The cost of investing in energy efficiency for low income households is more than double the benefits. Or so suggests an academic working paper on residential energy efficiency improvements for low-income households released by the Energy Policy Institute at the University of Chicago late last month, which has drawn the ire of the energy efficiency industry.
The randomised controlled trial featured 30,000 households in Michigan, with about a quarter encouraged with financial incentives to make energy efficiency upgrades through the federal Weatherization Assistance Program, which provides low-income households with about $5000 for upgrades such as furnace replacement, attic and wall insulation, and weather stripping, with zero out-of-pocket costs.
The study concluded that while the upgrades cut energy costs by 10-20 per cent, it only translated into $2400 in savings over the lifetime of the upgrades.
“Even when accounting for the broader societal benefits of energy efficiency investments, the costs still substantially outweigh the benefits. The average annual rate of return is -9.5 per cent when judged from society’s perspective,” the paper found.
The cost of carbon abatement through energy efficiency upgrades was found in the study to be $329 a tonne, compared with the $38 a tonne the US government estimates the social cost of carbon. The results were particularly alarming as energy efficiency upgrades have generally been seen as one of the lowest cost carbon abatement strategies.
“Energy efficiency investments hold great potential as a means to fight climate change,” professor of economics and director of the Energy Policy Institute at the University of Chicago Michael Greenstone said in a media statement.
“However, we found that, at least in the case of residential energy efficiency investments, the projected savings overestimate the reality on the ground.”
Study flawed, industry says
The response from the energy efficiency industry was swift and severe.
“Let me be blunt and to the point,” American Council for and Energy-Efficient Economy senior fellow Martin Kushler said in a blog post. “The ‘results’ of this very narrowly focused and arguably conceptually flawed study are being blown out of proportion.”
Mr Kushler said that the narrow scope of the study was being generalised to the whole residential energy efficiency industry across the US, and that it was inappropriate to do so.
“…[T]he concern is that a misunderstanding (or misuse) of this study will lead to low-income families having less access to important programs that drive down their utility bills. Or worse yet, as a broad-brush attack on all types of energy efficiency programs,” he said.
According to the ACCEE, the two major criticisms of the paper have been that:
- it looks at one program in one state and inappropriately seeks to apply the results to all residential energy efficiency programs
- the evaluation focuses only on energy savings and ignores the fact that low-income weatherisation (weatherproofing) is not only designed to save energy, but also has other objectives, such as improving occupant safety, health and comfort, addressing structural problems in homes, and reducing utility bill arrears
Mr Kushler said the study had created a straw man, with the implication that the low-income weatherisation program was meant to be cost-effective by comparing direct energy savings to total project costs.
“In reality, no knowledgeable expert in this field expects the WAP (or any typical low-income program operated by utility companies) to be cost-effective solely on the basis of direct energy savings,” he said. “States commonly exempt low-income programs from the usual cost-effectiveness tests. This is in part due to the very poor condition of the housing stock, and the major costs involved in upgrading the housing.”
He also said the study failed to canvas benefits such as comfort, health, safety, increased value of the improved housing stock, and reduced mortgage and utility bill stress.
Advocating for a carbon tax
ACCEE executive director Steven Nadel said the study was part of a “market-only agenda” regarding climate policy, with the Energy Policy Institute paper advocating for a carbon tax.
“While ACEEE supports such market-based approaches, we recognise the need to use multiple approaches to substantially reduce greenhouse gas emissions, including energy efficiency programs,” Mr Nadel said.
“A carbon tax is unlikely to do much to address the needs of low-income households, just as greenhouse gas reduction is not the main purpose of low-income weatherisation. Rather than tear down one approach at the expense of another, it would be useful to assemble a set of complementary approaches, using evaluation to make each approach as good as it can be. Biasing research, even toward a noble end, can undercut efforts to build support and find “win-win” synergies.”
Taking heed of the challenges and innovate
Environmental Defense Fund senior energy finance consultant Matt Golden said the paper had pointed to some critical issues, namely that:
- existing models for estimating efficiency over-predict savings
- public programs are an expensive way to deliver services
- public investments in efficiency can be valued in a number of ways, producing widely varying results
“The authors also correctly assert that we need to be serious about how we invest in carbon abatement, as the problem is so large we can’t afford to waste resources,” he said.
However, he said the conclusion that efficiency shouldn’t be a meaningful part of climate policy was “premature at best”.
The EDF has suggested changes that could lead to improved energy efficiency program performance.
“We must move away from basing efficiency investments on engineering models that incorrectly forecast energy savings, and toward investments in calculated efficiency gains based on the meter,” Mr Golden said. “Rather than rely on top-down programs that pay rebate coupons upfront, we should establish markets that price savings based on levelised avoided cost of new generation and pay for results as they occur.
“The energy efficiency industry is ripe with innovative business models, new types of financing, and advanced building technologies driven by a combination of access to data, engaged capital markets, and the existing and impending regulation of carbon emissions in power production. Valuing efficiency savings based on actual results will also complement a carbon price.
“The takeaway should not be to give up on efficiency but to aggressively encourage innovation and experimentation that can overcome the barriers to this critical carbon-free resource.”