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CHAPTER 1 ENERGY CONSERVATION POLICY AND BEHAVIOR Although energy policy is not high on the 1985 agendas of federal officials, energy use remains important to the nation. Energy use still affects air and water quality, and it might, in the long term, bring about major changes in climate. Inefficient energy use also makes the economy less efficient and less competitive internationally. And the high price of energy is a constant burden on households, busi- nesses, and municipalities--especially those that lack the capital to purchase energy-efficient technology. Thus, even if energy prices do not increase in the future as they did in the past decade, there is still reason for a national effort to improve the efficiency of energy use. Households are an important focus for that effort. Until now, residential energy conservation forced by energy price increases in the United States has mainly taken the form of reduced standards of living rather than increased efficiency of energy use {see Frieden and Baker, 1983; King et al., 1982; Morlan, 1981, cited in Hirst, Marlay, et al., 1983; Stern, Black, and Elworth, 1983~. Moreover, the reduced living standards have occurred primarily among low-income households: invest- ments in improved energy efficiency have mainly been made by the well-to-do (Dillman, Rosa, and Dillman, 1984; Energy Information Administration, 1980), while low-income households have cut back on health care, education, and other household expenses to pay for energy {Dillman, Rosa, and Dillman, 1984~. Because low-income households have made few investments in energy-efficient technology, energy costs have been rising fastest for those households (Energy Information Administra- tion, 1982), millions of which now pay more than one-third of their incomes directly for energy (Cooper et al., 1983~. Because of such developments, many state, municipal, and private decision makers consider energy efficiency important even though it is the list of federal Priorities. Many state energy offices not high on _ __ are working to relieve the hardship of energy costs and to stem the flow of energy dollars out of state economies. Electric utilities in several parts of the country are looking to residential energy effici- ency as a cost-effective alternative to power plant construction for meeting demand. And even the federal government continues to implement conservation policies enacted over the last decade, such as the low- income home weatherization program and the appliance standards and 1

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2 labeling programs. The continuing interest in policies and programs to improve household energy efficiency is reflected in a series of well-attended research and policy conferences over the last several years (see American Council for an Energy-Efficient Economy, 1984; Ester et al., 1984; Harris and Blumstein, 1984; Harris and Hollander, 1982; Morrison and Kempton, 1984~. THE HI}MAN DIMENSION OF ENERGY USE This report focuses on what we have called the human dimension of energy use--the way factors such as habit, trust, personal values, word-of-mouth communication, and recent personal experience affect the energy choices of individuals, households, and organizations. In earlier reports (Stern, 1984; Stern and Aronson, 1984), we have shown the importance for energy policy and policy analysis of an understand- ing of current knowledge about consumer behavior, including human thinking, motivation, information processing, and decision making; of the rules that govern the behavior of organizations and individuals in the face of change and uncertainty; and of other social and psycho- ~ogical processes. This report extends the earlier work, applying it to some unsolved problems regarding energy efficiency in buildings. It may be useful at the outset to suggest the kinds of policy problems that have been exacerbated by inattention to the human dimension of energy use. Efforts to implement energy efficiency by exhorting consumers to save or by sending them information about how to do it have had little effect (see Ester and Winett, 1982~. People often fail to notice, understand, or trust the information. Tax incentives have not reached all the people who could benefit, partly because many low-income people do not routinely pay attention to details of the tax code or keep the necessary records. Thus, tax credits have mainly subsidized affluent consumers (Energy Information Administration, 1980) and people who would have invested in energy efficiency even without the incentives (Berry, 1982~. And new energy- saving technologies are not readily adopted even when they offer a high return on investment (see, e.g., Office of Technology Assessment, 1982), in part because energy bills give confusing information that cannot readily be used to confirm energy savings (see Kempton and Montgomery, 1982; Kempton et al., 19841. When policy makers fail to recognize energy's human dimension, policy initiatives have often faltered. When the Residential Conservation Service program offered homeowners individualized energy information at low cost or even for free, the response was decidedly underwhelming (U.S. Department of Energy, 1984; Hirst, 1984; Hirst, Berry, and Soderstrom, 1981; Rosenberg, 1980~. When conservation programs offer loan subsidies for home weatherization, few people take out loans, and the rate of participation has had much less to do with the size of the subsidy than with the way the programs are marketed and managed (Stern, Berry, and Hirst, 1985~. Other disappointments in energy conservation may also be due to unanticipated behavior. When weatherization programs seem successful--

