Lessons learned from our last go-round with energy efficiency stimulus spending.
Last week it was reported that 1 in 4 American workers have filed for unemployment benefits during this pandemic. The situation is devastating. The >$2 trillion relief package funded by Congress has provided some relief in this time of triage. But more government investment will be needed as we work towards economic recovery.
We have a moral imperative to rebuild in a way that addresses systemic inequities that the pandemic has laid bare. We also need to reckon with that other existential crisis, climate change. Economic recovery + social justice + climate change mitigation. That’s a tall green stimulus order…
What kinds of investments could conceivably check all three boxes? “Shovel-ready” energy efficiency projects are rising to the top of many progressive green stimulus wish lists:
- This high-profile team of economists lists building energy efficiency retrofits among the most promising green stimulus investments.
- This Green Stimulus Policy Menu has been endorsed by Gina McCarthy and Bill McKibben among other progressives. The first item on the menu? A massive expansion of the federal Weatherization Assistance Program.
- The Green Jumpstart Plan would expand funding for low-income weatherization by $10 billion.
It’s easy to see the appeal of scaling up spending on efficiency retrofits. These investments can leverage existing government programs. They could help get thousands of unemployed energy efficiency workers back to their green jobs. They provide a way to direct spending towards low-income communities. And they can help mitigate climate change.
If these arguments sound familiar, that’s because we’ve been here before. Back in 2009, energy efficiency retrofits were an important part of the Obama administration’s stimulus package. Ten years later, we have an accumulation of economic research looking into how these kinds of investments have played out.
Economists tend to have a Debbie Downer reputation when it comes to energy efficiency program evaluation. But a clear-eyed look at our past experience seems critical if we are thinking seriously about gearing up for another round. So here it goes. Three research findings from economists that I think have direct implications for energy efficiency stimulus investments going forward.
1. Energy savings have fallen short of expectations.
Across a range of studies, economists have found that realized energy savings fall short of energy savings projections. The graph below plots some examples of ex post realized savings as a share of projected savings. A “realization rate” of 50% means that, for every unit of energy we expected to save, only half a unit was actually saved.
These “realization gaps” are big. This means that some of the investments we thought were going to be cost-effective turned out not to be.
2. Efficiency programs could be more efficient with better targeting
Energy efficiency programs rely on ex ante engineering models of measure-specific energy savings to guide investment dollars towards the most promising measures. But if the projections are wrong, funds can get misallocated. Understanding what’s behind the savings realization gap is important if we are going to do better next time.
Cue this great new paper by Energy Institute alum Erica Myers and co-authors Peter Christensen, Paul Francisco and Mateus Souza which dives deep into this question. Using data from thousands of homes served by weatherization agencies in Illinois, they find that a significant driver of the realization gap is systematic bias in the models we use to project savings. Modeling of savings from wall insulation – one of the most common weatherization measures- is particularly prone to over-estimation.
The authors go on to estimate household-specific energy savings (valued at retail prices which will overstate the social benefits from natural gas savings). The picture below shows how realized net benefits (energy savings net of weatherization costs) vary significantly across homes. To put these numbers in perspective, the average investment per home is $5250.
Notably, the homes on the left – where weatherization investment costs exceed the retail value of realized energy savings- are associated with much larger realization gaps. A key take away: Improvements in modeling and targeting could help us focus on the most promising measures, avoiding low or negative return efficiency investments.
3. Worker incentives matter
There’s also an accumulation of evidence that variation in work quality explains a significant part of the variation in the returns on efficiency investments. For example, Erica and her colleagues estimate that the realization gap in Illinois could have been reduced by 40% if all workmanship was brought up to par with the top 5% in their sample. An important finding! But easier said than done….
One standard way to incentivize improvements in work quality is to financially reward good work. The complication here is that quality can be hard to directly assess. But energy efficiency principal-agent problems have been mitigated in other contexts. For example, Energy Institute alum Joshua Blonz shows how a restructuring of worker incentives (removing the financial incentive to replace appliances that should not be replaced) can improve outcomes in a low-income appliance replacement program. Another take away: more work to refine worker incentives and training could really pay off.
The search for good green stimulus
The race is on to find good investments that can help get people back to work. If progressives prevail, these investments will also improve conditions in low-income communities and accelerate decarbonization.
Investments in energy efficiency programs have the potential to fit this bill. But not all shovel-ready energy efficiency projects are worth doing. There is so much need right now. Learning from past experience can help us direct stimulus dollars towards investments that will do the most good.
Keep up with Energy Institute blogs, research, and events on Twitter @energyathaas.
Suggested citation: Fowlie, Meredith “The Search for Good Green Stimulus” Energy Institute Blog, UC Berkeley, June 1, 2020, https://energyathaas.wordpress.com/2020/06/01/the-search-for-good-green-stimulus/