energy efficiency policies and market roi

7/28/2019 Energy Efficiency Policies and Market ROI

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Strategy Symposium

Final Paper

Transform the Environment.

Transform Your Wallet.

Jeff BishopNicholas Xu


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Introduction

With the dawn of the Industrial Revolution, ideas became property and mans ability to harness

nature enabled dramatic productivity gains. But while it was easy to quantify and seek out the lowest

price for a manufactured widget, the degradation to the environment was not factored into the free

market, and externalities such as pollution went un-priced. Over the last 150 years, we have seen as the

parts per million of carbon in the atmosphere has gone from 300 to 400reaching a level not seen in over

3 million yearsand for when the oceans were 60-80 feet higher1. The world is being correspondingly

transformed: glaciers are shrinking worldwide, water stresses are now occurring for hundreds of millions,

and global areas affected by drought have increased2.

Although globally humanity is transforming the environment with carbon output, decreasing

carbon output does not have to be costly. In fact, McKinsey in a 2007 report, shows that it is possible to

saveconsumers money while abating considerable amounts of carbon. While McKinsey focused on the

abatement potential for buildings and appliances, transportation, industry, carbon sinks, and power, we

are limiting this paper to just the energy efficiency of buildings and appliances, where it is possible to

both nearly 40 billion dollars annually (see Appendix B) while eliminating nearly 10% of the USs annual

carbon emissions3. This paper is structured to two particular areas: 1) what choices Booth students should

know after they graduate with regards to energy efficiency, and 2) what broad policy options the US or

specific states should use to ensure that there is market efficiency.

Booth Specific Recommendations

We wanted to create a series of recommendations for our classmates, because we felt that our

message of energy sustainability through efficiency fit with the themes of our education at Booth,

1http://www.nytimes.com/2013/05/11/science/earth/carbon-dioxide-level-passes-long-feared-

milestone.html?pagewanted=all&_r=02

http://climate.nasa.gov/effects3Reducing U.S. Greenhouse Gas Emissions: How Much at What Cost?. McKinsey Executive Report December 2007.
http://www.nytimes.com/2013/05/11/science/earth/carbon-dioxide-level-passes-long-feared-milestone.html?pagewanted=all&_r=0http://www.nytimes.com/2013/05/11/science/earth/carbon-dioxide-level-passes-long-feared-milestone.html?pagewanted=all&_r=0http://www.nytimes.com/2013/05/11/science/earth/carbon-dioxide-level-passes-long-feared-milestone.html?pagewanted=all&_r=0http://www.nytimes.com/2013/05/11/science/earth/carbon-dioxide-level-passes-long-feared-milestone.html?pagewanted=all&_r=0http://www.nytimes.com/2013/05/11/science/earth/carbon-dioxide-level-passes-long-feared-milestone.html?pagewanted=all&_r=0http://www.nytimes.com/2013/05/11/science/earth/carbon-dioxide-level-passes-long-feared-milestone.html?pagewanted=all&_r=0


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combining a social mission with attractive investment returns. We realize that Booth is but a small slice of

society, but its surely a start and we hope youll implement some of these measures and even pass the

message on through your networks!

I. Survey ResultsWe found two main insights from the survey of Booth second years. First that the class generally cares

about these issues:

Another lesson we can draw here is that even for a highly educated audience like Booth, that

likely has read about rising carbon emissions, it simply is too nebulous of a concept to care too much

about. Further, carbon emissions are complicated by a lack of global coordination making it hard to

generate the political will to take an economic hit on carbon reduction in the US when we have no control

over the policies of other carbon-intensive countries (such as China). However, it is encouraging to see

that Booth students care above average on issues such as efficiency, sustainability, and environment.

Our second key insight is that Booth students were highly responsive to ROI data on light bulb

choices; this is not surprising given the emphasis on ROI as a decision making metric.

0

1

2

3

4

5

Carbon Emissions Energy Efficiency The Environment Sustainability

Importance

Neutral


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In one survey question, we asked the class if they would prefer incandescent, compact fluorescent

lamps (CFL), or light-emitting-diode (LED) light bulbs. Then we presented them information on the total

cost of ownership information for each of these light bulbs, and asked them the same question. When

presented with total cost of ownership, the class moved significantly away from incandescent lights and

towards CFL and LED replacements. Therefore in making our recommendations we will focus on

presenting ROI metrics on various efficiency products and solutions.

II. Qualitative issues

The survey also allowed us to get some qualitative responses which we feel would be valuable to

address:

LED payback period

Some people responded that they were concerned about the longer payback period for LED

lights, and perhaps not being able to capture the full benefit before moving again for example. We

concede that LED prices are still high, and havent reached the scale of CFLs yet, meaning that it takes

longer to see a return. However in high cases of use or higher than average electricity costs these lights

can still represent a strong return and we encourage you to take your LEDs with you when you move to

take advantage of their long lifespan.