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3 when they lead to the insulation of walls, the caulking of doors and windows, and the installation of energy-efficient furnaces--energy savings have not matched predictions. On the average, savings are somewhat less than predicted, but the variability is a bigger surprise: while some buildings save double what was predicted, others show sub- stantial increases in energy use (Goldman, 1984; Goldman and Wagner, 1984; Hirst, White, and Goeltz, 1983; Hirst and Goeltz, 19841. Many plausible explanations have been offered for these outcomes, but none has been proved and the reason or reasons remain unknown. Perhaps people take some of their energy savings back as increased comfort by altering thermostat settings; perhaps installers of energy-efficient equipment do not install it the way the predictive models expect; and perhaps even the carefully constructed computer models used to predict energy savings are not correct or not precise, since different engineers using the same model of the same building often vary by 100 percent in their estimates of how much energy a building uses (K. Teichman, U.S. Department of Energy, personal communication). ABOUT THIS REPORT The committee's past reports show that conservation policies and programs have been built on an inadequate understanding of how people respond to prices, information, incentives, and other stimuli. Some of the needed knowledge exists, but much still has to be developed in the process of designing and implementing energy policies and programs. This report offers guidance for policy makers who need to understand the human dimension to make policies and programs in the building sector work. It addresses a small selection of policy issues, applying the relevant behavioral knowledge that exists and suggesting ways to develop the needed knowledge that does not yet exist. This report follows from the past work of the committee and draws heavily on evidence reviewed in our previous reports (Stern and Aronson, 1984; Stern 19841. Following those reports, it emphasizes contributions from the noneconomic behavioral and social sciences, particularly research on topics that have not been the primary foci for economists, such as word-of-mouth communication, program implementation, and the effects on consumer behavior of the sources of information rather than its content. We draw on some work by economists, but have not attempted to systematically review recent research in economics that, like the work reported here, could help illuminate the role of behavior in energy use. Such research includes modeling efforts that allow different determination of behavior as a function of climate, income, housing and appliance stock, and time of year (e.g., Dubin, 1985; Ruderman, Levine, and McMahon, 1984~; efforts to model appliance choice separately from appliance utilization (e.g., Dubin and McFadden, 1984; Goett and McFadden, 19827; efforts to test psychological hypotheses in econometric models (e.g., Hill, 1985, 1986~; analyses of consumer expectations of the behavior of markets (e.g., Mishkin, 1983~; and economic models of information search by consumers (e.g., Hirshleifer and Riley, 1979; Salop and Stiglitz, 1977; Wilde and Schwartz, 1979~. Such work by

