy savings certificates to be used in conjunction with its RPS, and indications 

are that other states may be moving in that direction. 81

An EEPS consists of targets for energy savings directed at electricity and/or gas utilities; often 

providing flexibility to achieve the target through market-based systems. With trading, a utility 

that saves more than its target can sell savings credits to utilities that fall short of their savings 

targets. Such systems permit the market to find the least-cost savings. 

All EEPS include provisions requiring the utilities or other program operators to provide energy 

savings improvements for the end-users. The utility and/or program operator must document the 

operation and performance of these programs. Some EEPS also include distribution system 

efficiency improvements, combined heat and power (CHP) systems, and other high-efficiency 

 

80 EEPS are also referred to as Energy Efficiency Resource Standards (EERS). 81 S. Nadel, Energy Efficiency Resource Standards: Experience and Recommendations, American Council for an 

Energy Efficient Economy, (Washington, DC, 2006), and sources cited in text. 
 37

distributed generation systems. EEPSs are typically implemented at the state level, but they can 

be implemented over local or regional areas. 

Today, EEPS-like energy savings programs are currently in operation in eight states: California, 

Colorado, Connecticut, Hawaii, Nevada, Pennsylvania, Texas, and Vermont. And, at least two 

other states, Illinois 82 and New Jersey, are working to plan their own programs. Beginning with 

Connecticut, we briefly summarize the eight states whose different EEPS programs are now 

underway. 

Connecticut 

Connecticut adopted its RPS in 1998. In 2005, state energy policy was amended to require 

energy efficiency by commercial and industrial consumers, including CHP plants; energy 

efficiency requirements for residential customers were not included. Under the 2005 legislation, 

electricity suppliers in Connecticut were required by January 1, 2007 to demonstrate that 1 

percent of the electricity they supply was from energy efficiency and CHP, a requirement that 

increases by 1 percent annually, to 4 percent by January 1, 2010. As a result, the utilities would 

need to seek additional energy savings, either by expanding existing programs, or utilizing the 

State’s market-trading system to purchase verified energy savings achieved by third parties, such 

as ESCOs, or buying energy savings certificates directly from the state. 

In 2004, Connecticut’s energy savings were equal to about 1 percent of electricity sales by the 

covered utilities, and of these savings, approximately 64 percent were from the commercial and 

industrial sectors. Connecticut expects that the expanded 2005 energy efficiency requirements 

will increase total energy savings relative to current efforts by almost 0.4 percent of annual sales 

annually in subsequent years. 

 

82 The Illinois Commerce Commission (ICC) opened a rulemaking in the summer of 2006 (Docket 06-0388) to 

implement the Energy Efficiency Performance Standard. However, the ICC subsequently suspended any action until 

it could clarify whether the ICC if fact had the necessary regulatory authority. The issue is now awaiting action by 

the State legislature legislation to resolve the matter. Personal communication with D. Baker (Nov. 6, 2006). 
 38

California 

California has a long history of promoting energy efficiency. In 2005, the California Public 

Utilities Commission adopted regulations setting electricity and natural gas savings targets for 

each of California’s investor-owned utilities (IOU) for the period 2006 through 2008. These 

regulations required the IOU’s to achieve combined energy savings totaling 23,183 GWh of 

electricity and 444 million therms of natural gas by 2013. In order to meet these goals, 

California’s utilities needed to significantly expand their existing energy savings programs. In 

2002, IOU energy efficiency programs saved 1,104 GWh per year. However, to reach the target 

for 2013, the IOUs will need to obtain an additional 2,318 GWh in energy savings each year or 

more than doubling the amount of savings. In 2004, the IOUs began to expand their efficiency 

programs in anticipation of the 2005 regulations, increasing their electricity savings by over 60 

percent from 2002, to some 1,869 GWh. But even with this impressive accomplishment, the 

IOUs still need to increase annual electricity savings by about one-third relative to their 2004 

efforts in order to meet the required 2013 savings targets. Moreover, the energy savings 

programs for natural gas will need to increase even more rapidly, needing to double by 2008 and 

more than triple by 2013. 

Colorado 

Colorado’s largest utility, the investor-owned Public Service of Colorado (also known as Xcel 

Colorado) is required to meet energy savings goals as part of a settlement agreement approved 

by the Colorado Public Service Commission in December 2004 to resolve litigation over its 

proposed new coal-fired power plant. Under the settlement, Xcel Colorado agreed to use its best 

efforts to acquire an average of 40 MW in demand reduction and 100 GWh of energy savings 

from energy efficiency programs each year from January 1, 2006 to December 1, 2013. Based on 

Xcel Colorado’s 2004 sales, the annual savings goals amount to about 0.38 percent sales. 

If the terms of the settlement are met, by January 1, 2014, Xcel Colorado will have achieved a 

cumulative total of 320 MW of total demand reduction and 800 GWh of annual electricity 
 39

savings. Implementation of the settlement by Xcel Colorado began January 1, 2006, and results 

to-date are not yet available.

Hawaii 

In 2001, Hawaii enacted its RPS that was later amended in 2004 to require renewable resources 

to provide 8 percent of electric sales in 2005, with the requirement increasing to 20 percent in 

2020. These amendments also modified the RPS to include energy efficiency as a qualified 

source of renewable energy. The RPS places no cap on energy efficiency savings, nor mandates 

a set-aside for renewable energy savings. Energy from CHP plants is also included. Hawaii’s two 

major utilities must evaluate savings from their efficiency programs, and submit a report 

annually to the Hawaii Public Utilities Commission for review. In 2004, renewable energy and 

energy efficiency resources accounted for about 11.2 percent of electricity sales; of this 11.2 

percent, renewables made up a little more than two-thirds, and the remainder came from energy 

efficiency efforts. 

Nevada 

In 2001, Nevada adopted its RPS, requiring that by 2013, 15 percent of the electricity sold to 

Colorado’s consumers be generated from renewable resources. In 2005, the RPS was amended to 

increase the portfolio requirement to 20 percent of electricity sales by 2015, with provisions 

allowing each utility to use energy efficiency programs to obtain up to 25 percent of the new 

RPS requirements. Furthermore, the RPS requires each utility to obtain at least 50 percent of the 

energy efficiency savings from the residential sector. 

Utilities may operate energy efficiency programs themselves and/or purchase energy savings 

credits from third parties. Each utility uses measurement and verification protocols to validate 

their reported savings. The Nevada Public Utilities Commission then reviews these renewable 

energy and energy efficiency credit submissions; no savings credits are approved until the 

submissions are verified. 
 40

Extra credits may be rolled over to future years. And, if a utility does not meet its portfolio goals, 

it is subject to fines and administrative sanctions.83 The utilities publicly announced their 

intention to achieve the maximum energy efficiency savings allowed under the law. In order to 

reach this goal, the utilities are expected to file a formal request to the Nevada Public Utilities 

Commission to approve a significant increase in energy efficiency funding for 2007-2009. . 

Pennsylvania 

In 2004, the Pennsylvania legislature adopted the “Alternative Energy Portfolio Standards Act:” 

under which renewable energy must increase to account for 8 percent of the power sold in the 

state by 2019 (after 15 years of implementation). Annual targets are set for intervening years. 

Savings from energy efficiency along with hydropower, waste coal generation, and generation 

from municipal solid waste (landfill methane) are included as Tier 2 “advanced energy 

resources.” Starting in 2006, the percentage of electricity generation from Tier 2 resources must 

increase over time—4.2 percent of electricity sold in 2006, 6.2 percent in 2011, 8.2 percent in 

2016, and 10 percent in 2021. 

For energy efficiency savings, there are two categories of savings estimates: (1) deemed 

savings84 and (2) metered savings. For the deemed savings approach, the Pennsylvania Public 

Utility Commission developed a Technical Reference Manual that includes algorithms for 

calculating savings from residential heating, ventilation, and air conditioning (HVAC), lighting 

and appliance measures and commercial and industrial HVAC, motor, and lighting measures. 

 

83 The Nevada Public Utilities Commission can waive fines and sanctions based on a determination that there was 

insufficient renewable energy or energy efficiency resources available for purchase. 84 This savings methodology is used for projects for which expected savings are reasonably well understood and, as 

a result, direct measurements would not be cost effective. Issues of measurement and verification are discussed in 

detail in Section IV. 
 41

Texas 

In enacting its electricity restructuring law in 1999, Texas became the first state to establish a 

requirement that the state’s electric utilities offset a portion of their demand growth through enduse energy efficiency programs. This 1999 legislation introduced retail competition in the sale of 

electricity and directed the Public Utility Commission of Texas (PUCT) to establish energyefficiency programs to meet a specific demand-reduction goal. Under these regulations, and 

subsequent 2001 legislation, beginning in 2003, Texas’ electric IOUs were required to 

implement energy efficiency programs that represented 10 percent of their demand growth. 

Energy savings goals are specified in peak kW and are based on a rolling baseline, defined as the 

average load growth over the previous five years.85 . 

Allowable energy efficiency programs fall into two main classes: standard offer and market 

transformation. Standard offer programs are offered by private energy efficiency service 

providers selected by customers. The utilities provide specified payments per unit of energy and 

demand savings to the service provider. Market transformation programs seek to overcome 

market barriers and promote long-term changes in markets for energy efficiency measures. 

Specific programs are developed by utilities and their shareholders in a collaborative process and 

then approved by the PUCT. 

The energy efficiency programs are funded through public benefit funds generated by utility 

transmission and distribution rates. In 2004, the public benefit funds totaled about $85 million 

statewide. Energy and demand savings are determined through a mixture of deemed savings 

estimates previously approved by the PUCT and in-field measurements in accordance with the 

IPMVP, the International Performance Measurement and Verification Protocol 86 

 

85 Public Utility Commission of Texas, Report to the 79th Texas Legislature, Scope of Competition in Electric 

Markets in Texas, Austin, TX, (2005). 

86 The International Performance Measurement and Verification Protocol, or IPMVP, was developed by the U.S. 

Department of Energy and is currently managed by the Efficiency Valuation Organization, a non-profit 

organization dedicated to energy efficiency measurement and verification. See: www.evo-world.org 
 42

In Texas, there currently are eight programs in operation, and the utilities are generally 

exceeding the requirement that 10 percent of load growth come from energy efficiency. In 2003, 

the specified goal was 135 MW, but utility energy efficiency programs reduced demand by 151 

MW, exceeding the goal by 11 percent, and reduced overall electricity use by 370,000 MWh. In 

2004, the specified goal was 147 MW, but utility energy efficiency programs exceed the goal by 

30 percent, reducing demand by 192 MW. And in 2005, the specified goal was 142 MW, but 

utility energy efficiency programs reduced overall demand by 181 MW, exceeding the goal by 

27 percent, as well as reducing electricity use by 500,000 MWh. 87

The apparent success of Texas’ energy efficiency program was recently established in an 

independent audit of program operations in 2003 and 2004. The audit not only confirmed the 

reported savings, but found additional savings. The verified adjusted energy savings showed that 

statewide, peak demand reductions exceeded the statewide goals by approximately 14 percent in 

2003 and by 34 percent in 2004.88 

Vermont 

The Vermont program is different than the other states in this section in that the energy 

efficiency goals were established by a competitively awarded contract and not directly by 

legislation or regulation. Nevertheless, the program functions the same as an EEPS and serves as 

a useful example. 

