In the era of climate change, energy efficiency is the &ldquo;first fuel&rdquo; (Motherway, 2019), a silver bullet for continued economic growth while consuming less energy, avoiding harmful emissions and lowering bills. The International Energy Agency (IEA) projects that today&rsquo;s most efficient appliances should be the default choice for consumers by the mid-2030s to achieve &lsquo;net-zero&rsquo; by 2050 (IEA, 2021). However, more than 730 million people still need access to basic electricity services while doubling the annual improvement in energy intensity between now and 2030 from the average 2010-2019 level (IEA et al., 2022).&nbsp;
Achieving this complete market transformation while improving access to services is not a simple task. Energy-efficient appliances cost more upfront, and their benefits are obtained later. Uncertainty over future benefits stemming from poor information on appliance energy performance and expected usage pattern prompts consumers to buy cheaper, inefficient appliances. Where energy consumption is lower than optimal, such as among low-income households, higher appliance efficiency might induce increased usage (Fowlie &amp; Meeks, 2021). This makes measuring the &ldquo;actual&rdquo; benefits difficult due to complications in measuring the welfare impact of higher appliance use. Even if the certainty of future benefits were high, the incremental upfront investment might not be affordable for many consumers due to poor access to credit (Berkouwer &amp; Dean, 2019). Further, subsidised electricity tariffs for low-income consumers distorts their incentives to invest in energy-efficient appliances by extending the payback period.
A critical question is then how to increase uptake of energy-efficient technologies even among low-income households?
<h3>Energy efficiency is both privately and socially beneficial</h3>
Information asymmetry, credit constraints and perverse incentives due to low tariffs hamper the private decision to invest in energy efficiency. But distortions in the market for electricity, such as the absence of a price on the environmental externalities of consumption, make a strong case for government intervention (Jaffe et al., 2004). The rationale for energy efficiency is even stronger in developing countries where low-income consumers suffer from low power supply reliability and power distribution utilities struggle to recover revenue. By reducing energy consumption for the same level of end-use service, households can reduce their bills, prompting better bill payment behaviour, and providing utilities with more financial resources to enhance reliability (Phadke et al., 2019).&nbsp;
There is emerging empirical evidence for this virtuous cycle. An experiment conducted in the Kyrgyz Republic found that higher adoption of compact fluorescent lights (CFLs) by some consumers connected to a distribution transformer led to better supply reliability for all consumers on the transformer (Carranza &amp; Meeks, 2021). CFL adoption among consumers also increased organically, indicating that early adoption of new technologies creates useful information for later adopters. This is a clear social benefit. In Ethiopia, an evaluation of a voluntary CFL distribution programme for households found that 1) low-volume consumers were more willing participants, and 2) poorer households benefited relatively more due to the lower diversity of end-use services (Iimi et al., 2019).&nbsp;
Beyond monetary gains, Rom and G&uuml;nther (2019) provide an important example of estimation of non-monetary benefits. Using surveys and sensor-based measurements of solar lighting appliances, they found a reduced incidence of eye and respiratory diseases due to indoor air pollution. Similar benefits have been observed for energy-efficient cooking technologies in Senegal and Kenya (Bensch &amp; Peters, 2015; Berkouwer &amp; Dean, 2019). &nbsp;
Thus, even if households cannot spend on energy-efficient technologies, governments must aggressively promote them.&nbsp;
<h3>A more granular approach to promoting energy efficiency among households</h3>
The natural question that follows is how should governments intervene to help households transition to more efficient appliances?&nbsp;
&lsquo;Standard and labelling&rsquo; (S&amp;L) programmes have been one of the mainstays of government intervention. S&amp;L programmes combine minimum energy performance standards (MEPS) for appliances with disclosure of energy performance information through labels. Over 1,200 MEPS and labelling programmes have been implemented for electrical equipment globally (CLASP, 2022). S&amp;L programmes often indicate enough savings to recover the cost of an efficient appliance in 3-5 years by assuming some usage pattern and consistent performance over the appliance&rsquo;s life. However, actual benefits depend on the elasticity of appliance use relative to efficiency (Hausman &amp; Joskow, 1982). If a consumer&rsquo;s usage increases by more than the efficiency, savings may not be realised. MEPS may also impose a net cost on consumers with low usage due to income constraints or climatic conditions. If households could gain higher returns from investing elsewhere, forcing the purchase of an efficient appliance through MEPS could reduce consumer welfare. This is regressive from a distributive aspect. Further, appliance performance over time is dependent on maintenance practices (Bhasin et al., 2020), making savings estimates based on static parameters redundant.