Incandescent CFL LED

Light Bulb Choice

No Info

ROI Info


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LED/CFL breakage

These products, especially if certified by Energy Star have strict minimum warranty

requirements: 2 years for CFL bulbs and 3 years for LED bulbs. These required minimum guarantees

generally exceed industry standard practice and you often dont even need the original purchase

information to get a replacement.

LED Light Quality

Some people commented that they dont like the lighting hue of LEDs because they are not

warm. While this is a legitimate matter of taste, manufacturers are responding to it by warming up the

quality of light by adding materials such as phosphorus. LEDs objectively emit very high quality light;

the Rijksmusuem in Amsterdam for example has recently reopened with LEDs to light up their paintings

because they dont emit excess heat or UV rays4.

CFLs and Mercury

CFL bulbs do contain a small quantity of mercury, about 4mg. Manufacturers have been working

to reduce this and products are available with as low as 1mg. This does mean that you should take

additional care not to break the bulbs when handling and disposing of them, but the risk is minimal. In

terms of mercury pollution, most mercury pollution comes from electricity production, so reducing

electricity usage will lead to a net decrease in mercury.

4http://www.newscenter.philips.com/main/standard/news/press/2013/20130403-new-rijksmuseum-illuminated-

with-philips-led-lighting.wpd


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Recycling programs for CFLs are expanding to safely dispose of them. But even in a worst case

if all 272 million CFLs sold in 2009 were landfilled, they would add 0.12% to the US mercury emissions,

before taking into the account the reduction in electricitywhich reduces the amount of mercury

associated with electricity generation5.

II. IRR Calculations

We show cash flows (defined as initial cost, then savings) for several efficiency products relative to

their conventional counterparts

Light Bulbs Case

5http://www.energystar.gov/ia/partners/promotions/change_light/downloads/Fact_Sheet_Mercury.pdf
http://www.energystar.gov/ia/partners/promotions/change_light/downloads/Fact_Sheet_Mercury.pdfhttp://www.energystar.gov/ia/partners/promotions/change_light/downloads/Fact_Sheet_Mercury.pdfhttp://www.energystar.gov/ia/partners/promotions/change_light/downloads/Fact_Sheet_Mercury.pdfhttp://www.energystar.gov/ia/partners/promotions/change_light/downloads/Fact_Sheet_Mercury.pdf


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Assumptions:

$(20.00)

$(15.00)

$(10.00)

$(5.00)

$-

$5.00

$10.00

Savings by Year

CFL Savings

LED Savings

-30

-25

-20

-15

-10

-5

0

5

10

0 1 2 3 4 5

Cash Flows

CFL CF

LED CF

CFL 5 Yr IRR: 208%

LED 5Yr IRR: 11%


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Average National Energy Cost: $0.115/kWh

3hrs/day of daily use

Source: EPA Research 2012

Conclusion:

At this time, CFLs represent a much better investment case than LEDs, primarily driven by the

high initial cost of LEDs. These returns can become even more attractive as costs of these new bulbs go

down, or if your use and electricity costs are above national averages.Note: these calculations are

different from the initial ones we showed in class, due to new data on average costs and residential usage

from the EPA study

Appliances Case

Assumptions:

Average National Energy Cost: $0.115/kWh

Average National Gas Cost: $1.08/therm

Average National Water Cost: $8.37/thousand gallons

Washer:

$(60.00)

$(40.00)

$(20.00)

$-

$20.00

$40.00

$60.00

$80.00

Y0 Y1 Y2 Y3 Y4 Y5

Cash Flows of Efficient Appliances

Washer

Dishwasher

Refrigerator

Washer 5 Yr IRR: 120%

Dishwasher 5Yr IRR: 81%

Refrigerator 5Yr IRR: 25%


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o 6 loads/wko 3.10 cubic feeto 6.00 Water Factoro Additional cost of Energy Star model: $50

Dishwasher:o 4 cycles/wko Rated electricity/year: 295kWho Rated water/cycle: 4.25 gallonso Additional cost of Energy Star model: $10

Refrigerator:o 22.7 cubic feeto Rated electricity/year: 513kWho Additional cost of Energy Star model: $40

Source: EPA Research 2012

Conclusion:Its important to note that these benefits are measured when deciding to buy a new appliance and

deciding between the conventional model or a more expensive energy star model. The return case for

replacing an older model with a brand new model will be much more variable and complex given the high

initial cost of appliances and wide variety. In general we can see that it is worthwhile to pay for more a

more efficient device if making a new purchase decision. If you are making a replacement decision,

Energy Star provides calculators which allow you to manipulate variables and will give you ROI data,

which we also used for data in our calculations.