In 1999, the Vermont Public Service Board (PSB) transferred operations of Vermont’s energy 

efficiency programs from the utilities to a single, statewide “energy efficiency utility” operating 

under the name Efficiency Vermont (EV). EV is financed by a public benefit fund established by 

the legislature, and it is administered by the PSB. Efficiency Vermont is run by a contractor, 

selected through a competitive bid process. 

 

87 Public Utility Commission of Texas, Report to the Texas Commission on Environmental Quality, Emission 

Reduction Incentive Grants, Austin, TX, (2005). 88 Summit Blue Consulting, LLC, et al., Report to Public Utility Commission of Texas: Independent Audit of Texas 

Energy Efficiency Programs in 2003 and 2004, Austin, TX, (2006). 
 43

The selected contractor enters into a performance-based contract with PSB that includes specific 

energy (kWh) and peak demand (kW) savings targets and the mechanism for how the savings 

will be counted. The contractor is required to submit a report annually to the PSB detailing the 

estimated savings claimed for installed measures tracked and documented by its data tracking 

system. 

The contract contains holdback provisions limiting compensation received by the contractor, 

pending confirmation that contractual goals for savings and other performance indicators have 

been achieved. A review of the claimed savings is carried out by PSB, who makes any necessary 

adjustments before issuing a final ruling on the amount of savings achieved. An independent 

review is conducted on verifying savings. 

Efficiency Vermont began operations in 2000, and in 2004 the program achieved 205 MWh of 

annual savings and 26 MW of summer peak demand reduction, results that take into account 

savings obtained in 2004 from measures installed in previous years. A new contract was awarded 

for the 2006-2008 period, with an annual savings goal of over 1 percent of electricity sales each 

year. Verified savings to date have been exceeding the specified goals. 

The key features of EEPS policies in the U.S. are summarized in Table 3: 

Table 3: Summary of EEPS Policies in the U.S. 

State EEPS Description Applies to Savings Target Timeframe Measurement 

and Evaluation 

California Sets specific 

energy and demand 

savings goals 

IOUs Savings goals set for 

each program year 

from 2004 to 2013. 

The savings target for 

program year is: 23, 

183 GWh, 4,885 MW 

peak, and 444 

MMtherms 

2004-2013 

Annual MWh, 

MW, and therm 

savings adopted 

for each of these 

years 

M&E protocols 

established, based 

on IMPVP 
 44

Colorado Settlement 

agreement: sets 

specific targets that 

utility company 

will make “best 

effort” to achieve 

Public 

Service of 

Colorado 

320 MW and 800 

GWh (40 MW and 100 

GWh each year) 

2006-2013 Assumptions 

about free riders 

and spillover are 

made by utility 

and contractors; a 

third-party 

independent 

evaluator 

conducts field 

surveys and 

adjusts savings at 

the end of the 

DSM commitment 

period. 

Connecticut RPS includes 

energy efficiency 

at commercial 

and financial 

facilities, and 

also includes 

CHP and load 

management 

programs 

IOUs Savings goals get for 

each program year: 1% 

for 2007, 2% for 2008, 

3% for 2009, and 4% 

for 2010 and thereafter 

2007-2010 and 

thereafter 

Estimated savings 

are based on 

deemed 

(stipulated) 

savings. Impact 

evaluations later 

verify and true-up 

savings. 

Hawaii RPS includes 

energy efficiency 

IOUs 20% of kWh sales 

(overall RPS target, EE 

portion not specified) 

2020 Not available. 

Nevada RPS includes 

energy efficiency 

IOUs Energy efficiency can 

meet up to 25% of the 

energy provider’s 

portfolio standard, 

Combined EE/RE 

standard is: 6% for 

2005-6, 9% for 2007-8, 

12% for 2009-10, 15% 

for 2011-12, 18% for 

2013-14, and 20% for 

2015 and thereafter 

2005-2015 and 

thereafter 

A third-party 

independent 

evaluator 

conducts field 

studies and 

adjusts Nevada 

Power’s gross 

savings estimates. 

Will now be 

looking at free 

riders and 

reporting net 

savings. 

Pennsylvania Alternative 

energy portfolio 

standard includes 

energy efficiency 

IOUs Tier 2 goals (including 

EE): 4.2% for years 1-

4, 6.2% for years 5-9, 

8.2% for years 10-14, 

and 10% for years 15 

and thereafter 

Years 1-15 and 

thereafter 

Savings estimates 

are based on (1) 

deemed savings or 

(2) metered 

savings 

Texas Sets goals as 

percentage of 

forecast load 

growth 

IOUs 10% 2004 and 

thereafter 

Savings estimates 

are based on (1) 

deemed savings or 

(2) in-field 

measurements 

based on IPMVP 
 45

Vermont Sets energy and 

demand goals for 

overall PBF 

program 

Program 

administrator 

87,766 MWh for 2000-

2, 119,490 MWh for 

2003-5, 

204,000 MWh for 

2006-8 

2000-8 Savings are 

deemed 

(estimated) and 

reviewed by PUC. 

Adjustments are 

made based on 

evaluation results; 

custom 

calculations done 

for custom 

measures. 

Independent 

evaluations verify 

savings every 3 

years. 

Other ESC Experiences in the United States 

GS Energy’s Sterling Planet group is a private for-profit company pioneering the U.S. market for 

ESC, and already has trademarked the term “White Tags” for their product. Sterling Planet is 

focusing on four areas of renewable energy and energy efficiency, including market-based 

approaches; (1) Green Tags; (2) Green Power; (3) Green Buildings; and (4) White Tags. 

As reported recently in TreeHugger Online: 

...Sterling has a ‘nationwide plan’ that allows consumers in any state to invest in energy 

efficiency, and Sterling is also targeting businesses and organizations, with trading and 

banking going both ways. They hope to bring together White Tag buyers and sellers; 

buyers will include electric utilities in mandated markets with portfolio standards and 

corporations or institutions in voluntary markets that are looking to meet greenhouse gas 

emission goals. Sellers will include those who have taken concrete, effective measures to 

reduce their energy use and have contracted with Sterling Planet to measure, monetize 

and certify the White Tags that result. 89

The Sterling Planet group is using computer-based “state-of-the-art technology with advanced 

mathematical techniques and neural network algorithms to establish with greater than 99.9% 

accuracy, scalable and cost-effective processes for measurement, verification and certification of 

 

89 “An alternative to Green Tags—Sterling Planet’s ‘White Tags,’” TreeHugger Online, (May, 2006), available at: 

http://www.treehugger.com/files/2006/05/an_alternative.php 
 46

White Tags.”90 Their neuronetwork-based model, which we refer to as the Sterling Model, is 

based on three components: billing data, weather data, and verification data.91 

Here is an example to illustrate how the model is used92: 

If 100 high efficiency air conditioners are going to be installed in 100 buildings, the following 

activities are conducted: 

1. Baseline data on each building are collected: historical energy use (in this case, 

billing data) and weather data. 

2. After the high efficiency air conditioners are installed, a verification check is made to 

make sure the air conditioners were actually installed. 

3. More recent billing and weather data are collected to calculate current energy use in 

buildings. 

4. Savings are calculated by taking the differences in energy use (before and after the 

installation of high efficiency air conditioners): baseline energy use extrapolated over 

time minus current energy use. 

5. If changes in occupancy are known to have occurred, additional data may be collected 

on previous and current occupancy use, and the energy saving results are normalized 

for occupancy. 

Sterling Planet’s Experience to Date 

At present, the Sterling Model is currently under review by the Pacific Northwest National 

Laboratory and Georgia Tech.93 After these reviews, Sterling plans to give the Sterling Model to 

certification bodies for approval, and if approved, Sterling will give the model to customers for 

free. 94 

 

90 http://www.sterlingplanet.com and http://www.gs-energy.com/carbon.php 91 Personal communication with Paul McGregor, (Nov. 27, 2006). 

92 Presently the Sterling Model is applicable only to commercial and industrial customers. 

93 McGregor, (2006). 

94 Connecticut’s ESC market “opened” at the beginning of 2007. 
 47

IV. MEASUREMENT AND VERIFICATION (M&V) ISSUES 

Because the two are inextricably linked and are a major source of debate, baseline and 

additionality criteria are two issues of particular importance in evaluating energy savings. 

Determining additionality requires a baseline for the calculation of energy saved. In order to 

calculate energy savings, one needs to estimate the baseline energy use for a particular facility 

(i.e., its forecasted energy use). Moreover, many schemes require that the energy savings (or 

emission reductions) are additional to what would have occurred without a program (or ESC); in 

particular, additionality is an important requirement in the Kyoto Protocol’s Clean Development 

Mechanism (CDM). However, determining additionality is inherently problematic because it 

requires resolving a counter-factual question: What would have happened in the absence of the 

specific project? 95 Additionality and baselines vary by ESC system. Most use criteria similar to 

the CDM, in which the project would not have been implemented in the normal course of 

business in the absence of the ESC program. 

We examine in more detail how measurement and verification and baseline and additionality are 

addressed in the four countries with experience with ESCs: Italy, Great Britain, France, and New 

South Wales. 

Italy 

The Italian ESC system uses one or more of the following certification approaches: 

(1) Deemed savings approach: A deemed savings approach is used for projects for which 

expected savings are reasonably well understood and, as a result, direct measurements would not 

be cost effective. This approach is totally a priori, i.e., no on-site measurement of energy 

 

95 Similar challenges are faced in evaluating GHG emissions from project-based mechanisms, such as the Joint 

Implementation and Clean Development Mechanisms in the Kyoto Protocol, and also in evaluating utility programs 

in the U.S. 
 48

consumption is necessary. For each project, a specific amount of saved energy is specified exante for each measure. The savings are stipulated on the basis of technical analysis, as well as 

some simplifying assumptions (e.g., hours of use). In this approach, field measurements are not 

required and, for adjusting energy savings, a default factor is used for free riders (customers who 

would have installed an energy efficiency measure without the program) and for the persistence 

of energy savings (how long the energy savings will last).96 Pre-approval is not required for 

projects under this approach. 

