Energy efficiency subsidies: can they work?

It is probably known that the Spanish and Catalan governments, as well as cities like Barcelona, ​​offer subsidies to renovate homes and improve their energy efficiency. These programs help households increase their comfort while reducing their energy bills, which have become a major concern since the 2022 energy crisis. However, adoption has been lower than expected. Spain committed hundreds of millions of euros to subsidize heat pumps, but three years after the budget was approved, only 59% of the national funds had been disbursed by the end of 2024. Even more worrying, heat pump sales fell by 47% in the first half of 2024 compared to the previous year. How can these subsidies be designed to truly deliver on their promises? When a Spanish household replaces a gas boiler with a heat pump, the benefits extend far beyond the home. The change reduces the country's CO₂ emissions and helps Spain meet its climate commitments under the National Energy and Climate Plan (PNIEC). It also reduces dependence on imported fossil fuels, strengthening energy security. These collective benefits justify public support for investments in energy efficiency. Furthermore, more efficient heating and cooling systems make it easier to cope with temperature extremes in the home, reducing exposure to serious health risks and helping to protect the most vulnerable. However, the initial investment can be daunting. Installing an air-to-water heat pump, for example, can cost around €8,000. Over time, the system usually pays for itself, as energy savings typically offset the initial cost. But many households simply don't have the necessary funds or underestimate the long-term savings that come with improving energy efficiency. This is where subsidies can play an important role: helping households make investments that are beneficial in the long run but difficult to finance initially. Households should apply for the subsidy and make investments that increase comfort, protect health, and reduce bills. So why is adoption so slow? The main national aid, managed by IDAE, primarily supports air-source heat pumps, particularly air-to-water systems, which are often used to replace gas boilers. However, reversible air-to-air systems, which cost two to three times less, predominate in the Spanish residential market. Households that install these smaller systems can access other forms of support, such as an income tax deduction or local subsidies. The income tax deduction has one important limitation: as it is non-refundable, households with little or no tax liability can benefit fully. As a result, the 20% of Spanish households experiencing energy poverty are precisely those least likely to receive support through this mechanism. Local subsidies face a similar problem. They are often designed to supplement national aid or tax deductions, making them less effective when households are ineligible for the first two programs. However, the main obstacle is probably that subsidies typically operate on a repayment basis. Households must pay the full cost of the installation upfront, wait for administrative checks to be completed, and only then receive the subsidies, often months after the work has been finished. Obtaining public support often involves complex administrative procedures. Households may need energy performance certificates, technical assessments, or other documentation provided by certified architects or professionals. Finding these professionals, paying for their services, and managing the paperwork can be time-consuming and expensive. Furthermore, eligibility often depends on technical requirements, such as achieving a certain reduction in energy consumption, something households cannot always predict in advance. The result is a paradox: households must spend time and money just to find out if they will actually save money. Faced with uncertainty and complexity, many simply give up. Energy efficiency grants can generate real benefits, but only if they are designed in a way that households can actually use them. Clearer eligibility rules, faster payments, and fewer administrative hurdles would go a long way toward improving adoption. Another measure would be to make the income tax deduction refundable, allowing low-income households to also receive this support. With simpler rules and stronger political commitment, these programs can still become an effective tool for improving comfort, reducing energy bills, and decreasing emissions.