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The Incentive to Overinvest in Energy Efficiency: Evidence from Hourly Smart-Meter Data

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  • Kevin Novan
  • Aaron Smith

Abstract

Many households pay a marginal price for electricity that exceeds the marginal social cost of supplying that electricity. We show evidence that such pricing schemes can create an incentive to overinvest in energy efficiency. Using hourly smart-meter data for households facing time-invariant increasing block prices, we estimate how air conditioner upgrades affect electricity use. We find that the average participating household reduces consumption by 5%, which provides private savings in the form of lower electricity bills and social cost savings by decreasing generation and pollution costs. The private savings exceed the social savings by an average of 140%, so the average household is faced with an incentive to overinvest in energy efficiency. This incentive to overinvest in energy efficiency would be cut in half if consumers faced any one of three alternative pricing plans with lower marginal price but the same average price.

Suggested Citation

  • Kevin Novan & Aaron Smith, 2018. "The Incentive to Overinvest in Energy Efficiency: Evidence from Hourly Smart-Meter Data," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 5(3), pages 577-605.
    • Handle: RePEc:ucp:jaerec:doi:10.1086/697050
    DOI: 10.1086/697050
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    Cited by:

    1. Maya Papineau, 2017. "Energy Efficiency Premiums in Unlabeled Office Buildings," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4).
    2. Judson Boomhower & Lucas Davis, 2020. "Do Energy Efficiency Investments Deliver at the Right Time?," American Economic Journal: Applied Economics, American Economic Association, vol. 12(1), pages 115-139, January.
    3. Hancevic, Pedro I. & Sandoval, Hector H., 2022. "Low-income energy efficiency programs and energy consumption," Journal of Environmental Economics and Management, Elsevier, vol. 113(C).
    4. Fang, Yingkai & Asche, Frank & Novan, Kevin, 2018. "The costs of charging Plug-in Electric Vehicles (PEVs): Within day variation in emissions and electricity prices," Energy Economics, Elsevier, vol. 69(C), pages 196-203.
    5. Jing Liang & Yueming Qiu & Bo Xing, 2021. "Social Versus Private Benefits of Energy Efficiency Under Time-of-Use and Increasing Block Pricing," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 78(1), pages 43-75, January.
    6. Jing Liang & Pengfei Liu & Yueming Qiu & Yi David Wang & Bo Xing, 2020. "Time-of-Use Electricity Pricing and Residential Low-carbon Energy Technology Adoption," The Energy Journal, , vol. 41(3), pages 1-38, May.
    7. Wang, Xiaolei & Wei, Chunxin & Wang, Yanhua, 2022. "Does the current tiered electricity pricing structure still restrain electricity consumption in China's residential sector?," Energy Policy, Elsevier, vol. 165(C).
    8. Katrina Jessoe & Gabriel E. Lade & Frank Loge & Edward Spang, 2021. "Spillovers from Behavioral Interventions: Experimental Evidence from Water and Energy Use," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 8(2), pages 315-346.
    9. Liang, Jing & Qiu, Yueming (Lucy) & Xing, Bo, 2022. "Impacts of the co-adoption of electric vehicles and solar panel systems: Empirical evidence of changes in electricity demand and consumer behaviors from household smart meter data," Energy Economics, Elsevier, vol. 112(C).
    10. Qiu, Yueming & Kahn, Matthew E. & Xing, Bo, 2019. "Quantifying the rebound effects of residential solar panel adoption," Journal of Environmental Economics and Management, Elsevier, vol. 96(C), pages 310-341.
    11. Qiu, Yueming & Kahn, Matthew E., 2019. "Impact of voluntary green certification on building energy performance," Energy Economics, Elsevier, vol. 80(C), pages 461-475.
    12. Granderson, Jessica & Fernandes, Samuel & Touzani, Samir & Lee, Chih-Cheng & Crowe, Eliot & Sheridan, Margaret, 2020. "Spatio-temporal impacts of a utility’s efficiency portfolio on the distribution grid," Energy, Elsevier, vol. 212(C).
    13. Gosnell, Greer & McCoy, Daire, 2023. "Market failures and willingness to accept smart meters: Experimental evidence from the UK," Journal of Environmental Economics and Management, Elsevier, vol. 118(C).
    14. Hannah Villeneuve & Ahmed Abdeen & Maya Papineau & Sharane Simon & Cynthia Cruickshank & William O'Brien, 2020. "New insights on the energy impacts of telework," Carleton Economic Papers 20-20, Carleton University, Department of Economics.

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