(2) Engineering approach, with some field measurement: used for large-scale projects where 

energy savings are understood but vary by key parameters (e.g., hours of use). In this case, direct 

measurement of hours of use are required and then used with engineering calculations (e.g., 

expected energy use per device). For adjusting energy savings, a default factor is used for free 

riders but the persistence of savings is measured directly. 

(3) Energy monitoring: energy savings are quantified via a comparison of measured 

consumption before and after the project, taking into account changes in other factors, such as 

weather and occupancy levels. This approach is used for those efficiency measures that are less 

predictable due to variation in key parameters (e.g., changes in weather and hours of occupancy). 

For adjusting energy savings, a default factor is used for free riders but the persistence of savings 

is measured directly. 

For all of the approaches, the baseline is the average technology sold at the national level to 

produce the same level of energy service. If differences exist between various areas of the 

country, local averages are used. In contrast, the determination of additionality varies by each 

approach. For example, when using and the deemed savings or engineering approach, 

additionality is addressed after choosing the baseline reference technology (i.e., measures are 

additional if they go beyond the average technology sold at the national level). However, for 

 

96 Given that the crediting lifetime in the Italian scheme is 5 years for the majority of the energy savings measures, 

the persistence of savings over time is assumed to be equal to 100 percent; savings in subsequent years are estimated 

using a default persistence factor. 
 49

those projects using energy monitoring, the project developers have to demonstrate additionality 

in their proposal, which then must be approved by the Regulatory Agency before it can actually 

be applied. Most importantly, in the Italian ESC system, in order for savings to be considered 

additional, they must exceed market trends and those legislatively required. 

In June 2006, eligible operators were able to submit requests electronically (through the AEEG 

website) for the verification and certification of attained savings for the following measures that 

use the deemed savings approach: 

• Replacement of incandescent lamps with CFLs 

• Replacement of residential electric water heaters with electronic ignition gas heaters 

• Installation of more efficient residential gas fired boilers 

• Installation of more efficient residential gas water heaters 

• Replacement of single-pane with dual-pane windows 

• Wall and roofing insulation 

• Installation of high efficiency electric motors in industrial applications 

• Installation of high efficiency refrigerators and freezers 

• Installation of high efficiency washing machines and dishwasher facilities 

• Installation of low flow showerheads in homes, hotels and recreation facilities 

• Installation of faucet aerators in homes 

• Installation of air source heat pumps in new or renovated residential buildings 

• Installation of air conditioners with cooling capacity below 12 kW 

• Installation of variable speed drives for pumping systems below 22 kW 

• Installation of power regulators in public lighting systems 

• Replacement of mercury vapor lamps with high pressure sodium lamps 

• Use of photovoltaic generators below 20 kW 

• Use of solar water heaters 

• Energy recovery from natural gas decompression 
 50

Engineering estimates have been developed for the following measures that use the engineering 

approach: 

• Energy recovery from natural gas decompression 

• Variable speed drives on large hydraulic systems 

• Combined heat and power 

• District heating 

For those monitoring energy use, monitoring plans are required. They must be submitted to the 

Regulator for pre-approval, and must conform to pre-determined criteria (e.g., sample size 

requirements). 

Using predetermined formats, project developers submit their reported savings to the Regulator, 

who then verifies the actual energy savings realized by each project. The verification process 

includes random on-site inspections of the projects sites by the Regulator, as well as on-site 

audits of project-related documentation. 

Most of the projects submitted to date have used the deemed savings and the engineering 

approach. In all cases, ex-post verification and certification of actual energy savings achieved is 

conducted on a yearly basis. 

Great Britain 

In Great Britain, the savings of a project are calculated and pre-approved when the project is 

submitted, based on a standardized estimate that takes into consideration the technology used, 

weighted for fuel type, and discounted (using a discount factor of 3.5 percent) over the lifetime 

of the measure. As noted previously, certificates are awarded only once, for the estimated 

lifetime energy savings of an individual project, and not for the energy savings achieved within 

the current compliance period. Monitoring results only affect the energy savings accredited in 

future schemes. 
 51

Suppliers are accredited with energy savings for their schemes on an ex-ante basis, with 

accreditation based largely on findings from the monitoring of a sampling of projects conducted 

in earlier EEC rounds. The methodology for determining the energy savings attributed to 

measures was, based on recognized sources, such as the Building Research Establishment (BRE) 

and the Energy Saving Trust. 

The Department for Environment, Food and Rural Affairs (DEFRA) requires all suppliers to 

demonstrate additionality; the method chosen is based on a specific different technology. For 

example, for CFLs for the priority group, all CFLs are defined as additional, because of the high 

cost of the CFL and the low income of the consumer. 

For projects which rely on other government funding, then the achieved savings are adjusted 

based on the levels of other funding sources. The decision to allow 100 percent credit for nongovernment funding was a deliberate policy choice to ensure that other sources of funding are 

maximized.97 

Ofgem audits suppliers’ processes on a periodic basis, by hiring outside firms to inspect a sample 

of homes to make sure measures are installed as claimed. Two rounds of audits have been 

conducted to date: the summer of 2003, and in early 2005, and confirmed that the suppliers were 

implementing their schemes as proposed, and that they had the correct procedures in place to 

report their schemes accurately. 

Concerns have been expressed over the possibility that energy suppliers could falsely claim the 

total energy savings towards their EEC target by counting savings from other, current partnership 

projects and not from additional projects as is required. These concerns were due in part to the 

limited ex-post verification of the energy savings carried out by the Government. However, 

although actual energy savings achieved from the different measures were not monitored on a 

 

97 Eyre, (2007) 
 52

before-and-after basis, the National Audit Office (in a report published in July 2004) found that 

“in administering the EEC, Ofgem has established robust arrangements for checking suppliers’ 

schemes and obtaining reliable data.” 98

 

France 

As of the end of 2006, 94 standardized savings actions had been defined, and standardized 

methodologies set up for estimating savings for these actions. These methodologies are based on 

“fast and straightforward user-friendly procedures” that are based on technical evaluations 

obtained by pilot projects and/or mathematical models. 

Energy projects must be additional to business as usual. The criteria for additionality depend on 

the implementer of the particular energy savings project(s): 

• For an obligated implementer or public municipality, any eligible energy savings activity 

is considered additional

• For eligible but non-obligated implementers, an eligible action is additional if the action 

implemented is not related to its main activity. This criterion therefore excludes all 

implementers whose core business is related to energy efficiency. 

Additionality is determined based on the focus of the eligible actions: for example, for 

commercial new construction, additionality is based on the French building code 

for commercial construction, although no standardized saving action had been adopted for new 

buildings by the end of 2006. For insulation and energy systems such as boilers or electric 

heaters, the baseline is based on the existing stock of building or equipment. And for other 

products, such as electrical appliances, or installation of CFLs, the baseline is based on current 

sales, such as the average power of incandescent lamps installed in households, the estimated 

percentage of CFLs sold to replace incandescent lamps, and the annual consumption of 

equipment (refrigerators, freezers, etc.) based on a representative sample. 

 

98 Ofgem, (2004) 
 53

New South Wales 

In New South Wales, there are three methods for calculating emission reductions from energy 

efficiency projects: 

The Default Abatement Factors Method specifies “default abatement factors,” which are 

deemed or stipulated factors for certain common equipment and installations, such as 

CFLs, refrigerators, washing machines, motors, and the replacement of electric hot water 

systems with gas. 

The Metered Baseline Method is typically used in energy performance contracts. In this 

method, energy savings are calculated by conducting metering before and after the 

contractor’s installation of an energy efficiency measure. Depending on the extent of 

variation in the baseline, the energy savings are then normalized, by using such factors as 

weather or occupancy. 

The Project Impact Assessment Method relies on engineering data to calculate energy 

savings. This method is used when the energy reductions are small compared to 

electricity consumption at the site, baseline energy consumption data for the site are 

unavailable (e.g., new construction), or the unexplained variation in the baseline is high. 

Under the GGAS to date, 33 projects have used the Project Impact Assessment Method, 11 have 

used the Default Abatement Factors Method, and 3 have used the Metered Baseline Method. 99

New South Wales uses different criteria for determining additionality than in the CDM. In New 

South Wales, all of the projects for creating emission reductions have to be additional to a 

 

99 Sniffin, (2006). 
 54

business-as-usual baseline. 100 This type of additionality is different than the criteria used for the 

CDM, where as was discussed earlier, the project would not have been implemented in the 

normal course of business in the absence of the GGAS. 

 

100 Crossley (2007); MacGill, Outhred, and Nolles, (2006) 
 55

V. REPORTING, TRACKING AND ACCOUNTING 

Because of the similarities of market-based instruments for energy efficiency and renewables, it 

is useful to look at the experience with REC reporting, tracking and accounting systems to 

identify lessons that might be transferred to ESC systems. 

REC Systems 

From our investigation of REC systems, we identified four primary issues that are relevant to a 

discussion of ESCs: (1) establishing the property rights to the tradable certificate or instrument; 

(2) avoiding double counting/selling; (3) proving compliance with specific programs; and (4) 

integrating voluntary and compliance markets. Upon closer examination, we believe that these 

issues can be effectively addressed with the use of electronic tracking systems. 

Both the European and US/Canada/Mexico REC systems use software similar to that used in 

electronic banking and transfer systems. These tracking systems are policy and technology 

neutral; they are an accounting system that establishes and follows the property rights to the 

RECs, tracks their transfer from the generator’s account—where they are first issued to other 

accounts that have purchased the certificates, until claims are made and the certificates are 

“retired.”101 Since a specific REC may only be deposited into one account at any point in time, 

these tracking systems not only establish property rights, but also protect against double counting 

within their jurisdiction. 

In these systems, a REC is issued every time a participating generator generates one MWh of 

power verified and reported by the control area operator. That certificate is issued, given a 

unique serial number, and deposited into the generator’s account where it is held until it is either 

 

101 Once ‘retired,’ the REC with that unique serial number may not be re-circulated into the system for any future 

use. It is ‘frozen’ in a retirement account. 
 56

transferred to another account or retired. These tracking systems are only accounting systems; 

they are not involved in the financial transactions and do not serve as trading platforms. 

Each certificate is accompanied by an electronic database with the following information: 

• Technology/fuel type 

• Project size 

• Geographic location of project 

• Owner of project 

• Date of first operation of project 

• Date of creation of the certificate and 

• May also include associated emission data and eligibility of RECs from this project for 

particular programs. 

