**2.4 Incentive beneficiary**

Partial refunds can be delivered in any point in the equipment supply chain, but typically they are provided to end consumers. The decision shall be made based on specific market's characteristics and obstacles. For example, product manufacturers will be targeted if the production of more energy-efficient products is needed, while distributors might be targeted if efficient equipment accessibility is the main obstacle in that specific market [1]. In this chapter's proposal, end customers are targeted, and hence it is of a downstream-type program.

Downstream inducements have the benefit of increasing buyers' acceptance of energy-efficient units, which has helpful spillover effects (i.e., the purchase of energy-efficient units by nonparticipants in the program due to the enhanced knowledge about the benefits of energy efficiency). The presence of a refund by itself is a signal and could in some cases have greater impact than the cash amount. Furthermore, downstream-type programs have a unique feature where they can be easily directed to a particular group of the society such as low-income households. However, a drawback of such programs could be the massive operation costs required in delivering refunds to big numbers of beneficiaries on individual basis [1].

#### **2.5 Evaluation**

Programs and policies are not usually thoroughly evaluated. Governments do not at all times allocate money and time to assess their programs in details. Moreover, a certain program could have various goals, which can be wide-ranging, especially when they incorporate research and development elements; this complicates evaluation of the program's success. Evaluation of rate-funded programs is more likely to be performed more scientifically as a necessary input to plan for upcoming resource investment, and impact evaluations are normally part of the development of these programs [18].

#### **2.6 Examples of downstream programs**

The typical fiscal tools used for downstream programs along with consumer reward points and replacement programs are briefly described below.

### *2.6.1 Downstream fiscal instruments*

Fiscal instruments that include income/sales tax reduction are popular incentives applied by governments. Since 2005, France has had an effective tax credit (tax credits reduce the taxes the consumer pays, whereas tax deductions lower the consumer's taxable income). As of 2010, more than 6.2 million households had benefited from this French tax credit [19]. Tax credits can be applied for the purchase of efficient boilers, windows, heat pumps, and even renewable energy equipment. Since 2007, the Italian government has offered a tax deduction of 55 percent for the replacement of heating, ventilation, and air conditioning (HVAC) systems with more efficient units and for the cost of other home efficiency improvements as well. Until December 2010, the program included a tax deduction of 20 percent for the replacement of old refrigerators. A tax deduction of 50 percent was newly added for the replacement of white goods including refrigerators, dryers, washers, ovens, freezers, and gas cookers [20].

*Energy Savings Analysis of a Recommended Residential Air Conditioning Incentive Program… DOI: http://dx.doi.org/10.5772/intechopen.82634*

#### *2.6.2 Consumer reward points*

stakeholder engagement and education with regard to how to participate in the

cle in that specific market [1]. In this chapter's proposal, end customers are

Downstream inducements have the benefit of increasing buyers' acceptance of energy-efficient units, which has helpful spillover effects (i.e., the purchase of energy-efficient units by nonparticipants in the program due to the enhanced knowledge about the benefits of energy efficiency). The presence of a refund by itself is a signal and could in some cases have greater impact than the cash amount. Furthermore, downstream-type programs have a unique feature where they can be easily directed to a particular group of the society such as low-income households.

However, a drawback of such programs could be the massive operation costs required

Programs and policies are not usually thoroughly evaluated. Governments do not at all times allocate money and time to assess their programs in details. Moreover, a certain program could have various goals, which can be wide-ranging, especially when they incorporate research and development elements; this complicates evaluation of the program's success. Evaluation of rate-funded programs is more likely to be performed more scientifically as a necessary input to plan for upcoming resource investment, and impact evaluations are normally part of the

