Home Barriers to the energy cooperation and solutions Economic perspective barriers

Economic perspective barriers

In industry, the economic perspective is usually the most influencing one and profitability is the decisive factor for the adoption of various measures in general


Financial

Complexity of business models

The project must be beneficial in total, not necessarily for individual partners. This means that individual companies which benefit from a cooperation may need to compensate those companies worse off due to cooperating.

For energy cooperation projects of two or more companies, complex situations arise: investment, operation and maintenance costs must be divided between the participants while benefits need to be shared.

Financing

Financing

Financing problems or too high investment costs are often quoted as reason why measures are not realized.

From an economic theory point of view, capital is expected to be perfectly mobile, that means, this capital is invested where it generates the highest revenues. In companies, the most profitable projects, i.e. those with the lowest payback periods, are selected. Long-term energy efficiency projects often have to stand back behind other (non-) energy (efficiency) projects, which pay off sooner.

Hidden costs

The innovative character of energy cooperation projects can lead to uncertainties regarding hidden costs. First-of-its-kind investments may be considered as too risky to be in line with the company rules.


Running costs

The running costs of technical equipment, technical personnel, service costs are often not thought of, these add up to the investment costs.

This barrier is also connected to split incentives: different actors focus on different topics and face different incentives due to their responsibilities in the organisation.

Furthermore, in case of highly innovative cooperation projects, it is much more difficult to account the running costs beforehand, due to shared responsibilities and few experiences in the field.

Costly backup systems

In addition to the investment and running costs of the new system, single companies may need to have a backup system to prevent down-times and/or security issues if the park infrastructure is out of order for some reasons. Depending on the type of energy cooperation, the installation of backup systems may be expensive.

Market related

Unknown development of energy prices

Energy prices can hardly be forecasted. Profound forecasts of renowned institutions have proved to be wrong.

Cost-benefit analyses often find that the payback period is extremely sensitive to changes in energy prices that fluctuate a lot. Energy markets are global markets and are subject to many distortions, which may result in drastic and long-term price changes.

Energy market risks are a crucial uncertainty, which negatively influence especially those projects with a payback period close to its allowed limits.

Running costs

High investment costs vs. low savings

The basis for any economic calculation is the balance between the benefits achieved by a project and the associated costs. For some projects, investment costs or running costs are too high or associated benefits are too low.

The ratio of benefits and costs is the starting point of many investment decisions.

Low savings can be achieved when conventional energy sources are cheap. Often, costs caused by environmental damage and climate effects are not well or not at all reflected by market prices.

In this sense, joint energy efficiency investments and cooperation are held back, although they would make sense from an economy perspective.


Lock-in effects

When innovative technologies are used to gain higher energy efficiency, lock-in effects can occur due to missing competitors and alternatives of the used technology. Such dependencies are usually avoided by enterprises.

Lock-in effects occur when a consumer depends fully on one supplier, because the products, such as innovative energy efficient technology, are not available from other suppliers or the costs of changing to another (similar) technology are very high.

Lock-in effects are not only a risk but a market related issue. Contractual agreements must intend to avoid such potentially negative effects.


Risks and Uncertainties

Many assessments showed that risks and uncertainties are essential barriers to energy technology improvements in general and, even more important, for energy cooperation.

Risk insurances for innovative projects in the renewable energy and energy cooperation sector are hardly offered as own research by the authors shows.

Risks of partner default

For any cooperation, there is the risk of cancellation. Often, the contractual agreements between companies clearly define the process when partners decline the cooperation due to modification of the plant or changes in the whole process, shutdown due to bankruptcy of the company or shutdown due to relocation of the site. Generally, starting cooperation is most appropriate as soon as possible after installation or modifications of plants.

Cooperation between competing companies

Although cooperation could foster the competitiveness of the single companies, data exchange and supporting market competitors could lead to economic risks. This problem is also part of social barriers, especially when similar companies cooperate, problems can arise.

Transversal instruments

  • Involvement of ESCO as financing entity
  • Creation of a park ESCO
  • Energy management at company/park level
  • Energy saving insurance
  • Completion bond for energy efficient investments
  • Life cycle assessment and life cycle approach
  • Common energy audits
  • Financing agreements for energy efficient investments
  • Pre-commercial procurement for innovative energy investments
  • Certification of energy efficient technologies
  • Energy savings certificates or white certificates
  • Incentives and subsidies for energy investments
  • Crowdfunding initiatives for energy investments
  • Leasing for energy efficient equipment
  • Regulatory framework for fostering energy efficiency and renewable energy sources
  • Raising awareness and training activities on energy efficiency opportunities

Specific instruments

  • Extended producer responsibility for energy
  • Smart monitoring systems for energy facilities and plants
  • Digital transformation for energy data
  • Contractual agreements for sharing energy data
  • Smart billing
  • Energy labelling for efficient systems and services
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