Because there are major economies of scale associated with designing and operating a tracking 

system, most electronic systems cover broad geographic areas. As a result, there may be a 

number of different renewable energy programs in different states within a geographic area that 

all use the same tracking system. In such cases, although the eligibility and resource 

requirements for each REC program may vary widely, the database that accompanies each 

certificate allows program administrators and consumers to decide for themselves which 

certificates meet their personal, business, regulatory or program needs. 

Moreover, for the most part, renewable energy tracking systems have the capacity and 

functionality to accommodate other data fields and other types of certificates besides those for 

renewable energy. 

From when the European RECS tracking system first began operation in 2001, through 

September 2006, Europe’s certification and tracking system issued approximately 157 million 
 57

MWh of RECs; some 60 million MWh were issued in 2005 alone.102 In the U.S., approximately 

37 million MWh of RECs were issued in 2005.103 

Brief history of REC Systems 

In 2001, the Renewable Energy Certificate System in Europe (RECS) was formed as a 

membership organization of companies with renewable energy obligations under the European 

Union who wanted to develop a model electronic system for issuing certificates, and reporting, 

tracking, and accounting for the attributes from renewable generation. The RECS tracking 

system is very active today. In addition to issuing and tracking RECs, it also issues certificates 

for co-generation and CHP systems. 

In the United States, the first issuing and tracking systems were developed in conjunction with 

state RPS programs. In 2002, the Electric Reliability Council of Texas (ERCOT) established a 

generation information system to issue, track, and report on certificates used to administer the 

Renewable Energy Credit Program, an element of Texas’ RPS policy. A short time later, the 

New England Power Pool (NEPOOL) instituted a similar reporting, tracking, and accounting 

system for all types of generation located in the New England region the New England 

Generation Information System, or NE/GIS. 

Since then, several other tracking systems that have been implemented, or are under 

development, elsewhere in the United States: the Generation Attribute Tracking System 

(PJM/GATS), which is operational in Pennsylvania, New Jersey and Maryland; the Midwest 

Renewable Energy Tracking System (MRETS), which will cover Minnesota, Iowa, North and 

South Dakota, Wisconsin, Illinois and Manitoba; and the Western Renewable Energy Generation 

 

102 From the Association of Issuing Bodies (AIB) homepage: http://www.aib-net.org 103 This total includes the number of ‘eligible’ renewable energy certificates issued by operational tracking systems, 

plus the number of voluntary RECs certified by Green-e. Data are from a combination of NREL and CRS data 

reports, although the number is probably an underestimate, since it may not fully reflect RECs issued for RPS 

compliance in states without tracking systems. 
 58

Information System (WREGIS), which will include eleven western states, the Canadian 

provinces of British Columbia and Alberta, and northern Baja, in Mexico. 

Both MRETS and WREGIS are expected to become operational later in 2007. Of particular 

interest is that in addition to providing RPS-related compliance services, both systems were also 

developed with the voluntary renewable energy market in mind; under MRETS and WREGIS, 

certificates for both voluntary and mandatory renewable energy programs can be issued, tracked, 

and retired by the same tracking systems. 104

PJM/GATS is run by a for-profit company under state regulatory oversight, while the other 

tracking systems are operated as a governmental (MRETS) or a quasi-governmental (ERCOT, 

WREGIS, NE/GIS) entity. In either case, “static” data, including the type of system, its size, date 

of first operation, etc., may be verified by either a governmental agency, such as the state’s 

energy office, or as in Canada by an independent company—TerraChoice. “Dynamic data,” 

notably plant energy output, are primarily collected directly from generation facility meters. 

Before being input into the information system, these data are verified by the operator of the 

transmission control area where the project is located. 

Energy Savings Certificates 

Since ESCs schemes are relatively new, the reporting, tracking, and accounting have generally 

been undertaken by the Agency responsible for the design of the program. Under this tracking 

method, which is used in the existing ESC systems as well as in most of the U.S. energy 

efficiency programs, the role of the regulator is to “accredit” by issuing the licenses to third 

parties and then auditing their performance. Because this type of approach has some aspects of 

self-regulation, it carries a higher amount of risk for policy makers. However, this approach can 

potentially reduce the overall cost of compliance and implementation—a major concern for ESC 

schemes. In the final analysis, then, who issues the certificates is not as important as ensuring 

 

104 Center for Resource Solutions, Green-e Verification Reports for 2002 through 2005, at: www.resourcesolutions.org/index.htm. 
 59

the certificates themselves are based on verified data that are readily available either from the 

energy regulator, as in Italy, or from a certified verifier as is the case with other registry schemes. 

To illustrate, we review the operation of tracking systems in Great Britain, Italy, and 

Connecticut. 

Great Britain 

In discussing Great Britain’s ECC regime earlier, we noted that electricity and gas suppliers are 

required to report their achieved energy savings results to Ofgem on a quarterly basis, using a 

standardized spreadsheet developed by Ofgem. This information is used to compile Ofgem’s 

quarterly EC Update report. 

Once a project has been completed, Ofgem then confirms the exact types and numbers of 

measures that were installed, and also examines the results of the supplier’s monitoring of the 

quality of installations and customer satisfaction, along with evidence from the relevant project 

partners (e.g., retailers and social housing providers). And additional procedures are in place to 

monitor each supplier’s delivery of required energy efficiency services, and to oversee their 

progress against its target. 

Italy 

As mentioned previously, an important element in the Italian ESC scheme is that while the 

Regulator (AEEG) is responsible for overall implementation, the marketplace is organized and 

its operation is managed by the Electricity Market Operator (GME) according to rules and 

criteria approved by AEEG. The GME issues and registers ESCs upon specific request by 

AEEG, organizes market sessions, and registers bilateral over-the-counter (OTC) contracts in a 

Registry. Once registered, the ESCs are then available for trading. The ESCs are issued to all 

distributors and their controlled companies and to ESCOs. ESCs are tradable via bilateral OTC 
 60

contracts, or on a spot market organized and administered according to rules set out jointly by 

the Regulator and the Electricity Market Operator. 

Connecticut 

Under the Connecticut RPS program, which begin earlier in 2007, a set of eligible Class III 

measures (such as energy efficiency, CHP, and demand response) are listed in the Department of 

Public Utility Control (DPUC)’s Technical Reference Manual along with their deemed values. 

The DPUC reviews and approves the savings and passes this information to the NE/GIS, which 

issues certificates for the savings and places them in the account of the entity that paid for the 

savings. From that point on, these certificates are treated the same as RECs and are used to show 

compliance with the state’s RPS program. If the utility paid for the measures, then the 

certificates are issued to the utility’s account. If not, then the utility must buy them from 

whoever produced the savings and transfer the certificates into the utility account. Connecticut 

uses an electronic tracking system for tracking, reporting and accounting for energy savings as 

well as electricity generation. The program officially began in January 2007. 

Combining Renewable Energy and Energy Efficiency Issuing and Accounting Tasks 

As we’ve indicated, we believe that it is entirely feasible for the same accounting systems used 

to track renewable energy to be used for energy efficiency savings as well. 105 Once an ESC is 

issued, an ESC would have approximately the same functionality needs as a REC. And, to the 

extent that the same system was used for both ‘white’ ESCs and ‘green’ renewable certificates, 

little, if any, additional infrastructure investment would be required, thus lowering the cost of 

using these electronic tracking systems for ESCs, and quite possibly lowering the overall 

transactional costs for all participants. 

 

105 The European RECS tracking system was asked recently by the European Commission to consider issuing and 

tracking ESCs. 
 61

Moreover, the fact that the existing tracking systems could serve both mandatory state programs 

and voluntary markets provides additional justification for considering trading ESCs in both 

markets. Clearly it is very important to recognize that to meet the requirements of a future 

federal energy policy aimed at reducing GHG emissions, these same systems could be linked as a 

national Energy Efficiency Resource Standard into one harmonized national certificate tracking 

network. 

A fundamental issue associated with using an electronic tracking system for ESCs is the 

measurement and verification (M&V) of the savings: Who validates the 

calculations/measurements and who enters the information into the system? In the case of 

renewable energy, M&V issues are very straight forward since the data come directly from 

electronic meters and are verified by the control area operator, who is already verifying them for 

transmission purposes. In the case of RECs, because the data are obtained directly, the 

transaction costs are very low, and the reliability of the data is high. 

In the case of ESCs, however, the energy savings data for the same volume of energy as 

produced by renewable electricity are quite diffuse and would need to come from many more 

sources. This extensive data collection means increased transaction costs. Moreover, additional 

transaction costs result from converting this information into credible certificates: because there 

is no automatic system for recording energy savings, this information must be entered manually, 

necessitating additional individual project and data review. How much this additional effort adds 

to the cost of ESCs will depend on the efficiency of the M&V programs and processes. 

Some of the European literature expresses concern about trading ESCs for special purpose 

programs.106 For example, the UK program requires 50 percent of the energy savings to come 

from low-income households. Should ESCs become a fungible and interchangeable commodity, 

then specific program goals could be subverted because of buying ESCs from sectors other than 

those intended. 

 

106 International Energy Agency, (2006). 
 62

However, the issue of maintaining the goals of special purpose programs can be accommodated 

through a REC-type tracking system. Just as the database associated with RECs issued by 

renewable tracking systems is able to differentiate according to the source/type etc. of 

generation, it is also possible to do the same thing with ESCs for special purpose programs, by 

“red flagging” certain types of certificates to indicate that they can only be used for specific 

programs. 

Double Counting/Selling 

Double counting or double selling occurs when the same savings from the same activity are sold 

or traded simultaneously to two separate entities. Or, the same savings are claimed as credit for 

two different programs when the program rules do not allow such double counting. Double 

counting is a concern for renewable energy as well as for energy savings. 

The use of ESCs and a network of tracking systems with clear and compatible protocols for 

issuing certificates and verifying static data can, at least minimize, if not completely eliminate 

double counting. These types of tracking system and networks issue certificates with unique 

serial numbers, and ownership of the certificates is established by having these certificates 

deposited in an owner’s account—the same certificate cannot be held in two different accounts at 

the same time. Programs that use these systems to confirm compliance with particular targets 

usually require that the certificates used for compliance purposes be retired (put into a retirement 

account from which they may not be withdrawn again and used by anyone), and that a report be 

submitted from the system administrator to the regulating authority indicating the number and 

type of certificates retired in that participant’s account. 
 63

VI. POTENTIAL TECHNICAL OPPORTUNITIES FOR ESCS 

The use of RECs is established in the United States. Here, RECs are most commonly issued for 

the output from electric generating facilities. And while several of the tracking systems, 

including WREGIS and MRETS, are designed to issue certificates for behind-the-meter 

generation and thermal projects, most have not as yet developed the necessary protocols to do so. 