The typical fiscal tools used for downstream programs along with consumer

Fiscal instruments that include income/sales tax reduction are popular incentives applied by governments. Since 2005, France has had an effective tax credit (tax credits reduce the taxes the consumer pays, whereas tax deductions lower the consumer's taxable income). As of 2010, more than 6.2 million households had benefited from this French tax credit [19]. Tax credits can be applied for the purchase of efficient boilers, windows, heat pumps, and even renewable energy equipment. Since 2007, the Italian government has offered a tax deduction of 55 percent for the replacement of heating, ventilation, and air conditioning (HVAC) systems with more efficient units and for the cost of other home efficiency

improvements as well. Until December 2010, the program included a tax deduction of 20 percent for the replacement of old refrigerators. A tax deduction of 50 percent was newly added for the replacement of white goods including refrigerators,

dryers, washers, ovens, freezers, and gas cookers [20].

reward points and replacement programs are briefly described below.

in delivering refunds to big numbers of beneficiaries on individual basis [1].

targeted, and hence it is of a downstream-type program.

Partial refunds can be delivered in any point in the equipment supply chain, but typically they are provided to end consumers. The decision shall be made based on specific market's characteristics and obstacles. For example, product manufacturers will be targeted if the production of more energy-efficient products is needed, while distributors might be targeted if efficient equipment accessibility is the main obsta-

program [17].

*Energy Policy*

**2.5 Evaluation**

**48**

development of these programs [18].

*2.6.1 Downstream fiscal instruments*

**2.6 Examples of downstream programs**

**2.4 Incentive beneficiary**

South Korea and Japan have applied subsidies in the form of reward points to incentivize consumers to select efficient technologies. This approach aims at promoting low-carbon lifestyles by encouraging consumer responsibility and awareness [1].

#### *2.6.3 Replacement programs*

Replacement programs (i.e., premature retirement and direct install) replace wasteful products before their useful estimated life is ended with more energyefficient ones. Such programs help in decreasing energy use by inspiring the placement of efficient products and confirming that non-efficient ones are taken away from the market [1]. Mexico's PNSEE has replaced large numbers of old appliances. The program offers government-funded subsidies to households in order to replace their old refrigerators and air conditioners with more efficient ones. The subsidies cover a percentage of the price of the new equipment and the costs for removing the old one. To receive the subsidy, households must surrender working refrigerators and air conditioners that must be 10 years old or older [21].

#### **2.7 Energy analysis**

Approaches of energy savings vary between countries, and they have a major effect on results. For instance, in Europe the savings are commonly based on lifetime energy saving which covers accumulated savings over the life of the equipment over the program duration, while the California Public Utilities Commission objective is based on yearly energy savings gathered over a period of 3 years [1].

Also, diverse methods are utilized to estimate net savings from incentive programs. An inducement program's net energy savings are usually the percentage of savings related only to the program itself. Those gross savings do not include the savings coming from the freerides who are contributors that will purchase efficient equipment without the availability of the program. Yet, it includes savings from participants who were encouraged to purchase efficient products as a result from the program's impact on that market that are usually referred to as spillovers. Furthermore, gross savings does not include savings resulting from other programs such as existing standards/codes, S&L programs, other monetary inducement programs, and of course external events such as economic recessions/growths. Usually gross savings calculation is not easy considering the existence of different bodies within the country offering several other different monetary programs for the same equipment. A final concern that should be accounted for is the increase in energy consumption that happens within the program participants as a result of the decrease of their energy bills which is a phenomenon typically referred to as rebound effect. Continuous evaluation and assessments are important and shall be performed regularly by governments to keep program administrators up to speed and aware of possible drawbacks that incentive programs might face and how they can be fixed [1].

Moreover and before going into energy analysis and savings quantification in this chapter, it is vital to understand what an energy system is. Scott wrote a paper about "the energy system" and defined it from sources to services where services are basically what people wants and sources are what nature provides as can be seen in the figure below [22].

Sources, transformer technologies, and carriers together identify the energy sector. Hence, it can be understood that the energy sector is only a part of the energy system [22]. As we are evaluating air conditioning incentive program in this study, the below graph describes the energy system, as per Scott, of a space cooling service in Saudi Arabia.

