June 12, 2006
Do Government Energy Conservation Programs Work?
BusinessWeek lauds California government efforts to raise energy efficiency and sees these efforts as a big success.
Now, as temperatures creep up in much of the country and the peak air-conditioning season begins, it's worth noting that from an energy perspective, there's much good happening in California. More than 30 new power plants have come online in the past six years, generating 12,000 megawatts. The California Energy Commission estimates that it will have generation reserves of more than 20% this August, nearly three times what's required should power usage spike.
The better story, though, lies on the demand side of the equation, or what the state's fitness-focused governor might call portion control. Since California began aggressively pursuing energy efficiency in the mid-1970s, the state's per-capita electricity usage has remained flat at around 6,500 kilowatt-hours per person. In the rest of the country, consumption has risen from 8,000 to 12,000 kilowatt-hours in the same time frame. In terms of carbon emissions, that's the equivalent of keeping 12 million cars off the road.
Click through and you can read about all the ways the state government of California has managed to keep demand for electricity lower. However, one way is not mentioned in the article: electricity costs more in California than in most states. California's electricity is about 12 cents per kilowatt-hour (kwh) and in New England it costs about 13 cents per kwh with 16.45 per kwh in New York (wow!) versus a US national average of 9.67, 8.32 for the Moutain states and 6.97 for Wyoming. Therefore a chart of per capita energy usage by state shows Hawaii (22.83 cents per kwh), Rhode Island (14.84), New York (16.84), and California (12.98) at the 47th thru 50th spots. Whereas at the top of the list cheap electric Wyoming (6.97) has over three times the per capita electricity usage of California and not coincidentally about half the electric cost of the 4 lowest per capita electric using states. Prices have powerful effects on demand. The next biggest electricity using states are Kentucky (6.44), South Carolina (8.75), and Alabama (7.99). States with cheap electricity use more electricity. No surprise there.
How much of California's lower electric usage is due to higher electric prices? How much is due to weather that provides more natural lighting and the opportunity to spend more days outside? How much is due to government policies aimed at encouraging conservation and more efficient energy usage?
A historical analysis which compared California and national electric prices and per capita electricity usage along with per capita income (affluent people can afford to spend more to heat the jacuzzi and use air conditioning) might be able to tease out the effects of government policies versus prices. Of course, electric price differences are also a product of government policies where some regions put up bigger obstacles for coal and nuclear plants and new electric plants in general. Also, California and other states that mandate increased use of renewable electric energy sources are driving up electric prices and thereby discouraging electric usage.
George W. Bush is not a believer in many government efforts to improve energy efficiency. The Bush Administration continues to cut energy conservation programs.
If Congress accepts the Energy Department's proposed 2007 budget, it will cut $152 million - some 16 percent - from this year's budget for energy-efficiency programs. Adjusting for inflation, it would mean the US government would spend 30 percent less on energy efficiency next year than it did in 2002, the ACEEE says.
One energy-efficiency program on the chopping block is the Heavy Vehicle Propulsion and Ancillary Subsystems. It helps improve the fuel efficiency of heavy-duty trucks, one of the nation's biggest oil consumers. That program is "zeroed out" in the 2007 budget request.
The same fate awaits the $4.5 million Building Codes Implementation Grants program. It helps states adopt more energy-efficient requirements for new buildings, the nation's largest consumer of electricity and natural gas.
The $8 million Clean Cities program has helped clean-fuel technologies, like buses that run on compressed natural gas, get to market. But it's slated for a $2.8 million cut.
The article lists other programs that will be cut and includes conflicting views on the efficacy of all these programs. I suspect that program for raising building code standards for energy efficiency is money very well spent. Big improvements in building efficiency are achievable with existing technology and can be made fairly cheaply on new construction. Best to make sure the new buildings are energy efficient since the average building lasts for many decades.
The real question is why the capital markets fail to capitalize this building enhancement on their own since there is clearly a net present value from the energy savings.
I've said it many times before and I'll say it again, until the tax base goes to assets rather than activity (income/capital gains, etc) the economy is operating in the wrong coordinates.
Randall Parker said: I suspect that program for raising building code standards for energy efficiency is money very well spent. Big improvements in building efficiency are achievable with existing technology and can be made fairly cheaply on new construction.
James Bowery said: The real question is why the capital markets fail to capitalize this building enhancement on their own since there is clearly a net present value from the energy savings.
These two comments suggest that there might be a market failure. Maybe buyers are not knowledgeable enough to recognize that energy-efficient buildings can substantially reduce recurring energy costs and increase the value of a structure. In response, government could mandate a more restrictive building code. But consider an alternative that is not as bluntly interventionist.
