This paper investigates a particular energy efficiency investment — cogeneration — in the industrial sector. Using data from the U.S. manufacturing sector, we find that discounted present value of realized savings is only half of the projected, based on the same upfront investment cost. We also find no robust evidence of significant rebound effects, where the manufacturers increase their production due to efficiency-induced decrease in end use energy cost. Empirically estimated private annual internal rate of return is less than 3%. Accounting for environmental benefits, the social rate of return is only around 5%. This is suggestive of a missing “efficiency gap” and that even in profit maximizing settings, returns based on ex ante projections and ex post evidence are significantly different for energy efficiency investments.

Areas of Focus: Energy Markets
Definition
Energy Markets
Well-functioning markets are essential for providing access to reliable, affordable energy. EPIC research is uncovering the policies, prices and information needed to help energy markets work efficiently.
Energy Efficiency
Definition
Energy Efficiency
Improving energy efficiency is lauded as a promising way reduce emissions and lower energy costs. Yet, a robust body of research demonstrates that not all efficiency investments deliver. EPIC faculty...
Definition
Well-functioning markets are essential for providing access to reliable, affordable energy. EPIC research is uncovering the policies, prices and information needed to help energy markets work efficiently.