Barriers and Enablers to Energy Efficiency in Existing Buildings: Are Transaction Costs Making the Norwegian ESCO Market Fail?

Abstract

This study shows that transaction costs are making the Norwegian ESCO market fail. ESCO is an abbreviation for energy service company. ESCOs offer energy services to private and public enterprises. This study analyses the barriers and enablers of a market for energy efficiency services in existing buildings in Norway.
Available technologies can be installed in existing buildings to reduce energy consumption. Most investments in energy efficiency services are commercially profitable, and in some cases come at zero opportunity cost of capital. Still, the ESCO market in Norway has struggled to take foothold.
This study tests the hypothesis that transaction costs in ESCO projects are causing the market for energy efficiency services in existing buildings in Norway to fail. It uses transaction cost economics, a theory found within institutional economics, to analyze whether transaction costs on both the supply and the demand side is causing this failure. Transaction costs can be seen as all the hidden costs stemming from friction between buyers and sellers of highly specific assets.
Market failure suggest that society are producing a suboptimal level of energy efficiency services. If this is the case, Norway runs the risk of investing in a level of energy supply that is dimensioned for an inefficient level of energy consumption. Market interventions are analyzed to see whether they are capable of reducing transaction costs. Energy performance contracting, a project management tool developed through EU funding, is given special attention because it has attributes that are closely linked to transaction costs.