Although very important, exergy efficiencies and analysis are outside the scope of this chapter, and it focuses mainly on energy efficiencies and energy

*Energy Savings Analysis of a Recommended Residential Air Conditioning Incentive Program…*

This chapter attempted to quantify the energy savings and the associated economic feasibility from a proposed incentive program where several assumptions and estimations are needed and were utilized. Maximilian Lauer (2008) described several techno-economic assessment (TEA) methods among which are the net present value (NPV), annuity method, net cash flow table, and internal rate of return where he referred to the NPV method as the most common method utilized by the majority of professional practitioners of techno-economic assessment [27]. In this chapter the net present value (NPV) (discounted cash flow) will be used as one of the techno-economic assessment (TEA) methods where the net present value of each year will be discounted to year zero by the discount rate by means of the

*NPVn* <sup>¼</sup> *NFC*

*NPVtotal* ¼ ∑

Maximilian recommended performing sensitivity analysis to investigate the effect of input parameters on the results which will be performed in this chapter. Sensitivity analysis shall be implemented to describe how sensitive any outcome variable (for this proposal, the NPV in each scenario) to variations of input parameters. Since there are usually several input parameters, such technique can help in determining which parameter drives the majority of the deviations in the

Sensitivity analysis is commonly used in energy efficiency evaluations. For instance, Dae-HyunChoi and Le Xie (2016) recommend a novel analytical framework to measure the sensitivity of home energy management systems (HEMS) to

In order to investigate different aspects of the study, several data collection methods were used such as questionnaire, interviews (site visits), and published data (through secondary research). The questionnaire targeted the end users, while the interviews targeted some major stakeholders in the air conditioning industry. The majority of the data analyzed in this chapter is coming from the

Hence, the NPV of the project (i.e., NPVtotal) will be the total of the discounted

*n* 1

ð Þ <sup>1</sup> <sup>þ</sup> *<sup>d</sup> <sup>n</sup>* (2)

*NPVn* (3)

analysis.

following formula [27]:

outcome [27].

**3. Statistical analysis**

**3.1 Methodology**

questionnaire.

**51**

**2.8 Techno-economic assessment (TEA)**

*DOI: http://dx.doi.org/10.5772/intechopen.82634*

cash flow for each year over the project period [27]:

fluctuations in input data for HEMS operation [28].

In this chapter the focus will be on final or site energy savings quantification mainly not the primary energy saved. This is why it was important for the reader from a comprehension point of view to be provided with a glimpse of site-to-source energy systems. Since the proposal is about Saudi Arabia, it would be also useful to shed some light on Al-Musa et al.'s [23] efforts in implementing Scott's concept of energy systems to the Saudi electricity and LPG systems for cooking and water heating applications where they quantified the efficiency of the system by using the following formula [23]:

> <sup>ɳ</sup>System <sup>¼</sup> <sup>ɳ</sup>Extraction<sup>∗</sup> ɳTransportation<sup>∗</sup> ɳTransformer Technology<sup>∗</sup> ɳ*T*&D<sup>∗</sup>ɳServiceTechnology*:* (1)

They found out that the Saudi electric system efficiency from source to service is around 20 and 23% for cooking and water heating applications, respectively [23]. If a model to be developed for the space cooling applications is using the same formula, the efficiency of the service technology needs to be changed to consider window and split units' efficiencies. However, this is outside the scope of this chapter.

Another example from a developing nation is the efforts described by McNeil and Michael (2005) in their research where they studied the possible benefits from improved energy efficiency of key electrical products in India. The objective of the project was to assess the benefits which cost-effective enhancements in energy efficiency may get to developing nations. The project focused on four appliances among which are the air conditioning units. The life cycle cost analysis methodology was used in this project along with identifying the country's energy and environmental impacts in an attempt to offer through estimations of the possible returns of appliances energy efficiency programs in India [24].

The proposal in this chapter was analyzed with focus on energy efficiency and energy analysis. However, it is worth mentioning that several other researches focus also on exergy efficiencies and exergy analysis. Tolga Taner (2105) mentioned in his paper that energy analysis may be clarified with an exergy analysis where exergy is defined as the available energy [25]. Also, exergy could be defined as the available work or quality of energy. It basically quantifies the capability of a source to create useful work. Hence, exergy is considered a thermodynamic unit that offers a numerical value to the energy quality [25].