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4 economists is moving on a parallel track with the kinds of behavioral research that form the primary basis for this report. The remainder of this chapter distinguishes four approaches to conservation policy--information programs, financial incentives, standards, and technological research and development--and identifies the major kinds of behavioral questions that arise in considering each kind of policy. Chapter 2 offers a framework that policy analysts can use to get answers to these types of behavioral questions. It discusses the methods available for answering such questions and outlines the strengths and weaknesses of each. Chapters 3 through 6 examine selected policy issues in more detail. Chapter 3 examines the effectiveness of incentive programs for residential energy efficiency, reviewing avail- able data and drawing conclusions about what makes such programs attrac- tive to energy users. Chapter 4 focuses on the role of information in home retrofit programs, showing how the key behavioral questions that arise in that context could be addressed more comprehensively in the future. Chapter 5 addresses another information-based policy option, the development of home energy rating systems. Drawing on available knowledge, it offers suggestions for designing and evaluating future rating systems. Finally, Chapter 6 examines a current issue in the implementation of energy-efficient technology: observed and expected energy savings from home retrofits. It sets forth a research program for determining the major causes of the gap between prediction and reality that considers both the behavioral and technical factors involved. We believe this report will be of value to policy makers considering and implementing policies for residential energy efficiency. It is especially pertinent to the policy issues specifically raised in chap- ters 3 through 6, but it can also help in considering other policy and program options in the residential building sector. Thus, the report speaks to concerns of several offices in the U. S. Department of Energy ^ ~ - ~ municipal governments, the discrepancy between (DOE), state energy offices, utility companies, and nonprofit organizations. BEHAVIORAL QUESTIONS RELATED TO CONSERVATION PROGRAMS FOR BUILDINGS Information Programs Many conservation programs for buildings are based largely on information. For example, Residential Conservation Service programs have offered better information to energy users through home energy audits, and DOE's Home Energy Rating System (HERS) and appliance labeling programs aim to save energy by providing more accurate information to purchasers about the energy efficiency of buildings and appliances. The success of these programs depends on the effect of new or improved information on major expenditures by energy users, for home purchases and retrofits and for major appliances. To design and implement such programs effectively, several types of behavioral questions must be addressed.

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How can a program be designed so that the information it offers is used? Experience shows that information from energy programs often goes unnoticed, fails to be understood or correctly interpreted, or is ignored because of mistrust of its source. How can a Program be designed to spread information widely? Energy programs reporting the most widespread success within a target audience are usually those that are advertised by word of mouth or through highly credible local institutions. Community groups are being used increas- ingly to implement energy programs because of a belief, supported by case studies, that such groups spread information more successfully (e.g., Gaskell and Pike, 1983; also see Chapter 3~. How can the of facts of a oroaram be forecasts Formal energy demand models rarely contain terms for information, so they can only forecast its effects by making assumptions about how information affects the variables that the models represent. Empirical knowledge about how people respond to Information IS essential For Forecasting. How clan the of feats: cuff a uroaram he assessed accurately? For measuring the effects of information on energy use, surveys asking if people received the information or what they did after receiving it are less reliable than direct measurement. But metering energy use gives an incomplete picture of the effects of a program if people choose to improve comfort rather than cut energy use. Thus, some program outcomes (e.g., comfort) that are essentially behavioral influence the energy effects of programs. To what can program effects be attributed? For improving programs, it may be more important to know what produced a program's effect than to know how large it was. Few program evaluation studies to date have considered this question. Incentive Programs Federal and state governments now offer tax incentives for energy efficiency, and utility companies offer energy loan and rebate programs. Such incentives are effective if they encourage investments that would not otherwise have been made, and their success in turn affects the need for other conservation programs. Some major behavioral questions about financial incentives have been examined (Stern, 1984:Chapter 3; Stern, Berry, and Hirst, 1985}, and we update that material in Chapter 3. In general, there are five behavioral questions about incentives that should be considered. How does investment change as a function of the size of an incentive? Evidence suggests that incentives work not only by changing the economic calculus for people who are considering investments, but also by attracting other people's attention to energy efficiency. If further study confirms this hypothesis, analyses of investments only in terms of their size would have to be broadened.

