First coined by Eric Hirst and Marilyn Brown in their 1990 paper, “Closing the efficiency gap: barriers to the efficient use of energy,” the energy efficiency gap refers to the difference between the amount of energy efficiency we save vs. the amount we could actually realize. This energy paradox, one that is argued as a win-win for both economies and environments, is not being realized fully, and researchers have been analyzing why for over 30 years. I’d like to share some of the prevailing theories from the leading scholars in the energy field, focusing on the theory of lack of information, but I would also like to expand on some of these theories from the perspective of an energy efficiency company, and with my own thought reasoning around the principle of cognitive biases.
We first truly experienced the energy efficiency gap during the rise to power of compact fluorescent lighting (CFLs). Compared to incandescent lighting—which are no longer sold in retail outlets—CFLs reduced energy consumption dramatically. Yet, the adoption process was slower than expected. But why? After all, they reduce energy consumption and save money. This is the premise of the energy efficiency gap.
Causes of the Energy Efficiency Gap
Let us look at the background of this research. In 1994, Adam B. Jaffe, former professor of economics at Brandeis University, and Robert N. Stavins, professor of business and government at Harvard University, identified explanations for the causes of this energy paradox. Three explanations identified were:
“(1) market failures, such as lack of information or misplaced incentives; (2) behavioral effects, such as inattentiveness to future energy savings when purchasing energy-consuming products; and (3) modeling flaws, such as assumptions that understate the costs or overstate the benefits of energy efficiency.”
In 2013, Stavins readdressed these in his blog, which is easier on the eyes, so I have used that as a reference.
In 2012, the National Bureau of Economic Research (NBER) examined causes for the energy efficiency gap and came to similar conclusions. The point that draws my attention the most is one that states a lack of information. This notion is particularly intriguing to me, as we experience this first hand on a daily basis. Our company, Prism Energy Services, helps thousands of businesses annually with energy efficiency needs, and three of the most common questions we hear are: (1) what is energy efficiency? (2) what is the energy efficiency program? and (3) how does this save me money? The lack of initial understanding of these three points, and our own experience, can conclude that the public is not aware of energy efficiency initiatives, nor are they aware of their economic and environmental benefits.
This is striking to me because New England ranks highly in utility-sponsored energy efficiency initiatives. Last year, I wrote about how the American Council for an Energy-Efficient Economy (ACEEE) published their State Energy Efficiency Scorecard, which ranked five New England states in the top 10 (Massachusetts, Rhode Island, Vermont, Connecticut, and New York). Beyond that, on a federal level, President Obama signed a new energy efficiency bill into law in April 2015. We’ve have ongoing state- and federal-level laws and initiatives, with analysts, researchers, bloggers, energy companies, trade organizations, and social groups spreading the word of energy efficiency at an increasing rate. This begs the question: why is the public, especially in New England, still “in the dark”? After reading a generous portion of the research, we are seeing two types of common behavior patterns, which are the major culprits: the market for lemons theory and cognitive biases.
Are We to Blame?
The market for lemons theory was introduced by George Akerlof, American economist and professor at Georgetown University, in his 1970s paper “The Market for “Lemons”: Quality Uncertainty and the Market Mechanism.” The theory states, in summation, that people will not purchase products or services without a proper understanding of that product or service. Essentially, the principle of the seller understands more than the buyer.
Cognitive bias is a theory in psychology whereby people form illogical conclusions, even when all of the necessary information is presented or available. While there are many types of cognitive biases, the two biases that more than likely play a role here are the mere exposure effect and the status quo bias.
Mere Exposure Effect
According to Psych Central, the mere exposure effect is “A psychological phenomenon whereby people feel a preference for people or things simply because they are familiar.” As we discussed earlier, we first experienced the energy efficiency gap in the early ‘90s due to the popularity traction of CFLs. Of course, every generation adopts new technologies differently. The perfect example is the tablet/cell phone/computer age maxim, whereby children and teenagers adopt new technologies at a much more rapid pace than their parents. With that in mind, it is not too farfetched to believe people who have grown up with incandescent lighting their entire lives would be hesitant to switch. Furthermore, CFLs did not offer versatile color-scale technology; it could not offer the same warm color hue that incandescent lighting provided, and therefore, could not provide the same familiarity. Now that CFLs are quite common, we are experiencing the energy efficiency gap 2.0 with LED lighting. We will more than likely experience another gap when OLEDs become mainstream.
Status Quo Bias
The status quo bias, according to Wikipedia, occurs when “the current state of affairs is objectively superior to the available alternatives, or when imperfect information is a significant problem.” The status quo bias strongly connects with the theory of loss aversion, which occurs when people have a “tendency to strongly prefer avoiding losses to acquiring gains.” Again, we see a lack of information taking a pivotal role in the decision-making process. Following the market for lemons theory, combined with the loss aversion theory, without a proper understanding of a product or service, people have a tendency to prefer the existing solution to avoid losses.
Final Thoughts
As a Massachusetts-based company, we are centered in an economy with the best energy efficiency program in the United States. We are more informed about energy efficiency than we ever have been before, thanks to state and federal campaigns and social movements. Yet, we find that there is still a broad lack of information about what energy efficiency is and how these programs work. While the topic of the energy efficiency gap has been researched heavily, it does not seem to relay the point that we are the only ones stopping ourselves from obtaining more economic and environmental sustainability. It seems that no matter how much information is spread and how effective our energy efficiency programs become, our own biases will continue to impede our energy efficiency goals and expectations. New energy efficiency technologies will continue to emerge, and in 20 years, we may see a new product to replace LEDs, and I posit we will continue to have this discussion.
I recommend anyone seeking more information to read a new January 2015 study on the energy efficiency gap written by Robert Stavins and his colleagues at Harvard and Duke University.