Energy efficiency gap and the limits to the effectiveness of non-price interventions: making the case for residential energy efficiency

Abstract

While ensuring efficient use of available energy is generally desirable with obvious benefits, consumers are known to be challenged with having to forecast equipment-utilization rates, evolution in applicable tariffs, savings accruing from EE equipment and other parameter values, and then to discount such streams to compare energy efficiency (EE) attributes of alternative options. Given such limitations, consumption from heightened equipment use (“rebound”) and, on occasion, higher than previous consumption (“back fire”) therefore reduce or negate the welfare effects from residential EE incentive programs. EE labels and other means to provide information have been used to overcome consumer ‘inattention’, and to attempt to convert EE procurement into ‘credence purchases’ – where equipment is purchased on faith in the label. The limits to such information campaigns (“nudge initiatives”) have been exposed in recent years. On the supply side, raising tariffs across the board might be politically unsustainable, and might not always lead to lower energy consumption, given the relative inelasticity of demand, especially in the context of residential end-use. Following a detailed review of relevant EE initiatives, the present paper advocates a mix of contemporary information signals that contribute first to decision utility with traditional price signals and those that impact the end-users’ experience utility. The paper posits that this two-pronged approach could eventually serve to shift discretionary consumption from peak to off-peak hours and subject to consumers’ budget constraints, to help conserve on energy used.