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6 How does investment depend on the type of incentive offered? House- holds may have definite, though nonuniform, preferences for different types of incentive. For example, some studies show that rebates are more attractive to many households than loan subsidies of the same economic value: they are preferred by low-income households and households that foresee bleak economic times for themselves (see Chapter 3~. Policy analyses have rarely examined the possibility that different types of incentive attract different types of consumers. What programmatic factors affect consumers' use of incentives? The marketing, organization, and management of an incentive program makes a tremendous difference in program success. These effects can even overwhelm that of the size of the incentive (see Chapter 3~. -How much investment would have occurred without the stimulus of an incentive? Most people who use incentives say they would have invested anyway. Self-reports, however, are not a reliable way to study people's motives, and more needs to be known to answer this important policy question. To what extent does an incentive increase the pace of an investment? The limited evidence suggests that incentives speed investment, but more needs to be known to see if the effect is large enough to justify particular incentive programs. Standards Although energy-efficiency standards for buildings are not currently being pursued in the federal government, there is federal legislation regarding appliance standards, and some state and local governments set energy efficiency standards for appliances and in building codes. Under the appliance standards legislation, DOE has been analyzing the behavior of appliance manufacturers and purchasers to determine whether standards would produce energy savings in addition to what can be expected as a result of market pressures (rising prices, foreign competition, etc.~. Four major behavioral questions are implicit in such analyses. Under what conditions does energy efficiency influence consumers' purchases? If energy efficiency is an explicit consideration when consumers choose buildings or appliances, better information will make their decisions more economically rational in terms of energy. If energy is not being considered, however, a national goal of increased efficiency may require setting standards. How might alternatives to standards, such as appliance labels or energy ratings for buildings, make energy efficiency a prominent consideration in purchase decisions? Well-designed information may attract attention to energy efficiency and make standards less necessary. To implement informational alternatives to standards, l

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7 informational strategies that attract attention to energy efficiency must be developed. How is the importance of energy efficiency in purchase decisions affected by the circumstances and purposes surrounding the purchase? People probably do not consider energy efficiency when replacing a furnace or water heater that suddenly breaks down, but there may be more time for comparison shopping for refrigerators or dishwashers purchased in nonemergency situations. Knowledge about the circum- stances of purchase may show that standards are more needed for some appliances than others. In the absence of standards, how do manufacturers, builders, and others make choices? To evaluate the need for standards one must know about the production of equipment in the absence of standards. Pur- chasers are not the only ones whose choices are relevant. There is a need to know more about how appliance manufacturers use information prices, and market characteristics product lines. There is also a need of builders, distributors, con- tractors, and retailers affect the decisions of purchasers. ~ , , _ about competition, expected energy in deciding whether to develop new to know more about how the choices Technological Research and Development New technologies are constantly being developed for building con- struction and retrofits and for use in appliances. Behavioral questions arise because the practical effect of any new technology depends on human choices about its purchase and use. Adoption decisions, in turn, depend on whether estimates of energy savings from the new technology are reliable, and it is hard to make estimates when the energy savings depend not only on the operation of the technology but on the behavior of the people who use it. For example, superinsulated houses save energy, but if people open windows frequently to freshen the air, savings will be much less than expected. Technological research and development raise at least two such behavioral questions. Which energy-efficient building technologies are most likely to be accepted readily in the market? This question is essentially in the market research field. For example, a heat reclaimer for flue gases may be easier to build as a new product than to include in a redesigned furnace or water heater, but the market for heat reclaimers to retrofit on flues may be very small compared with the market for energy-efficient furnaces or water heaters with built-in heat reclaimers. How can reliable es ~ . . technologies? Energy use in a building can change by 100 percent when the occupant changes (see, e.g., Sonderegger, 1978~. This fact is a warning against estimating energy savings from a new technology without observing how it works in field conditions when operated by people like

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8 the intended users. Even holding the user constant, engineering estimates are imperfect because decisions about the purchase and the intensity of use of a technology influence each other {Dubin and McFadden, 19847. In sum, no conservation policy or program can be evaluated realistically without examining a broad range of behavioral issues. However, policy analysts have not yet given high priority to studying the processes of choice among consumers, manufacturers, builders, and other important actors. More such study can be done, even within existing resource limits. m e next chapter offers a framework for answering behavioral questions about energy efficiency in buildings. .