There are similar measurement and verification issues with ESCs, as with behind the meter 

activities and thermal technologies. Each ESC is often diffuse and relatively small in size, 

requiring aggregation in order to reduce the transaction costs from measurement and verification. 

The behind-the-meter and thermal technologies most likely to take advantage of ESCs include: 

• Behind-the-meter renewable electricity generation (PV, wind, small biomass) 

• Solar water heating 

• Geothermal and air source heat pumps 

• Renewable thermal power (waste heat at biomass facilities) 

• “Smart Communities,” where the entire community is designed in a manner that reduces 

all types of energy inputs, including electricity, natural gas, and heating and 

transportation fuels. 

• Cogeneration and CHP 

Because they reduce the customer’s need for externally produced electricity, natural gas, or other 

fuels, these other activities serve as demand-reduction strategies. However, these activities are 

often not recognized as viable policy options, because proponents of renewable energy programs 

argue that they are not supply resources, or are designed only as a source for bulk power, while 

those favoring demand-side reduction programs believe these technologies represent the supply 

side and should be covered by renewable programs. 
 64

In Europe, however, many of these activities are included within energy savings programs. In 

Italy, for example, cogeneration, district heating and other thermal renewable energy 

applications, passive cooling, solar water heating, behind-the-meter renewable energy 

generation, and the promotion of electric and natural gas vehicles are listed as eligible projects. 

In addition, Great Britain’s ECC includes solar water heating and CHP, and it now appears that 

France will include district heating and thermal renewable energy applications in their new ESC 

program. 

To the extent that there is a desire to encourage greater use of these technologies and 

applications, there is no apparent reason that ESCs could not be used along with more traditional 

energy efficiency measures to meet such needs in a properly designed REC program that makes 

certain that the energy savings may be eligible for certificates from either the ESC or REC 

program, but not from both. 

In considering these technology applications, one key issue stems from the fact that some of 

these measures save thermal energy, gaseous or liquid fuels, and not electricity; therefore, all the 

energy savings produced must then be standardized into one value to allow for issuing 

compatible certificates. In Italy, this is accomplished by converting all savings into tons of oil 

equivalent (toe). In Great Britain and France, all savings are converted to terawatt hours (TWh). 

Combining multi-energy sectors simply requires an additional calculation to bring all of the 

sources under the same unit of measure. 

Similarly, in order to use RECs in GHG reduction programs, the RECs, which are measured in 

MWh, have to be converted to pounds of carbon (or carbon equivalent – CO2e) avoided. There 

has been a lot of research and debate concerning the proper methodology for doing this 

conversion. But whatever methodology is finally adopted, to the extent that ESCs might also be 

used as proof of GHG reductions or traded as offsets, the same methodology for converting a 

MWh of power generation would need to be applied to the savings from electricity. A different 

conversion factor would need to be used for natural gas or other fuel savings. Having a mixture 
 65

of sectors represented by one energy unit could require going back to the database to convert 

everything into pounds of CO2e. However, if an electronic tracking system is used for issuing, 

tracking and accounting for the certificates, an algorithm can be built into the software that can 

automatically convert the savings to pounds of CO2e. 
 66

VII. POTENTIAL POLICY OPPORTUNITIES FOR ESCS IN THE 

UNITED STATES 

For GHG reduction purposes, energy efficiency can either be an integrated part of a GHG cap 

and trade program or it can be handled through a separate but parallel energy savings program. 

Examples of the second approach are RPS (with energy efficiency targets) or EEPS programs, 

and utility and state energy efficiency programs (without hard targets107) that supplement a GHG 

cap and trade program that does not integrate energy efficiency. In addition, a national voluntary 

market for GHG reductions is gearing up that can supplement GHG reductions resulting from 

cap and trade programs. To the extent that such savings are real, measurable, verified and 

additional to business as usual, GHG reductions from energy efficiency measures could 

participate in this voluntary market. The issuing, use and tracking of real, measurable, verified 

and additional energy savings in the form of ESCs provides an opportunity for energy efficiency 

savings to be eligible and credible within a voluntary GHG market. 

Under these approaches, the eight state programs described in this paper, as well as any other 

RPS programs that contemplate adding energy savings to their requirements, offer opportunities 

for incorporating ESCs as a market-based and credible accounting instrument. EEPS programs 

that may be proposed by other states or the Federal government could also provide ESC 

opportunities.108 

Similarly, a state109 and/or a federal GHG reduction program could consider including the use of 

energy savings as a GHG reduction strategy. While it may be some time before either becomes 

law, there are indications that the newly elected Congress may seek to pass legislation for a 

 

107 Programs with “hard targets” are ones that have specific penalties for not meeting the target (e.g. a fine). 

Significant financial penalties justify the incremental transactional costs of ESCs that might be associated with more 

rigorous measurement and verification requirements. 

108 A recent report on ESCs indicates that either a separate or combined portfolio approach will work, the decision 

depending upon state-specific considerations and politics; Nadel, (2006). 

109 Several state and regional bodies are moving in this area, notably —RGGI [the Regional Greenhouse Gas 

Initiative, a coalition of states in the northeast and mid-Atlantic region], California, Washington, Oregon, and New 

Mexico. 
 67

national EEPS and a national GHG reduction program. Tradable ESCs can be included in any 

reduction program containing market-based mechanisms. 110 

Regarding the design of a basic electricity or gas GHG cap and trade program, if the system is 

facility-based, where emitting facilities are capped and receive a share of the allowances, then 

energy efficiency measures would not be eligible to receive GHG benefits except where they are 

performed directly at the capped facility. However, under a load-based cap and trade program, 

energy efficiency has the potential to become an important GHG reduction tool, especially if there 

are “set asides” 111and targets for energy efficiency, and the program can be designed in a manner 

that provides GHG benefits for “additional” efficiency measures. 

Moreover, the use of ESCs would encourage energy efficiency programs that promote the 

aggregation of energy efficiency savings, either by government or by the private market. And to 

the extent that a robust market for tradable ESCs (or verified GHG reductions from ESCs) 

develops, the revenue from the sale of the credits could be used to offset program costs. In 

addition, such markets could be expanded to include real and verified energy efficiency benefits 

from certified green buildings and energy-efficient communities. 

A supplemental voluntary market for ESCs could be created, similar to a currently functioning 

voluntary market for renewable energy.112 Significantly, the market for RECs has prompted 

construction of new renewable energy facilities separate from any need to comply with mandates 

and other related renewable energy policies. It is estimated that more than 2,500 MW of new 

 

110 Bertoldi and Rezessy, “Tradable certificates for energy efficiency,” (2004), p. 32. 111 A set aside is a pool of allowances that is used to award energy-efficiency and renewable-energy projects that 

reduce or displace electricity generation. 

112 There is currently a voluntary market for renewable energy, which represented approximately 12 million MWhs 

of RECs sold in the U.S. in 2005. This has been a very robust market that has increased exponentially every year 

since it first began in 2001/2 when approximately 180,000 MWh of RECs were sold. At that time, the majority of 

the purchases was from residential customers. In 2006, the majority of the purchases were from non-residential 

customers. For more information, see “Green-e Verification Reports for 2002 through 2005,” by the Center for 

Resource Solutions, San Francisco, CA (www.resource-solutions.org/index.htm). 
 68

renewables have been brought on-line as a result of this voluntary REC market.113 It is possible 

there would be a similar response to a robust ESC market. Moreover, in an ESC market, it would 

be possible for independent energy efficiency providers to compete in producing energy 

efficiency savings. By expanding the market beyond established utility energy efficiency 

programs and providers, the costs of energy savings programs and of the resulting credits could 

be reduced.114 

Any ESC market would, however, need to be designed to be compatible with utility energy 

efficiency programs and also ensure it does not introduce any unintended consequences that 

would change the outcome from what was intended or expected. In such a trading system, the 

energy savings are verified, and the credits are determined and then awarded by the program 

administrator.115 Suppliers could buy and sell ESCs, as could other entities that aggregate endusers (e.g., communities, non-profit organizations, etc.). The size of the credit is very important: 

it should be large enough to attract the interest of serious market participants, but small enough 

that potential participants are not excluded. And, as has been discussed earlier, in an ESC market 

it is important that associated transaction costs are kept to a minimum so that the system’s 

benefits outweigh the costs of implementation and administration. 

 

113 This information came from NREL voluntary markets web site: 

http://www.eere.energy.gov/greenpower/resources/tables/new_gp_cap.shtm 114 Nadel, op. cit. p.32. 115 This could be done by state utility regulatory commissions, US Department of Energy (DOE), or the US 

Environmental Protection Agency (EPA). 
 69

VIII. ISSUES & BARRIERS 

Here and in the following section, we describe the issues and challenges to establishing an ESC 

scheme as an effective and efficient method of using energy efficiency as a means for reducing 

GHG emissions. Because an ESC program is essentially a policy tool and not a formal policy, it 

is unlikely that a stand-alone ESC program will be implemented. Rather, development and 

implementation of an ESC program will likely be combined with either an energy efficiency 

portfolio standard (EEPS) or some other type of required energy efficiency target, or within an 

overall GHG reduction program. 

There are a number of activities that need to be addressed in designing and implementing an ESC 

program, including: 

• Program administration 

• Program marketing 

• Monitoring and evaluating projects (e.g., the issue of additionality) 

• Setting energy savings targets 

• Setting baselines 

• Choosing reference technologies 

• Establishing a process for issuing and tracking certificates 

• Verifying the data that is the basis for issuing certificates 

• Certifying certificates 

• Establishing a trading system for certificates (if trading is allowed) 

• Detecting noncompliance 

Most of these activities are not specific to using ESCs, but are necessary in any regulated energy 

efficiency program, including when energy efficiency is incorporated into an overall GHG 

reduction effort. However, several activities are specific to the use of ESCs: (1) establishing a 

trading system; (2) verifying the data that are the basis for issuing certificates; and (3) certifying 

certificates. 
 70

In addition, there are several significant design and implementation issues associated with the 

above activities that we discuss in the following pages: 

• Transaction costs 

• Evaluation, measurement, and verification costs 

• Eligible projects and cream skimming116

• ESCs and emissions trading 

• Savings targets 

• Integrating RECS and ESCs 

• Ownership of ESCs 

• Double counting/selling 

Transaction costs 

As noted earlier, a basic concern and possible barrier to the development of an ESC program will 

be transaction costs. Transaction costs may be high in ESC programs because: (1) the number of 

different activities that need to be conducted: (2) the number of potential participants in the 

residential, commercial, and industrial sectors that in turn leads to multiple interactions; and (3) 

the need for rigorous and systematic evaluation, measurement, and verification (EM&V) to 

maintain credibility. Further, among the factors influencing the administrative burden and the 

associated transaction costs are the number of regulated sources, the availability of data, and the 

level of reporting and monitoring needed. The result, therefore, is high transaction costs that 

negatively affect participation in an ESC program. 

