# Presentation: 485423

## R&D Planning Using Consumer Valuation of Energy Technology AttributesDavid J. BjornstadOak Ridge National Laboratory10 May 2005Energy Analysis Seminar SeriesNational Renewable Energy Laboratory Research funded by theOffice of Energy Efficiency and Renewable EnergyU.S. Department of Energy

## Energy technology R&D is typically  based on a cost-effectiveness Model

**Behavioral model is often implicit**
**Model assumptions may not accurately describe behavior**
**If the assumptions are not accurate, consumers may not respond to the new technology as predicted**
**Therefore, R&D that is a technical success can also be a failure in the marketplace**
**By applying the appropriate behavioral model, successful R&D may also meet with market success**

## This prestentation discusses a different behavioral model that may be appropriate for some R&D applications

**Describe model differences**
**Delineate needed information**
**Suggest how to incorporate new model in R&D planning**
**Detail barriers to immediate success**

##  Using “Cost Effectiveness” to design Energy Technology R&D targets 

**Assumptions **
**Decision makers behave as *****investors***
**All potential *****tradeoffs***** are evaluated**
**A new technology***** *****is a***** perfect substitute *****for the technology it replaces**
**Information describing technology known with *****certainty***
**Conclusions**
**Failure to penetrate markets may be construed to reflect “market failure” R&D should target cost-effectiveness **
**Cost-effective technologies will displace inferior technologies**
** ***** ***

## Are these assumptions valid?

**Decision makers may behave like *****consumers*****, rather than *****investors***
**Value energy-using products for the services they provide**
**Make purchases based on budgets, not as part of asset portfolios**
**Tradeoff marginal costs for energy savings against marginal costs for meeting other preferences**
**New technologies may not substitute perfectly**
**Compact fluorescent lights**
**Horizontal axis drum for clothes washers**
**Heat pump water heaters**
**Benefit evaluation from energy saving products complicated by uncertainty**
**Leads to higher hurdle rates and “waiting”**

## A consumer-based model may be more appropriate

**Based on observed behavior**
**Views energy-using products as bundles of “attributes”**
**Assumes consumers have willingness to pay for individual attributes**
**Assumes consumers sometimes tradeoff attributes against one another (substitutes)**
**Assumes consumers sometimes choose attributes in clusters (complements)**
**Hypothesis:  Energy-using products can be designed with energy-saving attributes bundled with complementary attributes for which consumers have willingness to pay.**

## How can this approach be implemented?

**Identify relevant energy-saving and complementary non-energy attributes and estimate consumer willingness to pay**
**Estimate energy savings from successful R&D directed toward “non-energy” attributes**
**Estimate costs for R&D toward non-energy attributes**
**Evaluate appropriate roles for DOE and partners in needed R&D**
**Develop a “protocol” to guide DOE’s role**
**Achieve understanding and acceptance within DOE**

## Methods for identifying attributes and estimating willingness to pay

**Analysis can target attributes by specification or disaggregation**
**Revealed preference models use actual market choices**
**Hedonic**
** ****Discrete choice**
**Stated preference models query subjects about what they “would do”**
**Contingent valuation**
**conjoint**

## Grover, Torok and Babiuck, used conjoint analysis to study impacts from new clothes washer regulations

**Focus groups and manufacturers chose relevant attributes – ten focus groups in five cities**
**Attributes collapsed into six groups– *****price, capacity, energy and water savings, load size options, door placement, and water temperature options***
**Conjoint approach used rankings based on survey methodology, evaluated value of  different choices using hypothetical choice method and realistic cost parameters**
**Conclusions: ****	****- Price, load size option, and temperature options most ****	****	****	****  important to consumers, accounting for 69% of utility**
**                        ****	****- Savings, door placement, and capacity next most ****	****	****	****  important **
**                        ****	****- On average, consumer’s reject a five year payback for ****	****	****	****  high efficiency washers, but would overwhelmingly ****	****	****	****  choose them if price were not increased**
**	****	****	****- Implications for capital cost, attribute tradeoffs, attitudes**

