Making Energy Efficiency Work

The Challenge

The average American consumes three times more energy than the average person in China and double the amount of energy as those in Germany and Japan. The primary challenge facing the U.S. energy system, then, is how to enable Americans to continue to enjoy a high standard of living while reducing the costly consequences of burning fossil fuels. Energy efficiency appears to be an attractive way of addressing this challenge, with the potential to deliver “win-win” benefits for consumers and the climate. Customers that install energy efficient appliances or retrofits can win by reducing their electricity bills, and the environment can win as reducing electricity consumption means lower carbon emissions. Policymakers have therefore made energy efficiency a cornerstone of climate policy. In the United States, the Department of Energy alone spent $14.5 billion on energy efficiency from 2000 to 2019. However, many new studies suggest that energy efficiency programs substantially underdeliver on their promises to reduce consumption. Across a sample of nine empirical evaluations of energy efficiency programs in the United States and Mexico, which spanned a range of programs and contexts, the most optimistic found energy efficiency upgrades delivered only 63 percent of expected savings. Further, several studies of the flagship U.S. residential energy efficiency program, the Weatherization Assistance Program, have found it to be less effective than expected—delivering 58 percent of expected savings in Wisconsin, 51 percent in Illinois, 50 percent in California and 38 percent in Michigan. Their failure to deliver is largely because of overly optimistic predictions from engineering models. These disappointing savings ultimately lead to the costs of the programs being substantially higher than their societal benefits.

“Energy efficiency appears to be an attractive solution to America’s energy challenge, with its dual promises of reduced local and global pollutants and lower energy bills. However, existing U.S. energy efficiency programs have failed to make good on these promises…That said, there are ample opportunities to improve U.S. energy efficiency spending.”

Recommendations

While energy efficiency policies are proving to be expensive ways to reduce carbon emissions, the concept of doing more with less energy is appealing. Policymakers should therefore find ways to improve energy efficiency programs.

• Government subsidies for energy efficiency programs should be properly targeted toward the most cost-effective upgrades. The vast majority of Americans currently pay energy prices that are below the true cost of their consumption because no price on pollution exists. In the context of energy efficiency, this means consumers underinvest in energy efficient technologies and upgrades. Without a price on carbon or other pollutants, government subsidies for energy efficiency should continue as a useful policy tool to encourage conservation. But given that energy efficiency programs have proven to be inefficient, it is important that the subsidies go towards upgrades shown to be most cost-effective.
• Energy efficiency programs should be subject to rigorous real-world evaluation. Federally funded energy efficiency programs—including those that involve government subsidies—should be required to incorporate rigorous real-world evaluation to determine which energy efficiency measures to invest in and uncover potential flaws in program design. These evaluations should be conducted by independent evaluators using state of the art methods such as randomized controlled trials. In order to incorporate new measures into a program, these measures should first be piloted with a small sample of real consumers before being deployed at scale. When piloting is not possible, programs should begin with a combination of existing evidence on similar technologies and engineering estimates, and conduct ex post analysis after deployment. This type of approach would help to prevent costly, ineffective investments; help the government discover which energy efficiency retrofits deliver the most; and identify implementation failures that undermine program effectiveness.

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