However, transaction costs can be reduced by: (1) bundling or aggregating energy efficiency 

projects, instead of a number of small, individual projects117; (2) using sampling in evaluating 

 

116 Cream skimming refers to the targeting of the most cost-effective energy efficiency measures with short payback 

times (also known as low hanging fruit), while excluding other cost-effective measures but with longer payback 

times. 
 71

projects, instead of evaluating every project; and (3) using deemed (stipulated) energy savings or 

engineering-based calculations, instead of monitoring or using field data. Moreover, as the 

participants become more experienced with the program requirements, transaction costs should 

correspondingly decrease over time. 

Evaluation, Measurement and Verification Costs 

As stated at the outset, the main focus of this research project is to assess how using ESCs can 

expand the use of energy efficiency as a method of reducing GHG emissions. And in order to 

evaluate the efficacy of energy efficiency as a resource that can reduce GHG emissions, as well 

as helping to meet other important economic, environmental, and energy system goals, reliable 

EM&V is essential to ensure the credibility, transparency, and consistency of ESC programs. 

To reduce their EM&V costs, California, Pennsylvania, and Texas have developed protocols. 

And with these protocols as models, other states can quickly institute their own EM&V systems 

and reduce their transaction costs. In addition, a tiered approach, such as the white certificate 

scheme used in the Italian ESC system, is a good mechanism for reducing the EM&V costs for 

certain energy efficiency measures, such as using the deemed savings approach to reduce costs 

for energy suppliers and provide certainty to investors through the ex-ante evaluation of the 

energy efficiency projects.118 

 117 For example, a city could be a community aggregator by targeting energy efficiency improvements across 

hundreds or thousands of households. At such a large scale, the cost of financing and management would be less 

than if this was done by each household making their own investments. 

118 One possible pitfall of relying on deemed savings is that if only standardized EM&V methodologies are used, 

then more complex system-wide energy efficiency measures, such as whole building retrofits, will not receive 

attention due to the need for more complex EM&V systems. Here, ESCs will need to be integrated with other 

policy instruments, including public benefit funds and state tax credits, that promote new and emerging 

technologies and system-wide measures. 
 72

Eligible Projects and Cream Skimming 

As is the case other energy efficiency programs, it is expected that most projects and measures in 

ESC programs will be highly cost effective, having relatively high benefits at low costs—socalled “low hanging fruit.” But, is “cream skimming,” where the first entrants are able to 

implement projects that are the most highly cost effective, good or bad? If the intent is to 

maximize energy savings, then cream skimming is an appropriate strategy, because you could 

obtain large quantities of relatively inexpensive energy savings in a short amount of time, with a 

quick payback. Here, the reliance is on already mature and competitive, or almost competitive, 

short term energy efficient technologies. However, from the perspective of greenhouse gas 

reduction programs, mature and competitive short-term energy-efficient technologies may not be 

considered additional and as such offer no benefits. In addition, such choices will mean “lost 

opportunities” for obtaining significant energy savings through energy efficiency measures, such 

as new construction, retrofits of whole buildings and other measures having long payback 

periods. Therefore, if ESCs are tied to energy savings goals, which are then tied to energy 

savings potential, then it is better for programs to use ESCs for long-payback measures. 

Another issue that stems from cream skimming is the increased presence of “free riders.” This 

might not be of great concern when considering how best to transform the energy market, 

because having free riders aids in promoting increased use of energy efficiency strategies. Still, it 

is important to determine whether the energy savings and emission reductions projects can be 

shown to be additional to any that would otherwise occur; if strict additionality criteria are 

developed, the issue of free riders may be mitigated. Therefore, in evaluating the criteria for 

selecting projects to include in an effective ESC program, one needs to ask the following 

questions: Should all projects be eligible or only those that involve readily accepted 

technologies, or only those projects that can demonstrate additionality? Should incentives be 

provided for projects with long paybacks and are less likely to be developed? 
 73

ESCs and Emissions Trading 

It is important to consider whether there should be direct linkages between ESCs and GHG 

emissions trading schemes. Projects that generate additional energy savings achieve reductions in 

CO2 emissions.119

In Europe, ESCs and the EU’s Emission Trading System (EU ETS) have been introduced in the 

energy sector in parallel. However, the existing ESC schemes and the EU ETS have significantly 

different characteristics and design features (e.g., obligated parties, covered sectors, measures, 

and methodologies for crediting towards energy targets). These differences present challenges 

for developing a common European carbon trading system incorporating ESCs. 

While there is no emissions trading currently underway in the U.S., it appears that we are getting 

closer in establishing such markets. One might well argue that it is best to wait until these 

schemes are in place, and then integrate ESCs. But that begs the question of what would be the 

added value of ESCs? And regardless of any mandatory market system for reducing GHG 

emissions, voluntary markets will continue to play an important role in reducing emissions. 

Further, while some may continue to insist that it is best to wait until more practical experience 

has been accumulated about existing ESCs, there is no denying the benefits of learning by doing. 

It is still unclear how much energy efficiency will be promoted by only the current approaches to 

emissions trading. Conceptually, ESCs can obtain more energy savings and quite possibly more 

cost-effective carbon reductions, particularly from sectors not currently covered by existing capand-trade systems, as is the case in the EU ETS, where households are not participants. The 

incremental cost for adding ESCs to trading schemes could be quite low, since these trading 

schemes will already have EM&V protocols. 

Nevertheless, there are a number of practical and technical reasons to remain cautious in moving 

forward with efforts at integration. An integrated scheme may become too complex in 

 

119 GHG reductions can be calculated from energy savings by various methodologies, including the use of average 

emission factors. E. Vine and J. Sathaye, Guidelines for the Monitoring, Evaluation, Reporting, Verification,

Certification of Energy-Efficiency Projects for Climate Change Mitigation, Lawrence Berkeley National Laboratory, 

Publication: LBNL-41543, Berkeley, CA, (1999). 
 74

administrative and technical terms, making it difficult to manage and vulnerable to misreporting 

and other flaws, such as double counting. If not properly designed, integration may even 

undermine the overall effectiveness of the two schemes (for example, if the issuance of credits 

under the two schemes is affected by double counting). 

Measuring and verifying the savings to certify the results remains a significant challenge. So, it 

is encouraging to point out that work in the U.S., Europe, and the CDM continues to make 

progress in answering the challenges and in the development of EM&V protocols for energy 

efficiency projects. 

Savings Targets 

Based on a study of the U.S. experience with energy efficiency resource standards (EERS), the 

authors recommended that future EERS savings targets be set at 0.8 percent per year of total 

retail sales. 120 Under routine conditions, savings at that level are at the upper end of historical 

experience. But in the present era of higher energy prices, and with new policy innovations such 

as “trading” for energy efficiency credits, such savings would seem to be realistically available. 

While those states just beginning to establish significant energy efficiency program may now 

lack the infrastructure and expertise comparable to states with established regimes, they 

potentially can achieve greater total energy savings from energy efficiency programs because 

they likely have many more “untapped” opportunities. For states without much experience with 

energy efficiency programs, they might initially establish more modest targets than the 

recommended 8 percent per year, but they could presumably increase their targets to higher 

levels within a reasonably short period. A five-year target of 5 percent is well within what 

 

120 M. Kushler, S. Nadel, and D. York. Energy Efficiency Resource Standards: The Next Great Leap Forward?, 

Proceedings of the 2006 Summer Study on Energy Efficiency in Buildings, American Council for an Energy 

Efficient Economy, Washington, DC. (2006), 5.206-5.216. 
 75

leading states have achieved, and it is still below what numerous studies have shown is the total 

cost-effective potential for energy efficiency.121 

Integrating RECs and ESCs 

Historically, renewables and energy efficiency have been addressed as distinct policy issues. The 

use of ESCs could be important to developing a more productive integration of energy efficiency 

and renewable energy policies and programs. As was noted earlier, RECs and ESCs are 

essentially compatible, and the same accounting and tracking systems and can be used for both, 

thereby reducing overall transaction costs for both schemes. In addition, the use of tradable 

certificates in both renewables and energy efficiency has the potential to create synergies that 

increase the opportunities for combined renewables and efficiency programs. Such combined 

programs could be very beneficial in making the electricity sector cleaner and more 

environmentally sustainable. 

There are some technologies that could fall under either energy efficiency or renewable energy, 

such as solar water heating, on-site generation, and geothermal heat pumps (see Section VI). 

Therefore, programs should be explicitly designed to ensure that the savings from these measures 

do not fall through the cracks because each program might conclude that the other program is 

more appropriate for the crediting of savings. Proper design is also important to eliminate double 

counting. 

Here the issue is not which side of the ledger the savings should be counted, but that the savings 

are counted accurately and consistently. As an example, solar water heating should not receive 

energy savings certificates in one state and renewable energy certificates in another when both 

states (or both programs) are participating in the same national program. Nor should such 

technologies be restricted from being included in either set of programs. Clearly, adjustments 

 

121 S. Nadel. The Technical, Economic and Achievable Potential for Energy-Efficiency in the U.S. – A MetaAnalysis of Recent Studies, Proceedings of the 2004 ACEEE Summer Study on Energy Efficiency in Buildings, 

American Council for an Energy-Efficient Economy, Washington, DC (2004). 
 76

will be needed in order to integrate programs and their eligible technologies under a common 

certificate issuing, tracking and verification system. 

RPS Programs 

There are issues associated with including energy efficiency measures as eligible within a RPS as 

opposed to establishing a separate EERS. We have found that such questions stem more from 

political expediency than public policy. 

Since the first state enacted a RPS in late 1990s, the concept has become well understood, to the 

point where a state’s consideration of adopting an RPS no longer creates insurmountable 

problems or entrenched opposition. Currently, there are more than 22 states with RPS laws, and 

other states are moving to adopt their own. 

On the other hand, energy efficiency portfolio standards, or other state programs that set specific 

energy efficiency targets, are a fairly new policy concept. Today, only four states—California, 

Colorado, Texas and Vermont—have separate, independent efficiency standards. Four other 

states—Connecticut, Hawaii, Nevada and Pennsylvania, have energy efficiency targets as part of 

their renewable or alternative energy portfolio standard. 

