Behavior and Energy Efficiency(More Questions than Answers)

James L Sweeney
Professor, Management Science and Engineering
Director, Precourt Energy Efficiency Center
Stanford University

1

What Goals Guide Japanese Energy Policy?
• What are, or should be, the goals for Japan or other Asiancountries?
– In US, energy policy triangle– In Japan, same issues? What are tradeoffs?
EconomySecurity

Environment2What is Technical Energy UseReduction Potential?
• What is the technical potential to reduce energy use in away that appropriately balances the goals?
• How far is Japan from that potential?
– Consumers? Industry? Commercial Buildings?
Transportation? City Infrastructure?
• How costly might it be to reduce energy use – if you canmotivate people to do so?
• Is there a readily accessible database on energy use
patterns in Japan that can be easily used by researchers
through Japan?
– For example, see Energy Information Administration
web pages: www.eia.gov/consumption/

3

Does “Energy Efficiency Gap” Exist in Japan?
• “Energy efficiency gap” exists IF:– Consumers and businesses use more energy than is
optimal in their own self interest• Why can “energy efficiency gap” exist?
– Poor information about electricity rates and use• Electricity does not have obvious price tags
• Limited feedback from use to cost
• Limited information at point of equipment purchase– Low salience of energy issues for households• Small fraction of income ; many small decisions;poor information for decision making– Poor information about co-benefits of energy efficiency• E.g., Natural lighting increases productivity• Is “energy efficiency gap” important problem in Japan?
418

How Can Metering and Feedback be Used?
• Feedback (immediate information linked to decisions)– Smart meters, sensors, energy information devices– How can one provide feedback to consumers that will
motivate consumers to cost-effectively reduce
electricity and natural gas use?
– Do you need active disaggregated feedback?
– How do you make the response long term, rather thanjust lasting over a few months?
– Some video games keep players coming back foryears.
– Are there any lessons from those games?
– How can dopamine response be triggered?

5What Information Leads to Large Response?
• Some feedback on impacts other than personal financial
costs may be more effective than on financial costs.
– Residential field experiment in Los Angeles gave
feedback on environmental harms, in particular external
health impacts of electricity consumption (MagaliDelmas)• Can comparison of energy use with other people in similarhomes motivate energy use reductions, for those who uselarge amounts of energy?
– In US: OPower mailings (Hunt Allcott research)– Single mailing: very low persistence– Monthly or quarterly mailings over long period:
Persistent reductions
6

Can Social Norms be Effective in Japan?
• Social norms– Can social media be harnessed for comparisons ofenergy use among people?
– Can social value of not wasting be communicated andharnessed?
– Can energy reduction competitions be structured amongfriends? Can these be effective?
– How would you motivate people to initiate suchcompetitions.

717

Economic Information versus Social Nudges• For low financial cost, economic information may not
motivate change.
• For large financial cost, economic information may be
crucial for energy use decisions.
• Social nudges may work across the entire spectrum• For what ranges of outcomes does economic information
provide best motivation and for what range will socialnudges provide best motivation?
• Under what circumstances will financial information
undercut social nudges?

817

Strength of the Motivation

Conceptually: Social vs Economic Motivations"Economic" with Information"Social" with Nudges

Dollar Magnitude of the Decision

9Can New Business Models Be Created?
• New Business Models• Shared benefits from energy efficiency contracts• Measurement and validation hard
• Difficult to create enough trust – two way problem.
• Distributed renewables can be rented to homeowner,
rather than sold.
• Organizations can finance energy efficiency capital
improvements. Repayment obligation legally and credibly
remains with property, if property sold.
• In US: PACE program (Property Assessed Clean
Energy). Repayment through property taxes• Other programs repaid through utility bills.