See: http://www.energystar.gov/ia/business/bulk_purchasing/bpsavings_calc/appliance_calculator.xlsx

III. Call to Action

We have presented a spectrum of solutions that have very high returns in addition to advancing a

worthy social cause. This list is by no means comprehensive, we avoided other solutions such as

insulation/HVAC which are highly project specific. However our main goal was to show everyone how

Efficiency Solution 5 Yr IRR

CFL 208%

Washer (new) 120%

Dishwasher (new) 81%

Refrigerator (new) 25%LED 11%


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thinking about efficiency can have a high payoff. We believe that our peers at Booth represent a unique

group that is can understand and appreciate these ROI arguments, care about making a difference, and are

fortunate enough to generally have the income to afford the additional upfront cost of these investments.

Policy Mechanisms

Through classroom surveys, a qualtrics survey, academic research, and discussion with energy

efficiency experts, we identified five policy measures that have been effective in changing consumers

behavior to move towards energy efficiency. We particularly wanted to focus on agency issues. As

McKinsey describes it,

Agency issues complicate alignment of businesses and consumers toward desirable abatementoutcomes; the builder of a condominium, for example, is usually not responsible for paying theenergy bill. Put simply, the potential for energy efficiency is real and large, but without a changein policy or approach, this potential will remain out of reach.

The mechanisms that we examined were:

Policy Measure Explanation

Government Mandate Requiring at the federal, local or state level that utilities must save a certainpercentage of electricity demand through energy efficiency

Tax Credit/Rebate Incentivizing at the local, state or federal level through an upfront or delayed taxcredit or rebate that would steer consumers to making alternative buying decisionstowards areas that are more energy efficient

Educational Campaign Having the government fund either government agencies or non-governmentalorganizations to educate a targeted populace on the benefits of energy efficiency

Peer pressure Using peer networks to encourage changes in buying decisions towards moreenergy efficiency products or to use more energy efficiency in homes

Market mechanism Relying on the free market and assuming that buyers are rational

We focused on research on energy efficient light bulbs as they are easy to understand, have a

large amount of data, and almost everyone in America has them. There are three particular types of light

bulbs that were studied for this analysis (see previous section for full explanation on each light bulb):

incandescent, CFL and LED.

To document the efficiency of these light bulbs, we used the case study model.


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I. Mandates: EU decided to phase out incandescent light bulbs by 20126

The EU endorsed regulation in December of 2008 to start a phase out from the European Union

market starting in 2009 and finishing in 2012. Starting with non-clear incandescent lamps being

phased out in September 2009, this automatically shifted consumers to CFLs, which save about 80%

of the energy of incandescent light bulbs.

For those customers using clear light bulbs (100W and above), the levels of outputs were made

consistently stricter from 2009 to 2012, with halogen clear light bulbs being on the market until 2016.

Special exemptions for special purpose incandescent light bulbs (such as those used in ovens or traffic

lights) were included.

The EU estimated this would negative affect (and make redundant) 2000-3000 of the 50,000

people producing light bulbs in the EU, compared to the 5 to 10 billion euros saved from energy bills

that can be invested in other economic activities.

II. Tax CreditIndividual utilities have given tax credits for energy efficiency programs

In 2007, the Illinois legislature passed a law requiring utilities to establish annual energy-savings

goals and to reduce energy delivered and peak demand. The utilities are required to meet this energy

efficiency reduction (see mandate above) but can spend up to 2.015% of the amount paid per kwh by

customers in 20077.

ComEd decided to meet the energy efficiency reduction partly by offering on-the-spot tax credits

in the first year of having energy efficiency requirements. ComEds goal was to change more than 11

6http://ec.europa.eu/energy/efficiency/ecodesign/doc/committee/2008_12_08_technical_briefing_household_la

mps.pdf7

http://www.dsireusa.org/incentives/incentive.cfm?Incentive_Code=IL19R&re=0&ee=1


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million incandescent bulbs to CFLs in three years. 8 They did this through partnering with local

hardware stores (such as Ace or Lowes) to lower the cost of CFL light bulbs to the price of

incandescent, and giving the rebate directly to the hardware store and on-the-spot savings to

individual customers. Through May 2010, ComEd paid $9 million in incentives to reduce the light

bulb prices of 8 million light bulbs for energy savings of 145,650 MWh (roughly 6 cents/kwh)9.

One Illinois utility, Commonwealth Edison, gave away CFLs to small businesses. However, only

37% of customers had installed the CFLs within one month of receiving them, and about a third of the

CFLs that were installed went into homes (people took them home) reducing in reduced operating

hours and lower kwh10.

