Exploring the role of households’ hurdle rates and demand elasticities in meeting Danish energy-savings target

The EU's Energy Efficiency Directive (EED) sets a binding target for energy-savings in EU member states. The EED further requires member states to perform ex-ante evaluations of energy efficiency policies implemented to achieve these savings. However, ex-ante evaluation of energy efficiency policies is difficult as it requires detailed modelling of end-users’ investment and energy demand behaviour. This paper details the Danish IntERACT modelling approach for ex-ante evaluation of energy efficiency policies directed at residential heating. IntERACT integrates the energy system model TIMES-DK into a computable general equilibrium framework. The paper explores the potential for meeting Denmark's EED-target through a policy-induced increase in households’ investments in energy efficiency retrofits. The paper considers the effect of energy efficiency policies on households’ investment behaviour by applying different levels of hurdle rates on households’ investments in energy efficiency retrofits. The paper shows that reducing the hurdle rate from 25% to 4% could meet more than a third of Danish energy-saving requirements for the period 2021–2030. This result includes a direct rebound effect of 31%. Finally, the paper demonstrates that reducing the hurdle below 10% has a substantial negative impact on households’ disposable income, making such policy less viable from a policy perspective.