Review of Methods Used by the U.S. Department of Energy in Setting Appliance and Equipment Standards (2021) / Chapter Skim
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4 The Economic Analysis of Standards
4 The Economic Analysis of Standards
Pages 52-83
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From page 52... ...
Therefore, DOE's economic analysis of standards proceeds against a backdrop of presumed imperfection in markets. These imperfections, often called market failures, may come from pollution externalities, manufacturers'' market power, or consumer mistakes.
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From page 53... ...
Finally, the committee returns to a discussion of market failures. THE EFFECT OF STANDARDS ON PRODUCERS From an economic perspective, appliance manufacturers come into the analysis of a proposed standard in two ways.
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From page 54... ...
One main reason for the effects of standards on consumer welfare and market efficiency is that sellers can increase profits by segmenting a market into customers with higher and lower willingness to pay for the product by offering products with different quality levels. Sellers may use energy efficiency to achieve that product differentiation -- both within and across sellers.
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From page 55... ...
The Determination of Markups How manufacturers respond to an appliance efficiency standard affects consumers' welfare in two ways: via the mix of features that the manufacturer decides to build into the appliance, as mentioned above, and by the final retail price. One component of the consumer's final price is the manufacturer's price as the product leaves the factory, which in turn partially depends on the cost of manufacturing determined in the engineering analysis in the Technical Support Documents (TSDs)
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From page 56... ...
. The article assumes cost pass-through does not affect a good's demand, notwithstanding changes in operating costs.
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From page 57... ...
The qualitative part of the MIA addresses trends in product characteristics, manufacturer characteristics, and standards' impact on manufacturer subgroups. In Phase III, "Subgroup Impact Analysis," DOE evaluates the impacts of energy efficiency standards on manufacturer cash flows, investments, and employment.
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From page 58... ...
However, this process is not entirely transparent. Moreover, it is not clear how accurately the GRIM cash flow analysis can reflect corporate behavior regarding the cross-product allocation of production costs, strategic pricing, and market segmentation that could affect an efficiency standard's cash flow consequences for one of multiple products manufactured by a company.
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From page 59... ...
If the consumer employs a higher discount rate, they will weigh the upfront purchase price more heavily than the lifetime savings in operating costs; if they use a low discount rate, they will do the reverse. The answer depends, in part, on how the consumer finances the up-front purchase.
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From page 60... ...
Moreover, it is difficult to precisely predict the operating costs over the lifetime of the appliance. The challenge of calculating these costs will vary across appliances and with the availability of official labels and information from third-parties organizations or consumer reviews, all of which can influence the impact of standards by providing greater information to consumers to improve choice.
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From page 61... ...
The committee nevertheless urges DOE to attempt such analysis where feasible. RECOMMENDATION 4-3: DOE should collect data on consumer choices in appliance markets and estimate a discrete choice model of consumer behavior to quantify the trade-offs that consumers face from changes in appliance performance.
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From page 62... ...
Even if DOE accurately estimated the changes in the purchase price and operating costs caused by a TSL, it would still be subject to too much uncertainty about the customers' discount rate to estimate the operating expense's present value. Additionally, even if DOE had perfect information about customers' implicit discount rate, it would fail to assess the relative-price elasticity of demand; the method DOE currently uses ignores changes in appliance quality and consumer preferences.
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From page 63... ...
It represents the savings to a consumer purchasing a TSL product instead of purchasing the baseline. The committee thinks that by presenting the distribution of LCC savings for each TSL relative to the baseline, DOE can clearly convey the uncertainties on the initial and operating costs of a particular efficiency level without contaminating this estimate with an estimation of shipments during the compliance year.
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From page 64... ...
By considering both, the LCC savings from purchasing a TSL product instead of a baseline product and also considering the LCC savings from replacing a currently owned baseline product with a TSL product DOE will obtain and communicate additional information on the value of setting the standard at a TSL, of interest for products where operating costs are a significant portion of life-cycle costs. Such savings are essential for estimating the benefits of appliance replacement programs that state governments, utilities, or other entities may consider to incentivize consumers to upgrade their appliances.
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From page 65... ...
DOE estimates the value of some components of installation and operation costs with this information and compounds these estimates with other values previously estimated -- that do not incorporate household or region characteristics -- to calculate the LCC savings. DOE then generates the ranges and distributions of LCC savings from the 10,000 LCC Monte Carlo trials.