III. Educational campaignthe Department of Energy regularly funds energy efficiencycampaigns

The US Department of Energy, through the Energy Efficiency & Renewable Energy division,

financially supports the Energy Efficiency and Conservation Block Grant Program, which is designed

to deploy the cheapest, cleanest and most reliable technologies the US hasnamely energy efficiency

and conservationacross the country. Nearly half a billion of competitive grants were awarded,

which were used for energy efficiency and conservation programs, including education.

Half of this money was used for the Home Weatherization Assistance program, with a portion

dedicated to Consumer Education. While this program boasts savings of $437/house per year11, we

were not able to find any conclusive data on how effective the educational portion of this isand

8http://www.energycentral.com/enduse/energyefficiency/news/vpr/6080/Results-Exceed-ComEd-Expectations-

Six-Months-After-Launch-of-Smart-Ideas-for-Your-Home-Energy-Efficiency-Program9

http://ilsag.org/yahoo_site_admin/assets/docs/PY2_QTR_Four_without_financials.259111452.pdf10

http://meeaconference.org/fck_uploads/MES_2010_presentations/MES_2010_Melloch_1-13-2010.pdf11

http://www1.eere.energy.gov/wip/wap.html


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how consumers respond when shown the data on how much they save from energy efficiency

lighting.

We discussed with an Illinois energy efficiency expert from the Environmental Law and Policy

Center12, who advised that education was tricky, as even though consumers say they want more

information when faced with the data they still dont change their behavior. She advised that

mandates were the best way to change consumer behavior.

IV. Peer PressureWhat your neighbors are doing

Academic research, followed by new companies entering the market (most notably

OPOWER) are now sending in select markets letters to residential utility customers to compare their

energy usage versus those of their neighbors. At a study of 600,000 homes, the average program

reduces energy consumption by 2% -- the equivalent of increasing energy prices by 11 to 20% to

show the same reduction in demand13. Each user is shown how they are doing compared to their

efficient neighbors, as well as all neighbors, and are assigned a smiley face or a frowny face:

The cost effectiveness of this program, on average, is roughly 3.31 cents per kwh saved.

Conclusion

12Interview with Sarah Wochos, Environmental Law and Policy Center. June 4, 2013

13http://opower.com/uploads/library/file/1/allcott_2011_jpubec_-_social_norms_and_energy_conservation.pdf


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Even in light of all the overwhelming evidence that efficiency solutions are market efficient and

will save consumers and businesses money, they face low market penetration due to various factors such

as the higher initial cost and apathy. It is estimated that as a percentage of sockets, CFLs have a roughly

20% saturation varying by state, with California having the max at 30%14. A lot of money and energy

savings are being left on the table. Based on the case studies, analysis and conversations with experts, we

feel that mandates are the best way to change consumer behavior towards energy efficiency. This does

two things: provides a clear market for producers; the certainty of a long-term market for energy

efficiency should allow more competitors to enter this space; and uses government levers to change

consumer behavior for their own benefit. We caution however that mandates have shown to be politically

unpopular in the US, and perhaps a state level approach is best because it takes into account local factors

such as energy prices. Instead of a direct mandate like Europe, in which the phasing out of incandescent

light bulbs is mandated, it might make more sense to have it gradually be done in the US per the

Environmental Protection Agency in higher and higher standards for lighting efficiency, to avoid the

unpopular policy of a direct mandate. Although of course for our classmates we feel like weve presented

a compelling investment case using only market mechanisms! We hope that armed with this knowledge

you might change your behavior and encourage others to join you.

14http://www.energystar.gov/ia/products/downloads/CFL_Market_Profile_2010.pdf
http://www.energystar.gov/ia/products/downloads/CFL_Market_Profile_2010.pdfhttp://www.energystar.gov/ia/products/downloads/CFL_Market_Profile_2010.pdfhttp://www.energystar.gov/ia/products/downloads/CFL_Market_Profile_2010.pdfhttp://www.energystar.gov/ia/products/downloads/CFL_Market_Profile_2010.pdf


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Appendix A


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Appendix B

Tech Cost/

CO2 Ton

Potential CO2

abatement

Total US

savings

Challenges Opportunities

Lighting -$87/ton 240 Megaton of

carbon

$20.9 bn

annually

Ownership

issues; lifetime

payback

Substitution from

incandescent to LED

and CFL

Electronic

equipment

-$93/ton 120 Megaton of

carbon

$11.2 bn

annually

Education Conversion to

Energy Star or

similar

HVAC

equipment


carbon

$4.5 bn

annually

Ownership

issues

Initial installation;

retrofits

Combined

Heat and

Power


carbon

$2.5 bn

annually

How to

implement

New buildings

Building

shell


carbon

$2.1 bn

annually

Ownership

issues

New buildings

* Over 21,300 Megatons of carbon are emitted each year into the atmosphere

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