Long Term Market Transformation from a Short Term Subsidy: Energy Savings from Residential Air-to-Air Heat Pumps in Norway

In the winter of 2003, a once-off subsidy program was launched in Norway to stimulate the diffusion of efficient and electricity-saving heating technologies in the household sector. Air-to-air heat pumps was one of the technologies that were subsidized. During the 1990s, the national market for air-to-air heat pumps was approximately one thousand units per year. The sales trend shows a distinct break in the 2002-03 heating season, and after a period with rapid growth sales have grown to around eighty thousand units annually. In this paper we estimate energy savings from the 2003 Household Subsidy Program (HSP) and a subsequent revised version of the program. First, an analysis is performed to identify the most likely autonomous market development. Three different approaches are used to establish this contrafactual baseline: (i) expert assessment, (ii) between countries comparison of heat pump market trends, and (iii) econometric market analyses. The difference between the observed sales and the baseline represents the estimated market effect of the HSP. Second, micro-level analysis of metered electricity consumption in the households participating in the HSP gives the per unit net energy savings needed to calculate the energy savings resulting from the Norwegian HSP. The 2010 accumulated added annual electricity savings resulting from the HSP are about 1.1 TWh or 3 % of total annual electricity consumption in the Norwegian household sector. Background – the Norwegian household sector What characterizes household energy use in Norway? Due to historical reasons, we now have a situation where close to 80 % of the energy supply for stationary energy use in the household sector comes from electricity, and more than 60 % of the electricity used in the domestic sector is for space heating (Grinden and Feilberg, 2009). Almost all domestic electricity production is from hydropower. This dependence on electricity is challenging for the electricity system for reasons of both power and energy capacities, particularly in the dry and/or cold years. Reducing this dependence on electricity, through energy efficiency and alternative heating technologies, therefore is a major goal of Norwegian energy policies. The second argument for saving electric energy is climate. Hydropower is “clean” energy, and exports of surpluses in the domestic market can replace CO2-emitting electricity production in the European market. Saving kilowatt-hours of electricity in Norway thus may reduce European carbon emissions. (OED, 2008). In 2001 the national energy agency Enova SF was established. Enova’s mission is stated as that of achieving an efficient stationary end use of energy with a secure and sustainable supply. Market transformation processes are central in these strategies. In 2003 Enova launched a program to introduce new electricity saving heating technologies (heat pumps, pellet stoves, and heat control systems). The purpose of this article is to analyze the market transformation effects of this program on one of the technologies, namely air-to-air heat pumps. More specifically, we wish to evaluate the market effects of the program in terms of sales of heat pumps and the electricity savings due to these effects. 2012 International Energy Program Evaluation Conference, Rome, Italy 1 The text is organized the following way: In the next section the theoretical underpinning of the Enova programs is presented, followed by a discussion of the different effects that can be expected from these programs. The last sections present the empirical analyses and discuss the findings and their implications. Theoretical basis and principles A fundamental idea of the Enova approach is to achieve long term changes (transformation) of the markets that are relevant for Enova’s mission. This approach recognizes that there are deviations between current energy behaviors of the actors in the target groups, and the socially desired energy behaviors. By energy behavior we mean any decision by a relevant decision maker (building owner or renter) that affects the stationary energy use of the decision unit. Energy behavior thus ranges from the daily habitual behaviors to larger building and technology investments. The long term market transformation that Enova aims for, implies that the choices characterizing socially desired energy behaviors become the natural choices of decision makers in the relevant decision process. Government interventions of different kinds and strengths are needed to initiate this market transformation, but in the long run markets need to incorporate sustainable and ongoing end use efficiency without government interventions. Enova’s program design builds on two theoretical platforms. The first is a robust understanding of decision making in the target groups, for which theories on micro level energy behavior decisions are central. Second, theories at a more aggregate level for understanding how innovative behaviors spread in a market are also important, together with the link between these market diffusion theories and the micro level theory. Insights from these theoretical platforms give direction for the design of the most efficient policy instruments. These concepts are briefly discussed below. Micro level energy behavior Traditionally, energy behaviors, in particular those behaviors that involve an investment decision, have been studied within the realms of the neoclassical rational actor model. The discussion of the “energy paradox” may be viewed as a response to and attempts to explain why so many energy related decisions seem to be out of line with the neoclassical model, particularly why many seemingly profitable investments are not undertaken. The energy paradox is discussed, among others, by Jaffe and Stavins (1994) and Golove and Eto (1996). Over time the theoretical base for energy behavior has broadened. We find it useful to expand the neoclassical model with elements from social psychological behavior models, such as the Theory of Reasoned Action (Fishbein and Ajzen, 2010), formerly known also as the Theory of Planned Behavior (Ajzen, 1991). This fundamentally micro level model can be further expanded by adding explanatory variables relating to the societal level (Egmond and Bruel, 2007) in order to explain individual energy behavior. Market transformation Individual decisions make up the market development process. There is a relationship between decisions at the individual level and the diffusion of a certain behavior in a target group. Understanding this relationship and the diffusion process, is aided by theories of the diffusion of innovations. Empirical evidence suggests that adoption in a target group of a certain technology or specific behavior follows a recognizable pattern. This idea has been formalized by Rogers (2003). There are three main points to be made regarding this diffusion theory. First, the diffusion over 2012 International Energy Program Evaluation Conference, Rome, Italy 2 time of the technology or behavior in question typically follows an S-shaped curve. This means that diffusion is slow and limited in the initial phases, then speeds up before it slows again, reaching a saturation level. Second, this pattern is often explained by psychological differences among adopters. Innovators and early adopters are the segments adopting first, followed by mainstream segments and finally the “laggards”. These segments can be characterized by different scores on key explanatory variables of the energy behavior model, such as risk aversion, attitudes toward new technology or behaviors, etc. The third point is that diffusion does not necessarily proceed in a continuous fashion once it has commenced. Often one finds barriers between the segments that may slow or even stop the diffusion between two segments. Of particular interest is the transition between early adopters and the early mainstream market. The diffusion of many innovations stops here, and Moore (2002) introduced the concept of the “chasm” to characterize this critical phase. Enova is motivated by these theoretical building blocks in the design of its market transformation processes. The design of the instrument portfolio reflects the key concepts of the decision model and the diffusion theory and addresses the barriers that are perceived to hinder diffusion at different stages of the diffusion (or market transformation) process. This is summarized in Figure 1. Figure 1. The Enova model: different policy instruments applied at different stages of the market diffusion process.