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2.5.3 Risk

Stringent investment criteria (high discount rates for efficient investments) and the rejection of particular energy-efficient technologies may represent a rational response to perceived risk (Schleich, 2009; Sorrell et al., 2004). Within the context of implementation barriers, risk may fall into three categories (Sorrell et al., 2011). The first one is the external risk, which is related to the overall economic trends

(e.g. recessions), expected fluctuations in energy use and energy prices and political changes and government policies. Uncertainty in energy prices can be related to fluctuation of exchange rates and stochastic prices for emission allowances under an emissions trading scheme (Schleich, 2009). Another category is the business risk which has to do with the economic trends of the individual firm or the sector and the financing risk. The last one is the technical risk, which is associated with the technical performance of the investment, measured for instance by its effectiveness and reliability. This is mainly the case with new and unfamiliar technologies which are perceived to be risky and, thus, the operation risk may overweight the potential benefits from reduced cost. Sutherland (1991) also suggests that these investments require higher hurdle rates because they are 'illiquid' and irreversible. In these cases the regulator or the industrial associations should aim to increase confidence and disseminate information and awareness among potential adopters (Schleich, 2009).

2.5.4 Imperfect Information

Huntington, Schipper, and Sanstad (1994) state that information problems taking different forms are the principal source of market failures that account for the 'gap' in energy efficiency investments. Sorrell et al. (2004) present the several dimensions to imperfect information based on Golove and Eto (1996) who distinguish imperfect information to 'lack of information' as ignorance on the energy performance of different technologies; 'cost of information', which includes the costs associated with searching and acquiring information on the energy performance of technologies and 'accuracy of information' as accurate information may be difficult to obtain, since sellers of technologies may have incentives to exaggerate or manipulate performance data and given that unbiased information may be available from other sources but this may be more costly. According to Sorrell et al. (2011) the information we are interested in, within the scope of the energy efficiency gap, is related to information on current energy consumption, on energy-specific investment opportunities and on energy consumption of new and refurbished buildings, process plant and purchased equipment. The lack of this information leads to making suboptimal decisions and in particular underinvesting in energy efficiency.

Note that information has the attribute of a 'public good' and once created it can be used by many people at little or no additional cost. Jaffe et al. (1999) state that it is difficult for a firm that invests in information creation to prevent others who do not pay for it from using this information especially given that the act of adopting a new technology is, by itself, a source of important information for others.

Finally, a special form of the imperfect information problem arises when parties to a transaction have access to different levels of information (asymmetric information). This is mainly the case in the principal-agent problems, as when the owner chooses the level of investment in energy efficiency in a system, but the energy bills are paid by the tenant. This issue will be discussed in the 'split incentive' barrier.

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