Consumer Perspective

Households experience two kinds of benefits: (a) direct benefits from reduced energy use and (b) indirect benefits stemming from improvements in previous stages through energy production, transmission and distribution, and so on. Direct benefits influence households due to savings resulting from lower energy bills and an increase in comfort. Indirect benefits of energy efficiency also influence households. For example, prices for consumers decline when energy efficiency improvements in industry lower production costs, and when advances in product designs reduce operation costs.

In 1970s, when the first energy efficient houses were being built, the buildings looked like common, ordinary houses. Only the initial costs were higher. According to a report by the Iowa Association of Municipal Utilities and Iowa Energy Center, energy efficiency can add 2 to 3 per cent to the cost of a new house. 'Builders tried long and hard to explain that their homes would be less expensive to own on a monthly basis than the traditionally constructed home, but many went out of business trying'.27 There is a failure of the normative principle of economic rationality, which claims that consumers act to maximise the net present value of their position by engaging in any economic transition that involves net benefits. Households like other economic subjects evaluate the current situation as more important than future well-being.

An interesting approach in the Netherlands was the so-called insulation mortgage. The energy supplier gives the consumer an additional mortgage that covered the cost of thermally insulating the house, and the repayments on the mortgage were less than the savings on the energy bill. So, the user had no change in capital costs and lower recurrent costs. The problem arises with rented houses. The house owner does not worry about the energy bill. The person renting will never invest in a house that is not his own. In fact, in many countries, the law specifies that the owner could request that any changes, even improvements that the tenant had made to be ripped out at his expense when he leaves the house. As a result, it is nearly impossible to install EE technologies in such houses. The situation differs depending on whether the house is for leasing, renting or selling. In such situations, institutional innovations can be used to overcome this type of barrier.

The concept of long-term profitability is especially difficult as far as individual economic subjects like households are concerned. Based on behavioural theories, Robinson writes 'Ifinvesting in energy efficiency would provide energy services at a lower marginal cost per unit of service than buying fuel or electricity, then the rational consumer will undertake that investment'.28

Rational family units are assumed to invest their savings if this brings them higher profits than they would get from a commercial bank.29

27 Martin 1997, 5.

28 Robinson 1991, 633.

29 If the household does not have enough cash or savings to invest directly in energy efficiency, possibilities of financing may be available. In practice, however, financing for EE upgrades are rarely used, unlike financing for cars, houses and consumer goods.

In practice, most people would prefer cheap, energy wasting technologies, rather than opting for more expensive, but highly EETs.

Another significant barrier to energy efficiency investments by household consumers is the transaction costs associated with gathering accurate information to make informed decisions. Suppose the consumer wants to insulate his house. Getting it all done is a huge hassle, and it is not at all easy to make the right choices about an issue that is likely unfamiliar and complex. Compounding the difficulties, a number of firms offer different insulating technologies. So with all these uncertainties, a safe and simple solution is not to insulate at all.

Another issue is that of risk avoidance. For example, if the walls of a house are constructed by an inner and an outer brick wall with a gap in between, then filling this gap with insulating foam vastly improves the insulation. However, there is a small risk that this will cause moisture bridges between the walls and will cause moisture to appear on the inner walls. If that happens, it will cause huge expenses. It is not surprising that the consumer is hesitant. He could possibly buy an insurance against this risk, but to find out the right policy is a hassle again.

The example mentioned above shows that not investing in EE can be a rational choice. If the government or any energy supplier or equipment supplier wants to promote EE, he will have to address these and similar issues. In such situations, the question of whether EE pays off is only one of the many points, and probably not the most important one.

Table 5.7 compares an energy efficient house with a standard house. The houses are evaluated from the financial point of view. The first reaction would be to prefer the standard house, as it is cheaper even after including the mortgage amount. But when we compare the energy bills, the energy efficient house costs less. Moreover, the mortgage interest is tax deductible while energy costs are not. The income required for the EE house is about USD 90 less per month, or over USD 1,100 per year, than for the standard house. At the end, buying the energy efficient house means a positive net cash flow since the benefits from EE improvement—the energy cost savings—is higher than the increased investment stemming from payment for the improvement in a given period of time.

