Building and Environment 40 (2005) 1207–1216 Rebate as an economic instrument for promoting building energy efficiency in Hong Kong F.W.H. Yik à , W.L. Lee Department of Building Services Engineering, The Hong Kong Polytechnic University, Hunghom, Kowloon, Hong Kong SAR, China Received 15 July 2004; accepted 11 October 2004 Abstract Economic principles have been applied to elicit the conditions under which there will be benefit to power companies in offering rebates to consumers to encourage them to adopt energy saving measures. The analysis also provides an answer to how rebate rate should be determined to maximise social benefit. However, the analysis of the rebate-based demand side management (DSM) programmes launched by the two power companies in Hong Kong in the year 2000 showed that the prerequisite conditions that would permit the power companies to derive benefits from the programmes were unlikely to exist. This suggests that use of this economic instrument for promoting energy efficiency requires governmental influence; it will not emerge solely as a commercial decision of the power companies in Hong Kong. r 2004 Elsevier Ltd. All rights reserved. Keywords: Demand side management; Rebate; Energy efficiency; Economics 1. Introduction Demand side management (DSM) programmes emerged in the late 1970s as a means widely used by power companies to influence consumers on the amount or timing of electricity use [1]. The objectives of a DSM programme may include peak clipping, valley filling and load shifting: peak clipping attempts to reduce peak electricity demand through cutting back consumption during peak periods; valley filling encourages electricity use during off-peak periods; and load shifting advances or defers consumption from the peak periods to off- peak periods. Differential tariff rates for consumption in different time periods in the day have been the major instrument for achieving the DSM objectives. Power companies have interest in implementing DSM pro- grammes, especially those that promote load-shifting (e.g. use of thermal storage systems), because efficiency of generation plants can be upheld and investments for capacity expansion can be postponed [2,3], which basically would allow them to sell more electricity with less capital investment to generation plants [4]. Since both valley filling and load shifting may not save energy, public policy makers prefer DSM pro- grammes that promote energy saving measures in the interest of energy conservation and environmental protection [5]. Many DSM programmes with these objectives offer rebates to consumers as incentive to adopt energy saving measures [6]. The United States Utilities launched in the early 1990s the first rebate- based DSM programme, was well received and is effective in saving energy [6,7]. Through introducing similar programmes, many countries have achieved considerable electricity savings while the average cost of the conserved energy has fallen significantly [8,9]. Different rebate policies have been adopted to achieve commercial and governmental objectives, which include increasing sales volume in the retail market [10]; promoting exports [11]; optimising airport handling capacity [12]; promoting vehicles of higher-than-average fuel efficiency [13]; and encouraging commercial banks to offer credits to less preferred sectors [14]. The rebate policies offer either a fixed rebate amount for the uptake ARTICLE IN PRESS www.elsevier.com/locate/buildenv 0360-1323/$-see front matter r 2004 Elsevier Ltd. All rights reserved. doi:10.1016/j.buildenv.2004.10.007 à Corresponding author. Tel.: +85227665841; fax: +85227746146. E-mail address: bewhyik@polyu.edu.hk (F.W.H. Yik).