Thus, with S&amp;L, mitigating the upfront cost of energy-efficient appliances is imperative to increase uptake. Various interventions have been tried worldwide. A national demand aggregation programme for lighting emitting diode (LED) lamps reduced their price by a factor of six in about five years, leading to a complete transformation of the Indian lighting appliances market (Kamat et al., 2020). However, the intense price competition also led to a reduction in the quality of the lamps. A similar programme for ceiling fans and air conditioners (ACs) did not achieve the same result due to their complexity and related consumer preferences (Aggarwal &amp; Agrawal, 2022).&nbsp;
If energy efficiency is a public good that benefits everyone but suffers from sub-optimal private investment, lowering applicable taxes on it can incentivise higher consumption. Lower tax rates on higher efficiency variants of essential appliances like lights and ceiling fans can facilitate demand and incentivise manufacturers to produce them. Linking tax incentives to S&amp;L programmes which are technology agnostic and update performance standards regularly (such that the variant with the highest efficiency rating in a given year is taxed the least) can ensure that the best available technologies are incentivised.&nbsp;&nbsp;&nbsp;
Both these policies, however, cannot provide targeted financial support to low-income consumers, where the inability to bear the incremental cost is more acute and potential welfare gains are larger. An upfront rebate on the cost of such appliances at the point of sale can be provided to achieve this. For example, the &lsquo;Cash for Coolers&rsquo; programme in Mexico was designed to provide a higher rebate to consumers with lower historical electricity consumption for replacing ACs and refrigerators (World Bank. 2010). In developing countries, where the state may share the cost of electricity, the monetary benefits of lower energy consumption can be shared with consumers through such rebates (Aggarwal &amp; Agrawal, 2022). The rebates can be removed once a large enough market for the product is created and prices reduce, as was done for solar home systems in Bangladesh (Newcombe &amp; Ackom, 2017). But a deeper understanding of appliance-level usage patterns is required to efficiently determine the rebate&rsquo;s size.&nbsp;
Finally, easing credit constraints for households can help too. Structured correctly, credit can mitigate multiple cognitive biases that hamper investment in energy efficiency. For example, Berkouwer and Dean (2019) found that regular repayments that are calculated based on actual savings from a high-efficiency cookstove helped consumers gauge the impact on recurring fuel expenses, thereby attracting attention to savings that are otherwise &lsquo;invisible&rsquo;. Further, dispersing repayments across many small instalments can reduce consumers&rsquo; tendency to give a higher weightage to large payments, and therefore, avoid availing credit. Many financial institutions already work with low-income households to provide micro-credit around the world. By adding energy-efficient appliances to their portfolio and structuring repayments based on actual savings, credit can be used as an effective tool to increase penetration of energy-efficient appliances.&nbsp;&nbsp;&nbsp;&nbsp;
Global inflation and the criticality of using energy to adapt to a changing climate will put increasing stress on economically and environmentally vulnerable households. State-sponsored and targeted energy efficiency programmes can help. But a deeper understanding of the welfare and redistributive impacts of energy efficiency policies is required, especially in emerging economies, to provide affordable access to energy for all.&nbsp;
Dhruvak Aggarwal is a Programme Associate at the Council on Energy, Environment and Water (CEEW). &nbsp;
<hr>
References
<ul>
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<li>Bensch, Gunther, and J&ouml;rg Peters. 2015. &ldquo;The Intensive Margin of Technology Adoption &ndash; Experimental Evidence on Improved Cooking Stoves in Rural Senegal.&rdquo; Journal of Health Economics 42 (July): 44&ndash;63. <a href="https://doi.org/10.1016/j.jhealeco.2015.03.006">https://doi.org/10.1016/j.jhealeco.2015.03.006</a>.</li>
<li>Berkouwer, Susanna B, and Joshua T Dean. 2019. &ldquo;Credit and Attention in the Adoption of Proﬁtable Energy Eﬃcient Technologies in Kenya.&rdquo; Berkeley, California, USA: Energy Institute at Haas.</li>
