Measuring the Welfare Effects of Residential Energy Efficiency Programs with Self-Selection into Program Participation

Summary:

• Energy-efficiency programs offer tremendous potential to save consumers money by conserving energy, while also reducing pollution and greenhouse gas emissions. However, past studies of residential energy efficiency programs have revealed that some programs may not be delivering as promised.
• The authors conduct a randomized experiment evaluating two large federally-funded residential energy-efficiency programs in Wisconsin. The experiment across more than 100,000 households was paired with administrative data to assess informational and behavioral barriers and other market failures.
• The study finds that when it comes to deciding whether to participate in an energy-efficiency program, audit costs are an important factor for households—with a higher subsidy to encourage audits increasing the take up of audits. While some have proposed that consumers don’t participate in such programs because they are incapable of or unwilling to weed through all of the information, the study did not find any evidence that consumers are poorly informed or suffer from behavioral biases.
• While the audit subsidies encouraged more households to participate in the audits, these households were not very likely to take up the recommended improvements. This in turn lessened the impact the program had on reducing energy consumption, pollution and greenhouse gas emissions.
• Ultimately, the study finds that households decide whether to make energy efficiency investments based on both monetary and non-monetary factors. For example, the households studied chose not to take up 40 percent of the investments that would have yielded a 20 percent or greater return, and did take up 36 percent of investments that yielded negative returns. This demonstrates that non-monetary factors like hassle costs, aesthetics, and the warm glow of having done something that benefits the environment contribute to the decision-making process.
• Overall, instead of providing Wisconsin residents net energy benefits, the residential audit program evaluated had the opposite effect—the costs exceeded the value of the energy savings and the environmental benefits. This is because the realized energy savings were only 58 percent of what was projected and the subsidies were not well targeted at investments with the highest environmental benefits.
• Energy-efficiency programs do offer significant potential to reduce pollution and emissions and save consumers money. However, in order for their potential to be realized, it appears that changes in their design are necessary. Specifically, this research suggests that subsidies for energy audits should be reduced or even removed. And, subsidies for energy efficiency investments should be better targeted towards investments that will deliver the greatest cuts in pollution and greenhouse gas emissions.