Friday, April 7, 2017

Measuring the Welfare Effects of Residential Energy Efficiency Programs

This paper sets out a framework to evaluate the welfare impacts of residential energy efficiency programs in the presence of imperfect information, behavioral biases, and externalities, and then estimates key parameters using a 100,000-household field experiment. Several results run counter to conventional wisdom: we find no evidence of informational or behavioral failures thought to reduce program participation; there are large unobserved benefits and costs that traditional evaluations miss; and realized energy savings are only 58 percent of predictions. In the context of the model, the two programs we study reduce social welfare by $0.18 per subsidy dollar spent, both because subsidies are not well-calibrated to currently-estimated externality damages and because of self-selection induced by subsidies that attract households whose participation generates low social value. However, the model predicts that perfectly-calibrated subsidies would increase welfare by $2.53 per subsidy dollar, revealing the potential of energy efficiency programs....
From 2010 to 2013, the Better Buildings Neighborhood Program helped more than 40 competitively selected state and local governments develop sustainable programs to upgrade the energy efficiency of homes and buildings. These leading communities used innovation and investment in energy efficiency to expand the building improvement industry, test program delivery business models, create jobs, and save consumers hundreds of millions of dollars.
Even before quantifying welfare effects, the program evaluation process generates several important empirical results. First, in the randomized experiment, there is no evidence of the hypothesized informational or behavioral failures. Within the letter variations, only price mattered: while a $100 audit subsidy increased takeup by 32 percent relative to control, all six informational and behavioral variations had statistically and economically insignificant effects. 
Non-experimental investment takeup estimates imply that households that had audits were willing to pay an average of $330 for the unobserved attributes of a recommended investment, perhaps due to "warm glow" from contributing to externality reduction or from the improved comfort of a weatherized home. Furthermore, post-audit investment takeup was remarkably inelastic to monetary benefits and costs: consumers did not take up 40 percent of investments with private internal rates of return (IRRs) greater than 20 percent, and they did take up 36 percent of investments with negative private IRRs. This inelasticity implies that consumers perceive a wide dispersion in unobserved benefits and costs. These results highlight the importance of using revealed preference approaches to welfare analyses, instead of conventional accounting approaches that consider only observed monetary factors
We estimate that realized energy savings fell well short of predictions. Specifically, the programs’ simulation models predicted that the average household that had an audit made investments that would save $153 per year at retail prices, or about 8.5 percent of baseline energy expenditures. In contrast, we estimate an average savings of $89 per year, implying a "realization rate" of 58 percent. The shortfall cannot be explained by temporary weather patterns and is far too large to be caused by a "rebound effect" (i.e. increased utilization in response to the decreased cost of energy services).
The social internal rate of return (including externality reductions) of investments made through the programs is negative 4.1 percent using the empirical estimates of energy savings. To help address the question of whether these results generalize outside the two Wisconsin programs, Appendix E presents a parallel analysis using data from 37 Better Buildings program sites nationwide. We find that the national programs had slightly worse IRRs than the Wisconsin programs.
The full paper is currently available free of charge at:

by Hunt Allcott and Michael Greenstone
University of Chicago Department of Economics Becker Freidman Institue
April 4, 2017

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