<li>Bhasin, Shikha et al. 2020. &ldquo;Do Residential AC Buyers Prioritise Energy Efficiency?&rdquo; New Delhi: Council for Energy, Environment and Water. <a href="https://www.ceew.in/publications/do-residential-ac-buyers-prioritise-energy-efficiency.">https://www.ceew.in/publications/do-residential-ac-buyers-prioritise-energy-efficiency.</a></li>
<li>Carranza, Eliana, and Robyn Meeks. 2021. &ldquo;Energy Efficiency and Electricity Reliability.&rdquo; The Review of Economics and Statistics 103 (3): 461&ndash;75. <a href="https://doi.org/10.1162/rest_a_00912.">https://doi.org/10.1162/rest_a_00912.</a></li>
<li>CLASP. 2022. &ldquo;Policy Resource Centre.&rdquo; 2022. https://cprc-clasp.ngo/.</li>
<li>Fowlie, Meredith, and Robyn Meeks. 2021. &ldquo;The Economics of Energy Efficiency in Developing Countries.&rdquo; Review of Environmental Economics and Policy 15 (2): 238&ndash;60. <a href="https://doi.org/10.1086/715606.">https://doi.org/10.1086/715606.</a></li>
<li>Hausman, Jerry A., and Paul L. Joskow. 1982. &ldquo;Evaluating the Costs and Benefits of Appliance Efficiency Standards.&rdquo; The American Economic Review 72 (2): 220&ndash;25.</li>
<li>IEA. 2021. &ldquo;Net Zero by 2050 - A Roadmap for the Global Energy Sector.&rdquo; Paris: International Energy Agency.</li>
<li>&mdash;&mdash;&mdash;. 2022. &ldquo;Tracking SDG 7: The Energy Progress Report.&rdquo; Washington D.C.: World Bank. <a href="https://trackingsdg7.esmap.org/data/files/download-documents/sdg7-report2022-full_report.pdf.">https://trackingsdg7.esmap.org/data/files/download-documents/sdg7-report2022-full_report.pdf.</a></li>
<li>&mdash;&mdash;&mdash;. 2022. &ldquo;Ministers from around the World Agree to Speed up Energy Efficiency Progress to Help Tackle Global Energy Crisis - News.&rdquo; IEA. June 2022. <a href="https://www.iea.org/news/ministers-from-around-the-world-agree-to-speed-up-energy-efficiency-progress-to-help-tackle-global-energy-crisis.">https://www.iea.org/news/ministers-from-around-the-world-agree-to-speed-up-energy-efficiency-progress-to-help-tackle-global-energy-crisis.</a></li>
<li>Iimi, Atsushi et al. 2019. &ldquo;Energy-Saving Effects of Progressive Pricing and Free CFL Bulb Distribution Program: Evidence from Ethiopia.&rdquo; The World Bank Economic Review 33 (2): 461&ndash;78. <a href="https://doi.org/10.1093/wber/lhw068.">https://doi.org/10.1093/wber/lhw068.</a></li>
<li>Jaffe, Adam et al. 2004. &ldquo;Economics of Energy Efficiency.&rdquo; In Encyclopedia of Energy, 2:79&ndash;90. Amsterdam: Elsevier.</li>
<li>Kamat, Ajinkya Shrish et al. 2020. &ldquo;Illuminating Homes with LEDs in India: Rapid Market Creation towards Low-Carbon Technology Transition in a Developing Country.&rdquo; Energy Research &amp; Social Science 66 (August): 101488. <a href="https://doi.org/10.1016/j.erss.2020.101488.">https://doi.org/10.1016/j.erss.2020.101488.</a></li>
<li>Motherway, Brian. 2019. &ldquo;Energy Efficiency Is the First Fuel, and Demand for It Needs to Grow &ndash; Analysis.&rdquo; IEA. December 19, 2019. <a href="https://www.iea.org/commentaries/energy-efficiency-is-the-first-fuel-and-demand-for-it-needs-to-grow.">https://www.iea.org/commentaries/energy-efficiency-is-the-first-fuel-and-demand-for-it-needs-to-grow.</a></li>
<li>Newcombe, Alex, and Emmanuel Kofi Ackom. 2017. &ldquo;Sustainable Solar Home Systems Model: Applying Lessons from Bangladesh to Myanmar&rsquo;s Rural Poor.&rdquo; Energy for Sustainable Development 38 (June): 21&ndash;33. https://doi.org/10.1016/j.esd.2017.03.002.</li>
<li>Phadke, Amol et al. 2019. &ldquo;Providing Reliable and Financially Sustainable Electricity Access in India Using Super-Efficient Appliances.&rdquo; Energy Policy 132 (September): 1163&ndash;75. <a href="https://doi.org/10.1016/j.enpol.2019.06.015.">https://doi.org/10.1016/j.enpol.2019.06.015.</a></li>
<li>Rom, Adina, and Isabel G&uuml;nther. 2019. &ldquo;Decreasing Emissions by Increasing Energy Access? Evidence from a Randomized Field Experiment on Oﬀ-Grid Solar,&rdquo; 53.</li>
<li>World Bank. 2010. &ldquo;Project Appraisal Document on a Proposed Loan in the Amount of US$250.625 Million and a Proposed Global Environment Facility Grant in the Amount of US$7.1186 Million to the United Mexican States and a Proposed Clean Technology Fund Loan in the Amount of US$50 Million to Nacional Financiera with a Guarantee of the United Mexican States for an Efficient Lighting and Appliances Project.&rdquo; Mexico: World Bank. <a href="http://documents1.worldbank.org/curated/en/142421468052473744/pdf/543030PAD0R2011ltaneous0disclosure1.pdf.">http://documents1.worldbank.org/curated/en/142421468052473744/pdf/543030PAD0R2011ltaneous0disclosure1.pdf.</a></li>
</ul>

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