How can decision makers determine the appropriate degree of ring-fencing for a utility holding company? The authors propose a systematic and objective method – recognizing business and financial...
Energy Efficiency Unknowns
Making efficiency programs work requires understanding real-world behavior.
A man named Raul was ready to replace his air conditioner because it was too old. He got a rebate that he didn’t even know about until he went to buy the new AC unit. Now Raul is using his AC much more than he did the old noisy one, and as a result he’s consuming more energy than he did before – even though his new appliance is more efficient than the old one was. Policymakers who decided to provide a rebate assumed that people like Raul would use their new air conditioners the same way they used their old ones, and thus they overestimated the energy savings AC replacements would bring.
This was the case in Mexico, where a large program that provided rebates to replace air conditioners resulted in increased consumption instead of the decrease that the engineers estimated before the program started.
This result really puzzled me. I was convinced that energy efficiency was the easiest way to move toward a more sustainable world. People save money when they get a lower bill, the government saves money on avoided subsidies, and the world gets less emissions. However, now I realize it’s not that simple.
The Trouble with Human Behavior
Energy is responsible for most of the emissions that cause climate change. According to the International Energy Agency, most of the potential greenhouse gas emission reductions will come from improvements in energy efficiency. However, in most cases, energy efficiency’s net benefits have been overestimated. Proponents of energy efficiency haven’t paid much attention to behavior.
Supporters of energy efficiency programs claim that money can be saved and emissions can be reduced just by wasting less energy. However, we don’t really know how much energy consumers are actually wasting – how much low-hanging fruit is there to be picked.
Governments around the world have annually spent billions of dollars on programs aimed at reducing energy consumption, including fiscal incentives, labeling, and standards. But there’s widespread disagreement about how much energy these programs actually save, and which programs provide the biggest bang for the buck.
When prioritizing the use of public money, many countries have relied on a curve describing energy efficiency actions and their technological costs and benefits. However, the analysis for those curves is done by just calculating the energy difference between the best available technology and the one in place, ignoring behavior.
Public intervention in energy efficiency is required because the actual price of energy doesn’t include all the public costs its usage imposes, and because the information consumers receive is far from perfect. Surprisingly, decisionmakers also have limited data to decide where and how public resources should be better spent on energy efficiency. Should they be used to finance efficiency in new buildings, or to help people replace their inefficient appliances? What efficiency programs have really worked around the globe?