One might well select the EE house since all the hassle of improving EE will reduce the monthly costs by 90 USD or 3 per cent. But often EE is not installed in most houses. If EE is installed in newly built houses the situation is far simpler. The owner has no choice and the builder or owner can be influenced by government policies. One major conclusion from this example is that in the housing sector, the main effort should go to new buildings and major replacements, like a new central heating

Table 5.7 Energy-efficient Homes vs. Typical Homes

Typical home


Energy efficient home


Home Price



Down Payment



Mortgage Amount



Interest Rate



Term (Years)



Monthly Mortgage Payment












Monthly Energy Bills






Monthly Income Required



Annual Income Required


Source: Adapted from Martin 1997, 5.

Notes: The interest part of the amount USD 693 is in the right column 'Monthly Mortgage Payment' is tax deductible. * Principal, interest, taxes and insurance.

** A borrower qualification method that incorporates energy efficiency in the debt-to-income ratios by adding the energy operating cost for the candidate house to other elements of the housing expenses.

Source: Adapted from Martin 1997, 5.

Notes: The interest part of the amount USD 693 is in the right column 'Monthly Mortgage Payment' is tax deductible. * Principal, interest, taxes and insurance.

** A borrower qualification method that incorporates energy efficiency in the debt-to-income ratios by adding the energy operating cost for the candidate house to other elements of the housing expenses.

boiler. Further, retrofitting EE is less important from a national point of view (Box 5.3).

Households should see the whole package of energy efficiency. Many considerations play a role in the consumer's decision making such as education, social status, convenience, feeling of competence and interest in new technologies as well as health and safety concerns. Swedes and Americans have different energy-using behaviours, and it is clear that a wide range of non-economic factors influence energy use. It is likely that people tend towards energy efficiency because of general attitudes to health, comfort and convenience rather than because of saving energy.

Based on analysis of efficiency programmes and consumer behaviour it is possible to design programmes, which make use of economic principles as well as other contributing factors that influence purchasing decisions. Successful EE programmes should include non-price factors, including awareness about environmental issues, energy consumption, and message on how to control and reduce energy waste.

Identification of cost-effective energy efficiency projects and implementing them to reduce environmental impacts would provide a new opportunity

30 Robinson 1991, 633.

Box 5.3 Trade-off between a Technology and Service—An Example

The simplest and well-known example for the trade-off between energy service and energy-efficient technology is the compact fluorescent lamp (CFL)

compared to the standard incandescent light bulb. A high quality CFL costs around USD 10, that is, 10 times as much as the incandescent light bulb (IB); but the CFL lasts 10 times as long and uses one-fourth or one-fifth of the energy used by IB. Hence, aggregated over the longer lifetime, the energy service from the CFL is much cheaper than from IB. There are examples for this trade-off for all services of energy. One point that has to be mentioned here is the replacement of IB with CFL. In the 1980s, the first CFL lamps were huge pots, the size of a pot of jam. They did not fit in any normal lampshades. Even today, CFL lamps are usually longer than incandescent lamps, and don't fit in many lampshades. Again, CFLs do not light up instantly, and so they cannot be used if instant light is desired (lamps on a staircase or cellar). CFLs have a different colour. Mixing CFL and incandescent in one room looks ugly. If there are electronic dimmers on a few light fixtures, CFLs won't work in them. To install the CFLs we must first replace the dimmers by normal switches. This shows that the choice for or against EE can often depend on quite subtle points, and that any ONE point can overrule all the advantages that EE would give.

Source: Thomas et al. 2000.

to reduce imported fuels for those countries, which import petroleum products, and to foster growth. With cost-effective projects and their subsequent successful execution the apparent conflict between development and environment may be moderated. Such types of projects are also expected to be beneficial to the utilities, the consumers, the government, equipment manufacturers, institutions and the society in general. Through the reduction of GHGs the quality of life will be improved and the people, in general, will stand to benefit.

Renewable Energy Eco Friendly

Renewable Energy Eco Friendly

Renewable energy is energy that is generated from sunlight, rain, tides, geothermal heat and wind. These sources are naturally and constantly replenished, which is why they are deemed as renewable.

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