Residential energy efficiency programs offer tremendous potential to save consumers money by conserving energy, while also reducing pollution and greenhouse gas emissions. For these reasons, such residential programs are often integral components of energy and climate policies. However, past studies have revealed that some residential audit programs may not be delivering as promised. Now, a new study by economists at the University of Chicago and New York University finds similar results for a different residential audit program, while also suggesting concrete ways to improve the programs to have lasting benefits.

“This study confirms past studies, including one by myself, Meredith Fowlie, and Catherine Wolfram, finding that the costs of some residential energy efficiency programs exceed their benefits,” says Michael Greenstone, director of the Energy Policy Institute at the University of Chicago and the Milton Friedman Professor in Economics, the College and the Harris School. “But importantly, our work also reveals vital lessons for how such residential programs can be improved. Doing so requires close coordination with policy partners who can help implement these lessons learned.”

Greenstone and his co-author Hunt Allcott, an associate professor of economics at New York University, worked with Wisconsin Energy Conservation Corporation (WECC) to conduct a randomized marketing messaging experiment using more than 100,000 households that participated in a large federally funded economic-stimulus program in Wisconsin, focused on energy efficiency.

Monica Curtis, executive vice president of strategic development and energy finance solutions at WECC, says of the study, “One of the benefits we hoped to leverage as part of this stimulus program was an opportunity to test and analyze new approaches to delivering energy efficiency programs. We appreciated the opportunity to work hand-in-hand with researchers to analyze approaches and outcomes to help us pinpoint how residential energy efficiency audit programs can be improved to maximize energy-savings benefits.”

The study found that the costs of the residential audit component of the program exceeded the value of the energy savings and environmental benefits components of the economic stimulus program. This is because the realized energy savings were only 58 percent of projected savings and the subsidies were not well targeted at investments with the highest environmental benefits. Additionally, higher subsidies tend to draw in consumers who are “tire kickers” that are unlikely to make investments, indicating low returns to subsidized energy audits.

Further, the study did not find any evidence that consumers are poorly informed or suffer from behavioral biases. The study did not consider economic stimulus benefits, which were relevant in the wake of the 2008 financial crisis, but are not relevant in normal macroeconomic conditions.

“This points to the tremendous value of retrospective evaluations using actual energy use data, instead of solely relying on projections,” says Allcott. “This helps us to provide more accurate information to consumers and policymakers.”

Further, he says, “The key for program designers is to set subsidies that are closely aligned with the value of the environmental benefits. Most residential audit programs currently don’t do this quite right, and it could help to generate much larger reductions in air pollution and carbon dioxide emissions at a lower cost. ”

Allcott and Greenstone found that improving the residential energy efficiency programs in this way—with higher subsidies given for the energy-efficient improvements that reduce air pollution and carbon dioxide emissions the most—could lead to gains of about $2.50 for every subsidy dollar spent.

Greenstone concluded, “There is a growing body of evidence that, as they are currently constructed, some residential audit energy efficiency programs miss valuable opportunities for households to save money while cutting pollution and emissions. However, our research suggests that a reduction in subsidies for energy audits and better targeting of subsidies for investments that are directed at pollution are promising reforms that merit careful evaluation.”

Areas of Focus: Energy Markets
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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
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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...
Making Energy Efficiency Work
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Making Energy Efficiency Work
Funding should be allocated to the energy efficiency programs that are most cost-effective based on independent and rigorous real-world evaluations.