Government could demand that building transactions become more transparent. For example, the builder of new structures would be mandated to provide potential buyers with information about insulation and energy costs. The information could be a table of different insulation levels versus recurring expected energy costs. The table could list pay-back periods for each level of insulation. If this data is provided in a convenient and intelligible form then the buyer would probably make a more competent decision.
An analogous program currently exists for enhanced transparency in car buying decisions. The federal government releases energy efficiency measurements for cars, i.e., miles-per-gallon measurements. These numbers are not fully accurate. Motor vehicle companies “game” the system and measurement techniques are imperfect. However, the mpg measurements still help car buyers make more informed decisions.
I would suggest that for most people, the decisions that make up lower energy prices are so far removed from the actual paying of the electric bill, that they decide to spend their building funds on other things. As usual, the Simpsons said it best:
[From 'Bart Gets an Elephant']
Homer: Bart! With $10,000, we'd be millionaires! We could buy all
kinds of useful things like...love!
Marge: Or double-ply windows. They look just like regular windows but
they'll save us 4% on our heating bill.
[long pause as family looks at her blankly]
Well they will.
Garson and James,
That people are unwilling to spend now for later gains is a simple matter of primate psychology. It does not require or indicate a market failure, and forcing builders to provide more information will only force them to incur additional costs that ultimately will have little influence on buyer behaviour.
Given a choice between aesthetics and eventual energy savings, most consumers will choose improved aesthetics because they have an immediate benefit--however small that might be.
I think it starts with builders. Builders want to make their construction as cheap as possible, so they negotiate a minimal energy standard with the local code jurisdiction and agree to marginal improvements over the years. As long as they can install cheap heat pumps, they are happy because it increases their margins.
That's what would drive consumers to make the choice between efficiency and aesthetics (if they are even offered the choice, and most builders don't). There is an upfront cost to efficiency. No one has told them HOW efficient their home should be (and most rely on the codes to take care of that, see para. 1). And no one knows what the point of diminishing returns is. Plus, relative to mortgage payments, utility bills are pretty low, so even if they understand cost/payback principles the incentive might not even be there for anything but the cheapest efficiency aids.
You keep saying that there are energy savings to be that made in changing building codes. That is not true.
Since 1972, the cost of energy saved far exceeds the cost of energy conservation in building costs. In Minnesota, every commericial and residentual building built since 1975, is very tight and very energy efficient. I cannot believe that is not true in other regions because the payback period is so short.
I have never heard of a building code in the northern tier of the states that does not require an energy efficient building. And these codes have been in effect for the last 30 years.
Whoa! First you say "In Minnesota, every commericial and residentual building built since 1975, is very tight and very energy efficient. I cannot believe that is not true in other regions because the payback period is so short." which implies market forces. But then you say "I have never heard of a building code in the northern tier of the states that does not require an energy efficient building. And these codes have been in effect for the last 30 years." which implies political forces.
This ("how do government conservation programs work") has historically been a field where wild supposition and arrogant ignorance have had full reign. Fortunately, there is now some good data which tells us how well they work. These have been submitted to the UK Energy Review which should be published by July 21st.
Some of the work by the UK Carbon Trust has identified a great many market failures of the type mentioned by other commenters. Almost every field of human endeavor still has some "negative cost options" for energy savings measures that can be implemented with cash savings (if you can borrow the cash at commercial rates in the first place). They are not taken up for some very simple reasons - see this presentation recently given in Cambridge by the chief economist at The Carbon trust in Cambridge:
slides here http://www.ifm.eng.cam.ac.uk/sustainability/seminar/documents/MichaelGrub8May2006.pdf
the negative cost options are shown in Slide 5 of the presentation.
Jake, define "energy efficient." Building codes are negotiated, not imposed, and any energy saving improvements that dramatically raise builder costs (superwindows, superinsulation, geothermal heat pumps, etc) are not part of any code.
The prudent people of Minnesota are not typical of Americans as a whole.
Why the heck do people in Wyoming use 26,208 kwh per capita per year while Minnesotans use 12,092 kwh per capita per year? Minnesotans pay 8.4 cents per kwh versus 6.97 cents per kwh for Wyoming. So only 1.43 cents per kwh more and the Minnesotan price is below the national average and yet Minnesotan electric usage is also below national average.
Oh, and next door in North Dakota they use 15,417 kwh per person per year. Maybe for agriculture?
I think your last comment hit the nail on the head. Areas with a higher livestock to people ratio will naturally use more electricity per person just to pump water to the trough.
I suspect that Wyoming has smaller households and uses more electricity for heating. Minnesota, being more urbanized, probably has more piped natural gas for heating. Household size counts since heating and air conditioning for five people costs about the same as heating for one.
But such is for statisticans. Or cowboys, I haven't been to Wyoming for a long time.
The value of a commercial building is the multiple of the income it generates. If the building uses a large amount of energy, then its value is less that a highly energy-efficient building.