## Segal used conjoint to study the market for Electric Vehicles in California

**Random mail sample of 2500 PG&E customers**
**Choice attributes**
**Vehicle type (gasoline, electric, and natural gas)**
**Range (90 and 300 miles)**
**Purchase cost ($15,000 and $25,000)**
**Refueling duration and options **
**Refueling time of day**
**Consumer attributes (demographic, driving habits, no. of cars, type of dwelling/garage)**
**	****	**
**	****	****Conclusions: ****	****- Capital costs dominate operating costs**
**	****	****	****	****- Convenience important**
**	****	****	****	****- Demographics important**
**	****	****	****	****- Few electric cars would be purchased**

## There are also a number of behavioral attributes recorded in the literature

**Consumers may overstate willingness to pay**
**Consumers may discount the future “inconsistently”**
**Consumers may base choices on reference points**
**Consumers may not act in their acknowledged best interests**
**	****All of this clouds identifying the appropriate role of government,**
**	****e.g., “negative internalities”**

## Emphasizing consumer preferences for non-energy attributes could alter DOE’s role

**Current DOE role**
**Partner with private sector**
**Emphasize cost-effectiveness**
**Lead roadmapping activities toward this end**
**	**
**Should DOE spend research dollars on non-energy attributes?**
**Change in approach**
**Little argument over low cost attributes – quality, convenience, reliability**
**Drawing R&D resources from energy efficiency would be controversial**
**Possible new DOE role **
**Leadership for addressing non-energy attributes through the “roadmapping process?**
**Would require buy-in by R&D managers**

## To implement the approach we worked with DOE managers to develop an attribute value protocol 

**Create array of technologies**
**Current standard technology**
**Best available technology**
**Potential new technologies**
**Estimate attribute values**
**Performance**
**Price**
**Positive attributes**
**Negative attributes**
**Estimate costs to achieve “success”**
**Estimate energy savings **
**Integrate information into decision process**

## We introduced the consumer valuation concept to managers in individual meetings and at a lessons-learned workshop

**R&D managers recognize  capital costs are a barrier**
**Less acceptance of non-energy attribute targets**
**Range of responses over getting the technology to market**
**“****it’s my ‘baby’ and it needs attention”**
**“****it’s not my job”**
**Concerns voiced over drawing resources from energy efficiency to other topics**
**“****If we target market preferences, we’ll be building hot tubs (spas) instead of efficient water heaters”**
**Recognition that R&D is often isolated from market demands**
**“****Someone should do the market research”**
**Technologists and market analysts tend to speak different languages**
**Could technology transfer play a role?**

## Estimating potential energy saving from enhanced non-energy attributes

**Candidate models for estimating energy savings from attribute modifications using **
**NEMS**
**AMIGA**
**MARKAL**
**Feasibility review concluded that resources would be better spent developing better estimates of attribute values**
**Smaller specialty models might better estimate energy savings**

## Success need not be expensive

**Start with low cost opportunities**
**Use benchmarks to target capital cost increases acceptable to consumers**
**Quality and reliability important issues for unfamiliar technologies**
**Information can sharpen insights and clarify roles**
**Establish consumer values over attributes**
**Establish potential energy savings**
**Resolve roles**
**Get the team on board**
**R&D managers key players in success**
**The “market” is heterogeneous**
**Identify “early adapters”**
**Target strategies to circumstances, i.e., in the U.S. a small number of builders constructs the majority of single family dwellings**
**Build on success**
***Energy Star***** increasingly recognized by U.S. consumers**

## Creative approaches could expand this concept toward upstream research topics

**One example: Optionality – “designing in” flexibility**
**For changing future circumstances**
**Energy prices**
**Tastes**
**Regulations**
**For different market niches **
**Early adopters**
**Different demographics**
**For different deployment strategies!!**

## More hard evidence would be helpful

**Current studies on willingness to pay**
**Diverse Samples and Methodologies**
**Most out of date**
**Little effort to integrate with other energy models**
**Current Emphasis on consumer as investor**
**May fail to predict behavior**
**Sometimes inappropriately interpreted normatively**
**Policies may be based on models that predict poorly**
**Creative approached to analysis may help**
**Sources of uncertainty**
**Apples and oranges**
**Alternative roles of government**