Improving Energy Demand Analysis (1984) / Chapter Skim
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3 The Effects of Financial Incentives on Energy-Efficient Investments in Residential Buildings
3 The Effects of Financial Incentives on Energy-Efficient Investments in Residential Buildings
Pages 43-60
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From page 43... ...
Uneconomically optimal" has been variously defined, but the essence of the concept is minimization of cost. The concept usually implies comparing the net present values of alternatives under stated assumptions about the operating costs of equipment, the discount rate for future energy costs, and the useful life of the equipment.
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From page 44... ...
, who are not concerned with operating costs, make many decisions; · the relatively time-consuming and complicated processes necessary for one to become informed about appropriate conservation measures and to actually make purchases; · consumer distrust of the suppliers of conservation services and information, particularly small contractors in the home improvement field; . but most economic analyses of energy efficiency have discounted these values at the market rate of interest, without considering that returns on investments in energy efficiency may be less certain that returns on investment in organized markets (Chernoff, 1983)
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From page 45... ...
. A variety of smaller grant, loan, and rebate programs exist to encourage more investment by offering financial incentives.
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From page 46... ...
To raise such possibilities is to suggest that the economic meaning of a financial incentive is not always obvious and to note the empirical questions that must be answered if formal models are to offer reliable interpretations of the effect of financial incentives. In exploring the relationship of financial incentives to investment in the energy-efficiency of residential
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From page 47... ...
We discuss evidence that the effect of incentive size may not be what is usually modeled and that incentive type and other nonfinancial variables may be critical to the success of incentive programs. Finally, we present approaches for improving understanding of how financial incentives work -- or fail to work -- in the context of residential energy conservation.
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From page 48... ...
The only data on threshold effects for such incentives come from studies of consumer response to real or proposed loan subsidies. Those data suggest that there is little consumer interest in loan subsidies, except for interestfree loans.
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From page 49... ...
Better methods for evaluating the effect of loan rates exist and are discussed in a somewhat broader context in the next section. Incentives as an Impetus to Speed Changes Already Planned It is also possible that incentives affect only those energy users who are already paying attention to the costs of energy efficiency -- that is, those who have already decided to invest.
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From page 50... ...
Furthermore, a conservation incentive program that says one must go into debt to conserve energy is not making an effective sales pitch, regardless of the interest rate offered. The idea that incentives only affect people who would have invested anyway remains only a hypothesis.
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From page 51... ...
For example, a simple economic model may compare a loan and a rebate in terms of net present value: rebates decrease present costs while loans defer them, so, given knowledge of consumers' discount rates, the two incentives can be compared by calculating the present value of the loan. By this method it becomes possible to tell which loan rates are equal in economic value to which rebate rates.
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From page 52... ...
Some of them, such as those offered by low-income home weatherization programs, cover labor as well as capital costs. Including labor may attract energy users because it solves the problem some people have of finding someone to do the work, but it may repel people if they do not trust the program or the workers it provides.
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From page 53... ...
Generally, procedures that make loan repayment seem painless -- by deferring it until a house is sold or by ensuring that loan payments are never greater than energy savings -- may make a large difference in response to loan programs. The above descriptions emphasize certain qualitative characteristics of financial incentives that seem likely to make a difference in consumer response: delay in receipt of the incentive, effort involved in obtaining it, uncertainty that it will be received, the incentive's effect on household budgets and cash flows, and trust in the offering organization.
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From page 54... ...
While some relevant data might come from evaluations of existing incentive programs and pilot studies of new programs under consideration, a more systematic and promising method can be used: small, laboratory studies that compare people's initial interest in a great variety of possible incentive packages. Methods of focused group discussion can provide some initial insights, but more quantitative estimates can be made by using methodology adapted from psychometric studies of decision making under uncertainty (e.g., Kahneman and Tversky, 1979; Tversky and Kahneman, 1981)
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From page 55... ...
It suggests that the most important influence on a program's effectiveness is not the loan rate or the term but implementation: promotion to the clientele, success in simplifying the decision process and in alleviating fears of shoddy work, and the ability of the sponsoring organization to gain trust. The same variables seem to affect conservation programs that rely primarily on information, such as the Residential Conservation Service and other energy audit programs.
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From page 56... ...
In particular, utilities succeeded in getting more homes weatherized when they had larger staffs for conservation, when management and personnel were dedicated to the program, and when their staff members promoted the program rather than contracting the job to outside organizations that were paid a fee for each audit they conducted. Simplification of the decision process is often identified as a major benefit energy conservation programs can offer households.
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From page 57... ...
Finally, trust in a conservation program is obviously Trust probably makes more difference for programs that offer energy information or installation services than for those that offer only financial incentives, but since these features are so often combined, trust can be a major issue in many incentive programs. Even in programs that offer nothing but an incentive, trust in the sponsoring organization may affect its ability to get consumers' attention.
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From page 58... ...
The overall cost of federal and state residential energy tax credits, loan subsidies for residential retrofit, and rebates for retrofit and purchase of energy-efficient appliances is probably several hundred million dollars a year. Unfortunately, very little is known about the absolute and relative effectiveness of these financial incentives in stimulating installation of energy-efficient technology.
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From page 59... ...
Are they the only forms of incentive likely to affect low-income people? · Is some of the money spent on financial incentives better spent on nonfinancial modes of attracting investment, such as marketing of conservation programs, guarantees of consumer protection, simplification of investment and payment procedures, and liaison between organizations providing incentives and others that may have higher credibility as information sources?
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From page 60... ...
High priority should be given to investing analytic resources in studies of the organizational and behavioral factors that seem often to spell success or failure in incentive programs. When one interest-free loan program has only 8 percent of its eligible households using the loans while a formally identical program has 90 percent participation, a research program restricted to analyzing the readily quantifiable financial variables -- in formal models or by other methods -- is ignoring the factors that may prove to be the most important.
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