Costs of Energy Efficiency Investments Are Double Household’s Energy Savings, Study Including Former Obama Economic Advisor Concludes
Presumptive Democratic Presidential candidate, Joe Biden, recently released his Biden-Sanders Unity Task Force Recommendations, a document spanning 110 pages and covering issues like “combating the climate crisis and pursuing environmental justice.” To accomplish this task, they state:
“We will address barriers and increase funding for programs that enable energy efficiency improvements for low-income families in urban and rural areas, including through the Weatherization Assistance Program (WAP) and the Rural Utilities Service.”
However, a recent study that included Michael Greenstone, who served as Chief Economist for President Obama’s Council of Economic Advisers, has found that the costs of energy efficiency expenditures under the Weatherization Assistance Program cost nearly twice as much as the money families would save on lower energy bills.
The Costs of Energy Efficiency Expenditures Outweigh the Benefits
The study conducted a first-of-its kind field test of the WAP to test its effectiveness. The analysis was based on a randomized controlled trial conducted with a sample of more than 30,000 households in the state of Michigan. Such experiments are considered the gold standard for evidence, according to the report’s executive summary.
Finding 1: The Models Used to Forecast Energy Efficiency Savings Were Really Wrong.
According to the report:
“The energy efficiency measures undertaken by households in the study reduced household energy consumption by between 10 and 20 percent on average. These are economically significant savings. However, energy savings realized at the average participating household were less than half of the average savings predicted by engineering models. (Figure 1).”
I know, you were very surprised the models were wrong. The study found that the models overestimated savings by 61 percent. While this is better than Governor Walz’s COVID-19 models, they still aren’t fit for making public policy decisions.
Finding 2: The Costs of the Energy Efficiency Investments Were More Than Double the Benefits.
” Specifically, the average household received approximately $5,000 of energy efficiency investments, but the estimated benefits of the investments were only about $2,400″
The advertised savings never materialized for energy efficiency projects. In fact, those who made these energy efficiency investments would be left with $2,600 less than they invested. This mistake is manageable for relatively wealthy households, but for the low-income households that will supposedly benefit from Biden’s plan, it would represent a significant loss of money.
Finding 3: There is no evidence of a significant rebound effect.
“Some speculate that energy efficiency investments don’t deliver on their promised energy savings because households adjust their behaviors and consume more energy services than they had before the investments were made. This is known as the rebound effect. Through field surveys, the study found that indoor temperatures were not statistically different in weatherized and unweatherized households.”
This finding may seem wonky, but it’s actually really important. If WAP households increased the temperature in their home because they could afford to do so, it would eat into the energy savings. The fact that the researchers found this did not occur eliminates a major excuse used by groups pushing for government-financed energy efficiency programs to explain away why the advertised benefits from the program never materialize.
Finding 4: Residential energy efficiency appears to be a poor investment on average.
“A common metric to judge the desirability of investments is the annual rate of return. For example, an investment that has an upfront cost of $1,000 and returns $100 in one year would have an annual rate of return of 10 percent. The engineering model projections of the annual rate of return to the energy efficiency investments conducted as part of this study are 11.8 percent.
This would be a very attractive investment as it greatly exceeds historical returns on stocks (5.9 percent), corporate bonds (1.87 percent), and real estate (.85 percent). However, this paper’s results suggest that the returns to residential energy efficiency investments fall well below these alternatives when judged from a homeowner’s (-2.2 percent) or society’s (-9.5 percent) perspective. (Figure 2)
Rather than producing a return of 11.8 percent, the WAP program actually produced an annual rate of return of -2.2, a difference of 14 percent. A family relying on these models to help them decide to invest in weather energy efficiency upgrades would be receiving bad advice that left them poorer both in the short run, and in the long run.
Finding 5: The weatherization upgrades were found to be very expensive ways to cut carbon.
Almost none of the policies advocated for by liberal environmental groups pencil out in the real world. If they did, these same groups wouldn’t need to mandate energy efficiency. To justify the costs they are imposing on all Minnesotans, these groups generally argue that even though private returns will be negative, the total costs to society will be positive. However, this study debunks this claim, too.
“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 percent when judged from society’s perspective. This finding of low, indeed negative, returns may help explain why energy efficiency investments have low take-up rates.
While some may argue that broader societal benefits—in the form of reduced greenhouse gas emissions—justify the energy efficiency investments, the findings do not support this claim. The analysis of the cost per ton of CO2 saved in the sample amounted to $329 per ton, far more than the federal government’s estimate for the social cost of carbon of $38 per ton.”
The conclusions of this study should surprise exactly no one. If energy efficiency investments pay for themselves in reasonable time frames, people will have a strong personal incentive to adopt these technologies. If energy efficiency technologies are not cost effective, we can expect the private sector to seek higher returns in other areas.
Biden’s plan, which adopts several policy platforms of the Green New Deal, doesn’t acknowledge this reality. If adopted, these policies would waste twice as much money as they save.