Muller et al. emphasized that exergy analysis is an essential tool which can be utilized in order to design and also operate an energy system. They also stressed on the importance of exergy analysis due to its significance for whole system exergy destruction [26]. *Energy Savings Analysis of a Recommended Residential Air Conditioning Incentive Program… DOI: http://dx.doi.org/10.5772/intechopen.82634*

Although very important, exergy efficiencies and analysis are outside the scope of this chapter, and it focuses mainly on energy efficiencies and energy analysis.

#### **2.8 Techno-economic assessment (TEA)**

Sources, transformer technologies, and carriers together identify the energy sector. Hence, it can be understood that the energy sector is only a part of the energy system [22]. As we are evaluating air conditioning incentive program in this study, the below graph describes the energy system, as per Scott, of a space cooling

In this chapter the focus will be on final or site energy savings quantification mainly not the primary energy saved. This is why it was important for the reader from a comprehension point of view to be provided with a glimpse of site-to-source energy systems. Since the proposal is about Saudi Arabia, it would be also useful to shed some light on Al-Musa et al.'s [23] efforts in implementing Scott's concept of energy systems to the Saudi electricity and LPG systems for cooking and water heating applications where they quantified the efficiency of the system by using the

ɳTransportation<sup>∗</sup>

They found out that the Saudi electric system efficiency from source to service is around 20 and 23% for cooking and water heating applications, respectively [23]. If a model to be developed for the space cooling applications is using the same formula, the efficiency of the service technology needs to be changed to consider window and split units' efficiencies. However, this is outside the scope of this

Another example from a developing nation is the efforts described by McNeil and Michael (2005) in their research where they studied the possible benefits from improved energy efficiency of key electrical products in India. The objective of the project was to assess the benefits which cost-effective enhancements in energy efficiency may get to developing nations. The project focused on four appliances among which are the air conditioning units. The life cycle cost analysis methodology was used in this project along with identifying the country's energy and environmental impacts in an attempt to offer through estimations of the possible returns of

The proposal in this chapter was analyzed with focus on energy efficiency and energy analysis. However, it is worth mentioning that several other researches focus also on exergy efficiencies and exergy analysis. Tolga Taner (2105) mentioned in his paper that energy analysis may be clarified with an exergy analysis where exergy

available work or quality of energy. It basically quantifies the capability of a source to create useful work. Hence, exergy is considered a thermodynamic unit that offers

Muller et al. emphasized that exergy analysis is an essential tool which can be utilized in order to design and also operate an energy system. They also stressed on the importance of exergy analysis due to its significance for whole system exergy destruction [26].

is defined as the available energy [25]. Also, exergy could be defined as the

ɳ*T*&D<sup>∗</sup>ɳServiceTechnology*:* (1)

service in Saudi Arabia.

*Energy Policy*

following formula [23]:

chapter.

**50**

<sup>ɳ</sup>System <sup>¼</sup> <sup>ɳ</sup>Extraction<sup>∗</sup>

ɳTransformer Technology<sup>∗</sup>

appliances energy efficiency programs in India [24].

a numerical value to the energy quality [25].

This chapter attempted to quantify the energy savings and the associated economic feasibility from a proposed incentive program where several assumptions and estimations are needed and were utilized. Maximilian Lauer (2008) described several techno-economic assessment (TEA) methods among which are the net present value (NPV), annuity method, net cash flow table, and internal rate of return where he referred to the NPV method as the most common method utilized by the majority of professional practitioners of techno-economic assessment [27]. In this chapter the net present value (NPV) (discounted cash flow) will be used as one of the techno-economic assessment (TEA) methods where the net present value of each year will be discounted to year zero by the discount rate by means of the following formula [27]:

$$NPVn = \frac{NFC}{(1+d)^n} \tag{2}$$

Hence, the NPV of the project (i.e., NPVtotal) will be the total of the discounted cash flow for each year over the project period [27]:

$$NPVtotal = \sum\_{1}^{n} NPVn\tag{3}$$

Maximilian recommended performing sensitivity analysis to investigate the effect of input parameters on the results which will be performed in this chapter. Sensitivity analysis shall be implemented to describe how sensitive any outcome variable (for this proposal, the NPV in each scenario) to variations of input parameters. Since there are usually several input parameters, such technique can help in determining which parameter drives the majority of the deviations in the outcome [27].