1017

Can Japan Design Stochastic Rewards?
• Stochastic Rewards– Balaji Prabhakar congestion experiment with Infosys inBangalore, India. Goal: incentives for Infosys
commuters to travel at uncongested times– Infosys employees given one chance for one month extra
salary if they took bus one half hour before rush hour,
two chances for one hour earlier.
– Expected value (value multiplied by probability) per
half-hour-early trip was 20 rupees – 40 US cents.
– Roughly 15% of employees decided to come one-halfhour or one hour early.
– Similar system, but much smaller rewards, used tochange commuting times to Stanford– Can stochastic reward systems be designed in Japan?
1117Are Split Incentive Problems Important inJapan?
• Split Incentive (Principal/agent) problems– Rental housing– Television set top box provided with cable service

1218

US Homes With Efficient Technologies or Behaviors
80%

OwnerOccupied
70%

RenterOccupied

60%

50%

40%

30%

20%

10%

0%

Lower HeatReduce
Some Windows
Well Insulated
WhenTemperature
Replaced
HomeHave
Low-E coating
Unoccupied
During Day Reduce
ProgrammableTemperature(Double orLower Heat
Thermostat
During Night
Triple Pane)At Night

Source: Calculated from the 2005 RECS survey, by Anant Sudarshan

1311Can split incentive problem be solved
with good information?
• Commercial or residential building performance rating andrating disclosure.
• Mandatory disclosure laws in California enforced at timeof major financial transaction• Green Building Certificates– LEED certification• Or are regulations needed?
– Building codes– Appliance efficiency standards

1417

Do Implicit Incentive Systems inCompanies Lead to Overuse of Energy?
• Corporation organization – energy as overhead• Managerial incentives: what you don’t measure youdon’t manage. Typically no incentive to manage
overhead items.
• Could internal information systems provide effectiveinternal controls?
• How can companies create social nudges for energy
efficiency?
• “Energy Citizens”

1518

When Electricity Markets are Liberalized, Will
Utilities have Incentive for Energy Efficiency?
• In some of US there is decoupling of net revenue fromsales. Less sales does not decrease profits.
– True-up annually of rates.
• Reduced sales implies under-recovery of fixed costs;
Under-recovery account; rate increase for next year
• Increased sales implies over recovery; Over-recovery
account; rate decrease for next year
• Can go further– Allow earnings on successful energy efficiency
programs. How large should incentive be?
• Earnings based on net benefit: electricity costsavings net of program and capital costs• What systems could work under electricity markets to beliberalized in Japan?
18

What are Tradeoffs in Rate Structure Design?
• Time-independent pricing in typical retail rates– Dynamic pricing– Several degrees of dynamic pricing possible– Risk-reward tradeoffs
Economic Efficiency (NetExpected Economic Value)

Risk to Customer

Flat Pricing
Seasonal Pricing
Time of Use Pricing
Critical Peak Pricing
Dynamic Pricing
Dynamic Pricing withhedging contracts

17Can Insights be Derived from Other Areas?
• Medical practice in the US includes dealing with behavioral
choices that have health consequences– Eating behavior– Exercise– Stress management– Smoking, drinking• Many of these involve low saliency activities.
• Cross-fertilization from the medical field could be veryvaluable.
– Case study: reduction of smoking in US over time
• Marketing and Advertising– Much social science research underlies practices

18

Are Rebound Effects Important?
• Increases in efficiency of energy use have direct effect:
reduce energy use. But reduced cost of energy-using
services leads to behavioral response: people use more ofthese services and thus more energy.
• Is behavioral response large enough to eliminate or greatly
reduce direct effect?
• If so, how can one design policies to overcome that issue?

19

How Big are Rebound Effects?
• Substitution: people may use more energy services
because efficiency of energy-using services increases– E.g.: More efficient air conditioners motivate people tocool their homes more– Small to modest for most household applications (~1030%); Smaller with fixed cycles (e.g. refrigerators)– How large in industry?
• Re-spending effect: money saved with energy efficiency isspent to buy other goods, thus increasing energy use.
– Effect may be from 5% to 15% of the savings, after
substitution effect is accounted for.
• Other effects: Probably insignificant• Net energy reduction of energy efficiency: Most likely 60%
to 85% of direct reduction
20