WP-023: Judson Boomhower and Lucas W. Davis, "Do Energy Efficiency Investments Deliver at the Right Time?" (June 2016)
Energy-efficiency policy and related analyses have tended to focus overwhelmingly on total energy savings, without regard to when these savings occur. In this new E2e working paper, Judson Boomhower (Stanford University) and Lucas Davis (UC Berkeley) demonstrate the importance of accounting for the timing of energy savings using novel evidence from a rebate program for energy-efficient air conditioners in Southern California.
Boomhower and Davis show that the value of electricity varies substantially across hours and demonstrate the importance of accounting for this variation when valuing energy-efficiency investments. During off-peak hours the marginal cost of electricity is very low, but during peak hours the value of demand reductions is much higher. And during a small number of ultra-peak hours each year, the value of demand reductions can be extremely high as the system operator scrambles to avoid blackouts. In addition to the wholesale market prices, generators receive capacity payments to guarantee their availability in the highest demand hours of the year. The implicit “price” of generation during those hours is therefore extremely high, potentially 100+ times the short-run marginal cost of the plant.
In the paper, the researchers focus on Southern California Edison’s residential air conditioning program Quality Installation Program. The QIP offers rebates for the installation of new energy-efficient air conditioners. Using hourly smart-meter data from the more than 9,000 households who participated in this program between January 2010 and April 2015, they estimate electricity savings and show that the savings tend to occur disproportionately during July and August, and during the hours 3pm-9pm.
This positive correlation during the summer between the electricity savings and the peak demand hours increases the value considerably compared to an investment that delivers a flat savings profile. Overall, Boomhower and Davis find that accounting for timing increases the value of air conditioner investments by 50% relative to a naive calculation that ignores timing. They also compare the estimated savings profile with engineering-based estimates for this program. The savings profiles are similar but there are several interesting differences. Probably most importantly, the econometric estimates indicate peak savings later in the evening. The engineering estimates indicate peak energy savings occur between 4pm and 5pm, while the estimates derived from the program data indicate peak reductions between 6pm and 7pm. This timing is particularly interesting and policy-relevant given all of the discussion about the “duck chart” and related trends in U.S. electricity markets.
Boomhower and Davis also show that other energy-efficient investments deliver more value when the evaluation includes the timing of the savings. Commercial and industrial HVAC programs, for example, have a timing premium of 20-30%. Careful accounting for the timing of savings can improve the efficiency of our energy-efficiency portfolio.