The trend of rising energy efficiency in the residential sector since at least the early 1970s suggests that householders have a history of adopting energy efficiency improvements when it is sufficiently cost effective for them to do so. Nevertheless, it is possible that various sources of market failure cause householders to overlook some energy efficiency improvements that are cost effective for them. In addition, ICANZ, AGGA and ABCSE (sub. DR144) cautioned that the observed improvement in residential energy efficiency since about 1991 could be at least partly due to the introduction of widespread government interventions — such as mandatory insulation requirements for houses — rather than being solely due to improvements initiated by householders. Moreland Energy Foundation Ltd (sub. DR115) claimed that government policies were a key reason why residential energy efficiency has been increasing.
The many potential barriers to increased energy efficiency were outlined in the general review in chapter 4. Not all of those barriers are relevant to the residential sector, or lead to market failures that may justify policy intervention.
There appear to be two broad reasons why householders might fail to adopt energy efficiency improvements that are cost effective for them:
• imperfect information — there are information asymmetries (sellers are much better informed than buyers about the energy efficiency of their products) and energy efficiency information has public good characteristics (there is little incentive for the market to supply information because it is difficult to exclude householders who do not pay for it); and
• split incentives — energy-consuming products are purchased on behalf of householders by other parties (such as landlords and builders) who do not benefit from greater energy efficiency.
Another constraint is the small potential benefits in monetary terms (table 6.1). In many cases, what appears to be marginally rewarding in monetary terms probably does not pass the cost effectiveness test after individuals take account of the time and effort required.
The information and split incentive barriers that householders might face are described below.
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Imperfect information
It can be difficult for householders to determine the energy efficiency of an appliance or dwelling prior to using it. Physical inspection may not reveal much about energy efficiency because householders do not have the relevant technical expertise and/or ability to undertake comprehensive tests. For example, Rheem Australia noted:
There is widespread ignorance and misconception amongst purchasers regarding the costs and benefits of solar water heaters and heat pump water heaters ... (sub. 46, p. 3) In principle, suppliers have an incentive to provide information about the energy efficiency of their products, especially when such information makes the product more attractive to consumers. In practice, such information is not always provided to consumers.
Buyers tend to select products on the basis of qualities such as price, performance, capacity and style, and energy efficiency may not be an equally visible attribute:
Marketing sources report that energy efficiency is often not a primary or even a significant consideration in consumer purchases. The apparent lack of concern is at odds with the fact that energy costs contribute significantly to the ‘whole of life’ costs of using an appliance. (Syneca Consulting 2003a, p. 4)
In a free market, consumers may not have sufficient information to make rational decisions about energy efficiency. Where sellers are much better informed about a product’s energy efficiency than buyers, adverse selection can occur (chapter 4).
This is more likely when the frequency of purchase is low, search costs are high relative to the purchase price, and the product is heterogeneous in price and quality (Sorrell et al. 2004). For householders, these conditions are most likely to apply when searching for a home.
Household appliances are often homogeneous and so the unit cost of providing information on their energy efficiency can be quite low. However, as it can be difficult to exclude householders who do not pay for it, there is little incentive for market participants to provide information that could assist householders in selecting cost-effective products. As noted by the Energy Retailers Association of Australia:
The information asymmetry between buyers and suppliers of appliances, equipment and building services is potentially significant (particularly for infrequent purchases).
The cost associated with small consumers attempting to become informed, individually, is clearly prohibitive in most cases. While provision of this information on a larger scale may lower the cost, standard public good/free-rider problems associated with the provision of information may inhibit such provision by private providers. (sub. 26, p. 32)
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Another information issue is that the energy consumption of a dwelling or an appliance (and the consequences of different usage patterns) can be difficult to determine, given that electricity bills are issued well after consumption has occurred, and individual appliances are not metered:
Most customers act as if they have no control over their electricity bill. What limited feedback they get (a bill every three months, and limited information on that bill) is too late for them to respond. (Jeff Beal, sub. 64, p. 12)
One means of addressing this problem is to install more informative electricity meters (chapter 14).
Split incentives
For the residential sector, split incentives are usually associated with dwellings.
Energy-consuming fixtures — such as water heaters — are often selected by a builder or landlord who is primarily concerned about the capital cost, whereas users also have an incentive to reduce running costs. This was identified as a problem by many participants in this inquiry (for example, Rheem Australia, sub. 46; Energy and Water Ombudsman NSW, sub. 48; Government of Western Australia, sub. 58;
TransGrid, sub. 62; AGL, sub. 66).
A recent survey by the ABS (2005a) of South Australian householders confirms that there are marked differences in the appliances used by tenants and owner occupiers.
For example, the survey found that tenants were more likely to use an electric heater (38 per cent of renters with a government housing authority and 27 per cent of other renters) than owner occupiers (15 per cent of owners without a mortgage and 12 per cent of other owners) (figure 6.4). The use of electric heaters was also more prevalent for low-income households (figure 6.5).
As noted in chapter 4, landlords/builders and tenants/home buyers could address split incentive problems by entering into a contract to share the costs and benefits of more energy-efficient products, or to separately negotiate contract prices of appliances. In practice, information barriers and transaction costs limit the instances of this happening. The Energy Consumers Council (sub. DR103, p. 5) expressed a concern that, even if information barriers and transaction costs were overcome, in
‘many cases landlords hold the power, and tenants have little choice but to accept inefficient premises’.
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Figure 6.4 Main type of heater used in South Australian dwellings, by tenure typea
a Data are for October 2004.
Data source: ABS (2005a).
Figure 6.5 Main type of heater used in South Australian dwellings, by incomea
a Data are for October 2004 and exclude households for which income data were not collected. b An income quintile comprises 20 per cent of households that reported their income. Quintiles were ranked from lowest to highest according to gross household income, after adjusting for the number and age of each household’s occupants.
Data source: ABS (2005a).
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