Thus for a building to be marketable it has to be energy efficient. So energy efficiency pays for itself both in annual income and in property appreciation
That is why I say the payback far exceeds the costs of energy conservation. Only an idiot would build a non-energy efficient building, and only an idiot banker would finance it. This has been the case for the last 30 years.
People in Minnesota use gas for heating, cooking and drying clothes. It would be too expensive to use electricity for those purposes as our temperatures can reach 35 below.
Once again, Jake, you seem to imply there are only two kinds of buildings - energy efficient and non-energy efficient. Efficiency is relative, so it would help if you would explain what constitutes energy efficiency for you.
For me, it's one that can get by with a grid-connected photovoltaic system at 10 W/m2, which is the 'Passive House' standard. That means high insulation, low usage appliances, geothermal heating/cooling, etc.
Bob Badour says "That people are unwilling to spend now for later gains is a simple matter of primate psychology." Also, Bob Badour provides a link to an article about "Hyperbolic discounting". Thanks for the reference and the link. Yes, human primates do perform “discounting”, i.e., they prefer smaller rewards in the near future versus bigger rewards in the far future. But I do not think that this is a fundamental obstacle to the building and marketing of energy efficient homes.
The willingness of human primates to defer immediate gratification is tested in the marketplace every day. For example, banks offer certificates of deposit (CDs) and various organizations offer bonds. The purchaser foregoes immediate rewards for a future stream of rewards. (An aside, mathematically, the purchaser appears to be performing “exponential discounting”, so the term “hyperbolic discounting” seems somewhat odd.)
In the real estate domain this means that some buyers will spend additional money immediately to purchase a more energy efficient building if they believe that a future stream of rewards will be generated. The future rewards will consist of reduced payments for energy. In addition, there is another deferred reward. The energy efficient building will have an increased resale value if the next buyer incorporates the reduced energy costs.
I argued in the second comment on this thread that buyers should be given more information about the energy efficiency options for buildings. I think that increased market transparency will help. Persuasive payback calculations must include the fact that humans perform “hyperbolic discounting” or “exponential discounting”. However, persuasive payback calculations already do this. Assets can be deployed to earn the market interest rate. Hence, the payback calculation must take into account the alternative use of money to earn interest. When this is done I think the knowledgeable buyer will sometimes opt for greater energy efficiency.
Reply to Donut: Thanks for the humorous Simpsons reference.
On market failures in real estate: Apartment owners who heat the entire building and pay the price have an incentive to insulate. But apartment owners who put meters for electric and natural gas to each unit and have each unit do heating do not have as much incentive. Granted, the tenants can move out of a leaky building. But without living thru a winter how will a tenant judge? Seems to me the market is not efficient in that case.
Similarly, home buyers typically aren't given much info about energy efficiency.
I've previously proposed that rather than have a single building code that buildings ought to be designed to ratings levels. Then when you buy a home you can buy one built to insulation efficiency ratiings level 3 or 4 or 5 and this could be right in the real estate advertisement.
Minnesota is not alone in having natural gas heating. Some areas have oil heating and some even have oil water heating. Though if they have oil heating they typically have electric dryers. That is what I grew up with in New Jersey. Electric heating is rare except in the south where heating is not done very much.
We need more information on the relative frequencies of use of electricity for space heating, water heating, cooking, and clothes drying around the United States. That'd help us judge the differences between the states in per capita electric use.
We also need more information on what percentage of each state's electricity goes to home use.
I go back to the original title of this post: We can't answer the question without knowing more about why electric usage differs around the country. Can governments make much difference? I still do not know.
Randall Parker: Providing more data about energy efficiency to tenants is a great idea. Specifying "insulation efficiency ratings" for buildings is also a great idea in my opinion. Both these measures would improve the market by providing more transparency. I should have remembered and cited your earlier blog posting that contained those proposals. Based on your comment above I searched for your earlier comments and I think they appear in this post from September 2005.
Yes, that is correct. I just went back and bolded that passage. I need to make my proposals stick out better.
Another idea I've proposed (can't remember whether on ParaPundit or FuturePundit) is to make energy efficiency levels of government buildings available on the web. People should be able to search and compare, say, energy bills of schools and their square footage. The civic minded citizens could dig up and publish information about which schools or administration buildings are energy inefficient.
States and provinces could legislate transparency requirements on local and county governments to make more cost data on building energy usage and even maintenance costs.
More generally I'd like to see databases of many more kinds of government costs up on the web. Compare your town to other towns with similar demographic profiles just by doing queries on web pages.
Randall - with the advent of the heat pump, electric heating has been widespread since the 70s. It is a builder's dream, one unit that heats and cools. Drops their costs tremendously, places a substantial cost burden on the homebuyer via utility bills in the winter.