Sensitivity analysis is commonly used in energy efficiency evaluations. For instance, Dae-HyunChoi and Le Xie (2016) recommend a novel analytical framework to measure the sensitivity of home energy management systems (HEMS) to fluctuations in input data for HEMS operation [28].

#### **3. Statistical analysis**

#### **3.1 Methodology**

In order to investigate different aspects of the study, several data collection methods were used such as questionnaire, interviews (site visits), and published data (through secondary research). The questionnaire targeted the end users, while the interviews targeted some major stakeholders in the air conditioning industry. The majority of the data analyzed in this chapter is coming from the questionnaire.

#### **3.2 Questionnaire**

#### *3.2.1 Structure*

The questionnaire had a total of 13 questions with the majority being of multiple-choice type which made it easier for respondents to respond and easier for the researcher to analyze. The survey was developed in Arabic using Google Docs platform.

#### *3.2.2 Sample size*

As per the Saudi General Authority of Statistics, the 2017 population of Saudi Arabia is around 20.4 million that the sample was drawn from. A statistically representative sample, using 99% confidence level and +/�5% confidence interval, would be less than 700 respondents (i.e., 666) using Survey System methodology as described in the below Equations [29]. The number of respondents in the study exceeded 4000, which is more than six times the needed sample size. The following formulas were used to calculate the needed sample size:

$$\text{SS} = \frac{\text{Z}^2 \ast (\mathbf{p}) \ast (\mathbf{1} - \mathbf{p})}{\text{C}^2} \tag{4}$$

where SS is the sample size, Z is the Z value (2.58 for 99% confidence level), p is the percentage picking a choice, expressed as decimal (0.5 used for sample size needed), and C is the confidence interval, expressed as decimal (0.05 = �5).

The sample size then needs to be corrected for a finite population as follows:

$$\text{New SS} = \frac{\text{SS}}{1 + \frac{\text{SS} - 1}{\text{pop}}} \tag{5}$$

**4. Program design**

incentive program:

**53**

Before going into the details of the Residential Air Conditioning Incentive Program, below are the major assumptions undertaken during the development of the

*Energy Savings Analysis of a Recommended Residential Air Conditioning Incentive Program…*

*DOI: http://dx.doi.org/10.5772/intechopen.82634*

3.Weighted average tonnage of the AC units is 2.0176 TR based on Saudi Label &

2. Units to be replaced are 10 years old or more. Moreover, old units are surrendered to program administrator when receiving the new unit.

5. 2016 existing residential stock of small units is around 23 million units.

1. Administration cost of the program is not considered.

Standard (SL&S) registration system.

4.Average annual operating hours is 2741.

where pop is the population (i.e., 20.4 million).

#### *3.2.3 Results*

The survey was run over a 1-week period. Over that period, the survey link received more than 7500 clicks. While the total number of responses exceeded 4700, only 4649 were included in the analysis as some of the answers were inconsistent and hence excluded. The response rate could not be determined exactly given the lack of statistics on who really saw the tweet, post, or message. The response-to-click ratio, yet, is around 63%.

The below figures show the sociodemographic profiles of the 4649 respondents used in the analysis. The following subgroup contains the majority of respondents in their respective sociodemographic categories: Income level, 9000–15,000 SR income group (36%); citizenship, Saudi (99.5%); marital status, married (82.4%); and age: 30–39 years age group (52.2%). Geographically, the highest representative administrated areas (regions) were central (49%), western (25%), and then eastern (15%).

It was noticed that some groups (Saudis, male, married, 30–39 years old) are over represented in the sample. This is not surprising given the fact that those groups are the ones who are interested in the topic at hand, which is good for the survey and its results.

*Energy Savings Analysis of a Recommended Residential Air Conditioning Incentive Program… DOI: http://dx.doi.org/10.5772/intechopen.82634*