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From page 66... ...
DOE estimates operating costs as a function of over a dozen parameters, characterizing how households use the appliance (number of cycles) , household discount rates, appliance characteristics such as energy and water use, and the price of electricity, of heating water by various means, and repairs.
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From page 67... ...
The LCC calculations can also significantly improve if DOE changes how it documents the engineering analysis results concerning annual energy use for each efficiency level. For dishwashers, the LCC calculations rely on an estimate of each efficiency level's yearly energy consumption.
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From page 68... ...
As noted before, DOE, in general, omits the consideration of consumer disposal fees in the calculation of consumer LCC savings. This omission is inconsequential in calculating costs to consumers if there is no correlation between a product's disposal fees and its energy efficiency.
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From page 69... ...
This may induce a rebound effect (or "take-back") : because energy services are cheaper, end users may increase their usage of the appliance and therefore their energy consumption.
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Energy Saved Versus Dollars Saved Energy efficiency standards pursue the dual goals of conserving energy and saving money. EPCA directs DOE to design standards to "achieve the maximum improvement in energy [or water]
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From page 71... ...
Changes in Emissions The DOE process takes an estimated change in energy consumption that follows from the LCC analysis and translates this into estimates of emissions reductions that include both combustion emissions for electricity generation (or direct use of the appliance) and upstream emissions due to extraction, processing, transportation, and fugitive emissions of fuel.
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From page 72... ...
The DOE process backward-induces marginal emissions factors from AEO forecasts in a process described in detail in a Lawrence Berkeley National Laboratory (LBNL) report (Coughlin, 2014)
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emissions (EPA, 2011) , the committee recommends that DOE considers estimating the energy efficiency standards impacts on PM emissions reductions and their economic value.
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Monetizing Emissions Reductions The DOE process monetizes changes in emissions quantities using outside studies and government reports on the economic and health damages associated with emissions. The DOE process follows the presidentially mandated procedures for calculating these numbers.
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From page 75... ...
Several potential market failures might justify minimum efficiency standards. The committee has sorted these possibilities into three broad categories: environmental externalities, inefficiencies due to consumer behavior, and inefficiencies due to producer behavior.
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From page 76... ...
. These papers review studies that conclude foregone energy savings in the consumer sector of perhaps up to 50% due to a broad set of policies, including structural barriers and pricing distortions as well as the behavioral attributes that underlie the energy efficiency gap.
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From page 77... ...
There exist cases where the apparent energy savings from improved efficiency more than offsets the additional upfront cost, yet consumers do not choose those appliances -- there is an energy efficiency gap on the consumer side. Note that mistakes are not necessarily only in one direction.
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From page 78... ...
In addition, some households may face severe constraints accessing credit, which could lead to apparently inefficient trade-offs between up-front cost and future operating costs. The irreversibility of an appliance investment and uncertainty over future prices of electricity implies that consumers will rationally only buy an energy efficient product if its operational cost-savings are significantly above its additional upfront cost (Hassett and Metcalf, 1995)
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From page 79... ...
RECOMMENDATION 4-14: The committee recommends that DOE give greater attention to a broader set of potential market failures on the supply side, including not just how standards might reduce the number of competing firms, but also how they might impact price discrimination, technological diffusion, and collusion. The existence of market failures justify public interventions in appliance markets, including setting minimum energy efficiency standards for appliances: the social costs of energy use are generally not internalized by individual firms or consumers, while other behavioral and structural issues may result in some consumers and firms purchasing equipment that, from either a social of individual perspective, makes an uneconomic tradeoff between the purchase price and subsequent operating costs, thereby inefficiently increasing energy consumption.
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From page 80... ...
As a result, quantifying, to the extent practical, the uncertainty of benefit and cost estimates, enhancing data collection, and focusing on market failures are critical to the economic justification of a standard. The value of the retrospective study is not primarily in estimating ultimate energy savings, which of course depend on a host of factors outside the standard itself,16 but rather in assessing the validity of assumptions made in the initial analysis and informing subsequent analyses conducted for other potential appliance standards.
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From page 81... ...
2019. Do Energy Efficiency Standards Hurt Consumers?
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From page 82... ...
2016. "Minimum Energy Efficiency Standards for Appliances: Old and New Economic Rationales." Economics of Energy & Environmental Policy 5(2)
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From page 83... ...
2013. Appliance Efficiency Standards and Price Discrimination.
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