Note: this post is part of a series highlighting PEC’s upcoming conference, Achieving Deep Carbon Reductions: Paths for Pennsylvania’s Energy Future, March 15-16 at the David L. Lawrence Convention center in downtown Pittsburgh. This piece was contributed by Michael Blackhurst, PhD of the University of Pittsburgh Center for Social & Urban Research, and is adapted from a longer article published by Pittsburgh Economic Quarterly, March 2016.
A building block of any deep decarbonization strategy will be energy efficiency– using less energy to provide the same service. While the research on the net effects of efficiency is far from settled, an overwhelming majority of studies identify short-term benefits to increasing energy efficiency. The most cited benefit is that efficiency improvements save consumers and businesses money, where many efficiency improvements could pay back their investments in two to 10 years. There are broader potential benefits of efficiency as well—reducing environmental impacts of energy use, improving building occupant comfort and health, increasing real estate values, and improving household affordability. The long-standing energy efficiency challenge has been how to realize those benefits, as many barriers limit achieving feasible and sensible efficiency improvements.
Building owners have historically been more reluctant than expected to make voluntary energy efficiency investments, even for profitable investments with payback periods of less than two years.
Building owners have historically been more reluctant than expected to make voluntary energy efficiency investments, even for profitable investments with payback periods of less than two years. The argument is that “transaction costs”—the time to find the right appliance, hire a contractor, or complete paperwork—add to the real and perceived cost of efficiency. Other noted barriers include decision uncertainty and limited access to the capital needed for upgrades. There are also barriers caused by “split incentives,” which highlight situations where the costs and monetary benefits of efficiency are split across different parties. For example, owners of rental property do not generally realize the potential monetary savings of efficiency.
Beyond building owners, energy utilities generally have a natural disincentive to encourage efficiency, as efficiency reduces demand for their services. Exceptions to this disincentive occur when utilities must choose between investing in new power supply infrastructure or increasing efficiency. Appliance and lighting manufacturers have also been reluctant to invest in efficiency improvements given that building owners tend to underinvest in products that exceed minimum energy codes.
All of these so-called “market failures” call for policy interventions that encourage the adoption of sensible efficiency technologies. The economically efficient approach varies depending on the type of market failure being addressed. For example, the classical approach to reducing environmental externalities is to monetize those externalities and tax energy consumption accordingly, thereby motivating consumers to reduce demand by investing in efficiency. If the revenue from such a tax is well-distributed, some policymakers suggest that aggressive efficiency could be deployed at zero net cost to society. In contrast, the preferred approach to overcoming information barriers is to provide consumers with proper information about their choices.
Since economically efficient approaches have historically been intractable, a tremendous number of “second best” efficiency policy interventions have been tried.
Since economically efficient approaches have historically been intractable, a tremendous number of “second best” efficiency policy interventions have been tried. There are policies that address non-price approaches to overcoming energy efficiency technology adoption barriers. These vary significantly in complexity, administrative capacity, and the type of instrument used to encourage adoption. For example, education and outreach programs have been administered to overcome information gaps and are relatively simple and inexpensive; however, they have demonstrated mixed success as the average consumer generally resists efficiency upgrades. Monetary incentives, such as providing rebates to consumers that adopt a technology, are more common but require a dedicated revenue stream and administrative capacity.
Policy options also vary based on jurisdiction. For example, the federal government promulgates minimum energy efficiency performance standards energy using appliances and vehicles, whereas local governments typically administer building codes.
How widespread are energy efficiency programs? While comprehensive statistics describing historical energy efficiency programs are unavailable, the Database of State Incentives for Renewables & Efficiency (DSIRE) summarizes high-level administrative characteristics for around 3,000 energy efficiency programs in the United States. A majority of existing programs use rebates that cover multiple types of technologies. Data describing revenue sources are less complete. A majority of programs administered by utilities are administered by user fees, which are typically nominal fees paid monthly by all customers. This is how Pennsylvania’s Act 129 energy efficiency program is financed.
A review of the national landscape demonstrates that there are additional opportunities to advance sensible energy efficiency investments at the local level in Pennsylvania. Some counties and local governments have taken advantage of efficiency policy instruments that naturally align with their existing administration of property titles, building codes, construction permitting, and inspections.
Too often, programs are funded without any foresight given to evaluation. Measurement and verification data are rare but increasingly important as efficiency has become an integral part of our energy, environmental, and public health policy.
For example, many cities now require audits or above code energy efficiency improvement to receive building permits for renovations and additions. Similarly, many counties require energy audits when a property is sold. A few cities with rental registries have addressed the landlord-tenant split incentive approach by mandating rental properties meet or exceed building code standards or by requiring owners to share the estimated costs of utilities with potential tenants. Broader energy disclosure laws are gaining popularity. Over a dozen U.S. cities require energy disclosure for larger commercial buildings. Both Philadelphia and Pittsburgh have required disclosure of energy use in commercial buildings over 50,000 square feet in recent years.
Nationally, the real estate community has also become increasingly interested in providing energy use efficiency and data to buyers, a process generally referred to as “greening the MLS,” the Multiple Listing Service. Currently, most property transactions occur with little or no information regarding efficiency and respective building operating costs, thus reducing the value of efficiency upgrades. While these programs are nascent, they do provide an economically efficient approach to increasing efficiency investments.
Too often, programs are funded without any foresight given to evaluation. Measurement and verification data are rare but increasingly important as efficiency has become an integral part of our energy, environmental, and public health policy. Given the complexity of administering energy efficiency programs, there exists a broader need to ensure energy efficiency programs are coupled with robust measurement and verification. Measurement and verification programs include collecting the approach building level data needed to track the program impact on both adoption and consumption.
Increasing energy efficiency can be more complicated than conventional municipal services that rest upon clearer standards informed by, for example, engineering principals or regulatory requirements. However, there is increasingly proper motivation and precedent for advancing robust policies that facilitate energy efficiency adoptions.
Dr. Michael Blackhurst is currently a Research Development Manager at the University Center for Social & Urban Research at the University of Pittsburgh. His research is robustly interdisciplinary, drawing especially from engineering, economics, and statistics. Current research and consulting domains include energy and water demand-side management for the buildings sector, regional climate change mitigation and adaptation, regional water resource planning, and environmental life cycle assessment. His work has been profiled in the New York Times and National Geographic. Dr. Blackhurst has eight years of experience leading a diverse array of engineering consulting services for public sector clients.