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Cost-Benefit Analysis of Home Energy Conservation Investments and Greenhouse Gas Reduction

Hunt Allcott and Michael Greenstone

Classical economics says people won’t pass up free money. If there’s a dollar lying on the seat of a subway car, somebody will take it, and quickly. Yet with respect to energy efficiency, the behavior of utility customers seems to contradict that accepted belief.

Utilities throughout the United States offer a wide range of incentives for people to make their homes more energy efficient, and thus reduce their energy bills. These include an expensive energy audit (usually subsidized or free for a customer) where a technician checks a home and identifies opportunities for increasing energy efficiency. These could include measures like adding insulation, air sealing, upgrading heating equipment, weather stripping windows and doors, and installing programmable thermostats. Often the programs also provide free installation of a set of energy efficiency measures during the audit (e.g., energy efficient light bulbs) and offer very generous rebates for the installation of more expensive measures. However, far fewer than expected decide to have the audits, and even fewer take up the measures recommended in those audits.   

A team of E2e researchers—Hunt Allcott of New York University and Michael Greenstone of the University of Chicago—want to better understand what makes people respond to energy-audit offers and recommendations, and ultimately calculate the energy saved from these actions. With funding from the MacArthur Foundation, they are conducting two randomized controlled trials—one in the U.S. Northwest and another in the Midwest—with large groups of customers and potential customers.  

In the Midwest experiment, the researchers are sending letters to people in two mid-sized cities encouraging them to have energy audits on their homes. They will compare the response rate of those who receive letters with those who don’t. In the letters, they test the impact of a variety of combinations of language, graphics and financial incentives on the response to the audit offer. Messaging and graphical variations emphasize different aspects of energy efficiency, including comfort, monetary savings via lower utility bills and impacts on climate change. Varying these factors randomly will enable the researchers to compare the effectiveness of various motivators side by side.   

The Northwest experiment, in contrast, examines the impact of financial and non-financial factors on people who’ve already had energy audits. Here, the researchers randomly separate customers into three groups. The first group receives the standard thank-you note and, a few weeks later, a follow-up phone call. The second group gets a thank you, plus an offer to double the standard rebates offered by the programs if they decide to take up the measures. The third group receives higher customer engagement in the form of several follow-up contacts from an expert who is assigned by the program to help the customer navigate the process for installing the recommended measures.

Preliminary results from both trials are expected in Spring 2015.