One of the issues raised in having both efficiency and renewables in the same program is that 

depending upon the situation, without separate targets, there could be less interest in continuing 

to investigate newer, experimental technologies.122 Worse, proponents of renewables could 

wind up opposing energy efficiency and vice versa, which would be counter-productive given 

the need for both approaches, particularly to meet the challenge of global warming. Such 

conflict can be avoided by recognizing that both energy efficiency and renewable energy 

technologies/measures can benefit from using many of the same implementation tools, such as 

 

122 For example, in an area where energy efficiency has been very successful but renewables are lagging due to 

siting issues, allowing either to be used to reach a common target could remove the pressure for resolving the 

renewable siting problems, so renewables are never developed. 
 77

tradable certificates and certificate tracking systems, as well as sharing some common 

administrative functions. 

In the final analysis, efficiency and renewables programs, whether in the same policy program or 

separate, should be understood as being compatible with individual energy savings targets and 

synergistic implementation approaches. The decision to integrate them into a comprehensive 

energy savings and emissions reduction strategy rests, not on structural issues, but on the 

particular focus and circumstances of individual states. 

Ownership of ESCs 

Another issue that will need to be settled is who owns the property rights to an ESC. Is it the 

person or company that provided the funding for the energy savings measure? Is it the person or 

company that installed the measure? If public benefit monies are used, how would that affect 

ESC ownership? If the energy savings measures were created under contracts that were silent 

with regard to ESC ownership, then how should ownership be established? 

In approaching questions of property rights, it is important to recognize that similar issues have 

arisen in the renewable energy/RECs area, and have been settled for the most part through 

appropriate contract language and some regulatory rulings. For example, in January 2007 the 

California Public Utilities Commission ruled in Decision 07-01-018 that they would allow 

renewable distributed generation system owners to retain 100% of their renewable energy 

credits), and that utilities would not be able to count the output of renewable distributed 

generation facilities that have received ratepayer incentives toward the utility’s renewable 

portfolio standard obligations. One might expect a similar decision favoring consumers (rather 

than utilities) when deciding on the ownership of carbon credits when public benefit funds are 

involved. The most difficult ownership issues are those associated with power purchase contracts 

entered into before the existence of RECs, and as a result, the contract is silent on the REC 

ownership issue. 
 78

In comparison, issues of ownership of ESCs raise additional questions. Who is responsible for 

EM&V? How is EM&V to be funded? Who is liable if the energy savings are not realized? Here, 

as experience with REC systems has demonstrated, the best solution to resolve these concerns is 

with explicit contract language that establishes the eligible source to making energy savings 

claims, and identifies who has the legal rights to any energy savings certificates, whether they 

exist at the time of contract signing or if they are created in the future. Further, should the 

existing contract be silent on energy savings certificates, but such certificates are expected to 

become a factor sometime during the life of the contract, the contract should include provisions 

for subsequent revision that allows for the clarifications of ownership of any ESCs at that time. 

The general rule for RECs is that they “follow the money”—whoever made the primary 

investment in the renewables project receives the RECs and can then sell them, trade them, or 

deed them over to another party as they choose. Problems can occur where there is a split in the 

financing, such as if the RECs are from renewables funded with both public and private capital. 

In such cases, because of measurement and verification issues and transactions costs, absent 

specific contract or regulatory language (see California decision above), questions of ownership 

are generally resolved in favor of the party that invested the largest share of the money. 

Double Counting/Selling 

As discussed earlier, double counting/selling is one of the most challenging issues to an effective 

and efficient market for renewable or energy savings certificates. As broadly defined, double 

counting is the sale or use of the same certificate or attributes derived from one unit of renewable 

electricity or energy savings by more than one person or entity at the same time. Table 4 below 

provides examples of various types of double counting. While it is possible to verify energy 

savings or renewable energy production through the use of attestations and auditing of the 

contract path or chain of custody of such attributes, this approach breaks down, or becomes 

prohibitively expensive, for large volume markets (markets with many players and many 

transactions). Furthermore, as programs are developed that use ESCs, additional rules on 
 79

potential double counting or double use situations will be needed to provide consistency with 

best practices that have been applied to RECs and other business transactions. 

A contract between buying and selling parties that explicitly identifies the ownership of the 

various energy attributes reduces misunderstandings and inadvertent double selling/double 

counting. And, as was discussed earlier in the paper, one of the main reasons for using electronic 

accounting and tracking systems is to guard against double counting/selling. In issuing of 

certificates with unique serial numbers that can then be tracked electronically, such tracking 

systems are able to eliminate the problem of double counting/selling within their particular 

geographic service area. However, with national programs or national markets, it may be 

necessary to work with a number of different tracking systems. One effort now underway is with 

the North American Association of Issuing Bodies (NAAIB) that facilitates the coordination 

between the different tracking systems to ensure double counting/selling does not occur between 

one tracking system and another. 
Table 4. Summary of Recommendations and Examples of Double Counting/Selling123

Double Counting/Selling 

Double Sale Partial Double Sale Double Claiming Double U

Definition Certificate is sold to more 

than one party 

Portion of a certificate is sold to more than one party 

More than one party is claiming ownership of a single certificate or portion of a certificate 

One party icertificate fpurpose or single certiand each usother 

Number of Parties Involved 

2 2 2 1 or 2 

Best Practice Recommendation 

Should be prohibited in all cases 

Should be prohibited in all cases 

Should be prohibited in all cases Regulators 

explicit lancircumstanthat are not 

Other Comments Usually deliberate and 

fraudulent 

May occur inadvertently due to customer confusion about what is included in product 

Usually a result of unclear contracts or lack of understanding of TRCs 

May be acccases, depelegislative i

REC Example A RE generator sells a single REC to two parties: 

a utility buying MWhs with the TRCs included in the contract, and a REC marketer. 

A RE marketer sells a REC to a green power customer while simultaneously selling the CO2benefit to a private company so it can make greenhouse gas claims. 

RE generator sells its RECs to a marketer and the electricity to a utility. The utility claims the electricity purchased is renewable on its disclosure label. 

A utility usmeet both aand to meemarketing con its disclo

ESC Example A company that has been issued ESC for their 

energy savings (or has bought such ESCs) sells a single ESC to two parties: a utility meeting its energy efficiency mandate and the ESC is included in a contract with an ESC marketer. 

An ESC marketer retires an ESC to meet an efficiency target and sells the CO2 benefit 

to another party that wants to use greenhouse gas claims. 

A company receives ESC for their energy efficiency improvements and claims the benefits on their greenhouse gas registry. Then they sell the ESCs to another party that claims a reduction in their greenhouse gas footprint 

A company efficiency mgain the higand also ustheir greenh

123 The RECs portion of this table is taken from: Jan Hamrin and Meredith Wingate, Regulator’s Handbook on Tradable Renewab

for Resource Solutions, San Francisco, CA, (May 2003). 
 81

IX. ROADMAP FOR OVERCOMING ISSUES AND BARRIERS 

As discussed above, we have identified four primary ways where there could be benefit 

in using energy savings certificates: 

• As a method for verifying compliance with an energy savings target (such as 

an EEPS program); 

• As a trading device (allowing ESCs to be bought, sold or traded) for parties 

required to meet an energy savings or GHG obligation; 

• As a mechanism to demonstrate eligibility for tax incentives, subsidies or 

carbon offset programs; and 

• Incorporating all of the above, wherever ESCs can be created and traded 

within a larger allowance, certificate or project credit trading regime where 

the ESC benefits are equal to or exceed their incremental costs. 

In light of these four potentially beneficial uses for ESCs, we present our conclusions 

concerning their potential to be a major element within an energy efficiency performance 

standard as a GHG reduction strategy. 

We begin by reiterating some of the major barriers to utilizing ESCs. First, as we have 

stressed, is the problem of transaction costs. We have pointed out that instituting a 

rigorous system of energy savings EM&V introduces additional costs, while at the same 

time, there are also benefits associated with greater certainty of the energy savings results 

that give these programs greater credibility. 

Reporting and accounting costs can be perceived as a significant issue. However, as 

discussed previously, one means of reducing reporting and accounting costs is to piggyback on the automated computer systems currently in use for electric generation 

information, such as REC tracking systems or Generation Information Systems (GIS). 

Since the incremental cost of adding additional fields to these tracking systems is 

relatively low, this could help lower accounting and reporting costs. 
 82

In almost all cases, state energy regulatory authorities have primary control over how 

these tracking systems are used. To then incorporate the issuing and tracking of ESCs 

into these systems would require: 

• Agreement by the appropriate decision-makers, probably utility regulators and 

possibly environmental regulators; 

• A discussion with the system operators to determine the systems’ capacity to 

handle these activities; 

• Development of any new system specifications, if necessary to accommodate 

ESCs;124

• Determination of the size of the ESCs that will be issued and the unit of 

measurement to be used; 

• If appropriate, the identification of any conversion factors needed to convert to 

the common unit of measurement and to convert to CO2e; 

• Development of the list of acceptable energy efficiency measures, or include all 

measures identified by participating programs; 

• Development of EM&V protocols, as necessary, for each of the types of 

mechanisms; 

• Determination of what static data are required (e.g. type of mechanism, 

geographic location, etc.) and how and by whom these data would be verified, 

such as by the regulator on a spot-check basis, or by third-party certifiers for each 

project; and 

• Determination of how and by whom the energy savings data will be entered into 

the system. 

In this regard, as mentioned earlier, a new non-profit organization is being formed, the 

North American Association of Issuing Bodies (NAAIB). NAIB will be a forum for the 

coordination and cooperation of existing and emerging systems issuing, tracking or 

registering electric generation or energy savings certificates, or related environmental 

attributes in North America. One of the goals of this new organization is to discuss common 

 

124 The Center for Resource Solutions has considerable experience in work with all of these systems. And 

in their opinion, very little, if any, changes to these systems would be necessary. 
 83

issues and resolve common problems. The NAAIB is expected to be launched in the 

summer of 2007, and if successful, it could act as a “one-stop shop” for developing common 

protocols and procedures for incorporating ESCs into existing and emerging tracking 

systems. 

The other major task associated with reducing transaction costs is to streamline the EM&V 

processes without sacrificing credibility. Possible options to address this include the 

following: 

• Use protocols established by other organizations (e.g., California’s EM&V 

protocols125); 

• Focus on those energy efficiency measures with energy savings that are relatively 

easy to calculate (e.g., deemed/stipulated savings) in the first phase of a program 

(followed by the inclusion of measures that require more intensive measurement and 

evaluation in the second phase of a program); 

• Ensure rigorous and credible measurement and evaluation, so that later verification 

can be conducted more quickly and less expensively; 

• Develop an infrastructure of trained measurement and evaluation professionals 

(upfront costs of training will reduce total program costs in the long run); 

• Allow measurement and evaluation of “bundled projects,” as long as the projects are 

similar in nature, scale, and geography; and 

• Allow performance benchmarks for determining additionality, instead of a projectby-project analysis of additionality. 

One of the overriding challenges to the question of reducing transaction costs is 

balancing costs with social justice—in other words, allowing everyone to participate 

compared to allowing only large customers and large firms to participate. The British 

ESC program, for example, is designed so that only residential customers can participate; 

however, because they target only to this specific sector, they expect to have high 

 

125 California Public Utilities Commission, California Energy Efficiency Evaluation Protocols: Technical, 

Methodological and Reporting Requirements for Evaluation Professionals., San Francisco, CA (2006). 
 84

transactional costs. If, however, it is possible to reduce some of the transactional costs, 

this could make ESCs more attractive in all kinds of venues. 

This presents the challenge of ameliorating the negative aspect of ESCs that is the result 

of making energy savings a commodity. As a commodity, the market will drive 

investment toward the least-cost energy savings mechanisms, possibly limiting (if not 

eliminating) investment in measures that would obtain considerable energy savings, but 

have high initial costs and longer payback times. If not carefully managed, this could 

undermine specific programs, such as weatherization for low-income households and 

increase the number of “missed opportunities” to achieve energy savings. 

Therefore, at the core of any efforts to balance costs with social justice, is the need to 

determine what ESCs deliver that is worth extra transactional costs, and in what ways can 

they be used so not to cause perverse and unintended results. 

To help reduce the transaction costs associated with more rigorous EM&V, our 

investigation finds ESCs might be most beneficially used for: 

• Programs that require high levels of credibility such as: 

o Efficiency or GHG reduction targets that include significant penalties for 

non-compliance; 

o Programs where significant amounts of money are at stake such as, tax 

credits for capital intensive efficiency measures, carbon credits or GHG 

taxes; 

• National or large regional programs where the use of ESCs for compliance 

purposes would significantly offset the administrative costs that would otherwise 

be required; 

• Large, market-based programs that focus on the use of a trading scheme as a key 

compliance tool; 

• Efficiency programs where the primary goal is obtaining as much energy savings 

as possible as rapidly as possible—including market transformation programs 

where the ultimate goal is to have everyone energy efficient; 
 85

• Measures with high initial costs such as new motors, processes and newer process 

technologies in the commercial and industrial sector, or whole building 

improvements, such as weatherization for low income ratepayers, or 

improvements for rental property, where third parties might be enticed into 

providing investment capital in exchange for the ESCs that might be produced. 

We have also identified the following programs where the use of ESC schemes would be 

less attractive: 

• Energy efficiency measures and programs that could be considered “business as 

usual” and not “additional” for the purpose of GHG reduction; 

• Existing state and utility energy efficiency programs that do not justify the 

additional transactional costs and where the programs are operating efficiently as 

they are; 

• Smaller energy efficiency programs where the transactional costs cannot be 

justified; 

• Special purpose programs that are targeted toward “lost opportunities” (such as 

whole building retrofits, new construction and time-critical renovation or 

equipment replacement), or aimed at special subgroups, such as low-income 

housing, rental housing, etc., unless the program is specifically designed to use 

ESCs as an incentive to attract financing. 

Based on our findings, the following governing principles are suggested to guide the 

development of sound ESC programs: 

1. The rules and procedures for issuing ESCs should be transparent and make 

relevant information publicly available and discourage any gaming or 

fraudulent claims; 

2. Programs that use ESCs should be as inclusive as possible, and allow for 

broad participation and support social and environmental justice; 

3. Programs that use ESCs should be designed in a manner that does not 

exacerbate lost opportunities, undermine special needs, or make it more 

difficult to justify longer payback energy efficiency investments; 
 86

4. Technical provisions should ensure real, measurable, and verifiable energy 

savings that are beyond what can be considered business-as-usual; and 

5. A mechanism for independent verification of the savings must be built into the 

system. 

Incorporating ESCs into Greenhouse Gas Reduction Programs 

There are two fundamental issues associated with incorporating ESCs into GHG reduction 

programs. One is how the basic cap and trade system is designed and how energy efficiency 

is included. The second issue is “additionality.” 

Regarding the design of a basic electricity or gas GHG cap and trade program, if the system 

is facility-based, where emitting facilities are capped and receive a share of the allowances, 

then energy efficiency measures would not be eligible to receive GHG benefits except 

where they are performed directly at the capped facility. However, under a load-based cap 

and trade program, energy efficiency has the potential to become an important GHG 

reduction tool, especially if there are “set asides” 126and targets for energy efficiency, and 

the program can be designed in a manner that provides GHG benefits for “additional” 

efficiency measures. 

When a program has as one of its primary goals the reduction of GHG emissions, then 

additionality will be the critical screening tool. As discussed earlier, additionality criteria 

have been used in conjunction with GHG reduction programs to show that a project or 

saving was undertaken because of a particular program and would not have happened 

otherwise. Several tests for additionality have been developed for the CDM and which could 

be applied in other GHG reduction programs. For example, one measure of additionality is 

“financial additionality,” where the project could not have been financed without the 

revenue from selling carbon credits. 

 

126 A set aside is a pool of allowances that is used to award energy-efficiency and renewable-energy 

projects that reduce or displace electricity generation. 
 87

Though many energy efficiency measures are cost effective today, it is always important to 

minimize costs while maintaining the quality and integrity of a program. Therefore, for 

GHG reduction programs that are trying to minimize costs related to determining 

additionality, one could develop an initial list of eligible energy efficiency measures that 

would be considered additional without too much paperwork--such as, whole building 

improvements, measures with long-paybacks, and investments with split incentives (e.g. 

improvements on leased or rented property). 

An issue related to additionality is how to integrate new energy efficiency GHG programs 

with existing utility energy efficiency programs, many of which are mandated by 

government. As with renewables, ESCs can be used for either government mandated 

programs or in voluntary markets, but not for both. And, as local governments, states, 

regions and possibly the Federal government design GHG cap and trade programs, these 

programs, and how the program’s baseline is calculated, will further define what is 

additional. 

Finally, because ESCs (and RECs) have transaction cost associated with them and have 

been denominated in fairly large units (e.g. MWh, TWh and Tonnes of CO2), ESCs may 

not be appropriate for use in GHG reduction programs with measures that individually 

yield small savings. An exception would be for a program specifically designed to 

aggregate or bundle many small energy savings into a credible, easily verified savings 

pool, as long as all the projects are similar in nature, scale, and geography. 
 88

Roadmap for Effective ESC Programs 

In conclusion, our research and analysis found that designing an effective energy 

efficiency program that uses ESCs must have the following elements: 

• Transparent rules and procedures: 

In developing their rules and procedures, including any subsequent modifications or 

revisions, each of the ESC schemes that we examined made a concerted effort to 

make relevant materials available, usually via the Internet, and provided a process 

for the general public to review and comment. Based on public comments, drafts 

were reviewed and revised prior to issue. In addition, the results of audits and other 

program findings were also made available to the public. 

• Little or no proprietary information is withheld from the public: 

We are not aware of any concerns over the release of proprietary information. 

• A measurement and evaluation system that ensures real, measurable, 

verifiable, and additional energy savings: 

All ESC schemes that we reviewed provided a flexible approach for calculating 

energy savings for groups of measures (e.g., deemed/stipulated savings, or energy 

monitoring – Italy provides a good example). These approaches are based on 

international methods that have been tested in the field for over twenty-five years. 

• Independent third-party auditing for verification and compliance:

All ESC schemes that we reviewed included a third-party verification system to 

ensure credibility and accountability. For example, the Independent Pricing and 

Regulatory Tribunal of New South Wales conducts audits for verification and 

compliance. 

• A process for issuing and tracking certificates that avoids double counting: 

All the ESC schemes that we reviewed included a process for issuing and tracking 

certificates. For example, the regulators in Great Britain and Italy -- along with the 

market operator -- are responsible for issuing and tracking the ESCs.

• A system for detecting and penalizing noncompliance: 
 89

All ESC schemes that we reviewed incorporated penalties for noncompliance in 

their programs. For example, France and New South Wales had fixed penalties 

while the penalties in Italy and Great Britain varied depending on the circumstances.

With these elements in place, we believe that an energy efficiency program using ESCs 

can efficiently and effectively operate in the voluntary or mandatory market for energy 

savings, assist with integrated energy resources planning, and be included in a program to 

reduce GHG emissions.

 
 90

GLOSSARY 

ADEME French Agency for Energy Management 

AEEG Italy’s Regulatory Authority for Electricity and Gas 

ATEE French Environment and Energy Association 

BRE Building Research Establishment 

CDM Clean Development Mechanism 

CFL Compact Fluorescent Lamp 

CHP Combined Heat and Power 

CRS Center for Renewable Solutions 

DEFRA Department for Environment, Food, and Rural Affairs 

DPUC Department of Public Utility Control 

DSA Demand Side Abatement 

EC European Commission 

EEC Energy Efficiency Commitment 

EEPS Energy Efficiency Performance Standard 

EERS Energy Efficiency Resource Standard 

EM&V Evaluation, Measurement and Verification 

ERCOT Electric Reliability Council of Texas 

ESC Energy Saving Certificate 

ESCO Energy Saving (Service) Company 

ETS Emissions Trading Scheme 

EU European Union 

EV Efficiency Vermont 

GGAS Greenhouse Gas Abatement Scheme 

GHG Greenhouse Gas 

GIS Generation Information System 

GME Italy’s Electricity Market Operator 

HVAC Heating, Ventilation, and Air Conditioning 

ICC Illinois Commerce Commission 

IDF Installation Discount Factor 
 91

IOU Investor Owned Utility 

IPART Independent Pricing and Regulatory Tribunal of NSW 

IPCC International Panel on Climate Change 

IPMVP International Performance Measurement and Verification Protocol 

LPG Liquefied Petroleum Gas 

M&V Measurement and Verification 

MRETS Midwest Renewable Energy Tracking System 

NAAIB North American Association of Issuing Bodies 

NE/GIS New England/Generation Information System 

NEPOOL New England Power Pool 

NGAC NSW Greenhouse Abatement Certificate 

NREL National Renewable Energy Laboratory 

NSW New South Wales 

Ofgem Office of Gas and Electric Markets 

OTC Over The Counter 

PJM/GATS Generation Attribute Tracking System (in Pennsylvania, New Jersey 

and Maryland) 

PSB Public Service Board 

PUC Public Utilities Commission 

PUCT Public Utilities Commission of Texas 

REC Renewable Energy Credit 

RECS Renewable Energy Certificate System 

RGGI Regional Greenhouse Gas Initiative 

RPS Renewables Portfolio Standard 

TOE Ton of Oil Equivalent 

WREGIS Western Renewable Energy Generation Information System 
 92

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