Elsevier

Energy Policy

Volume 29, Issue 2, January 2001, Pages 113-124
Energy Policy

Cost-benefit analysis of domestic energy efficiency

https://doi.org/10.1016/S0301-4215(00)00110-5Get rights and content

Abstract

There are a number of driving forces behind energy efficiency. In recent times, the Kyoto Protocol has been the most prominent in bringing energy efficiency to the fore. In some countries, the domestic sector has been highlighted as an area which has a significant potential for improvement. However, prior to the implementation of large-scale energy-efficiency programmes, it is important to evaluate whether they make economic sense. Heretofore, most economic evaluations of energy-efficiency programmes have concentrated purely on the associated costs of the programmes and the energy savings that result. At best, reductions in environmental benefits are also estimated, but rarely are other benefits calculated, such as increases in the levels of household comfort and improvements in human health. This paper endeavours to provide a template for ex ante economic evaluations of domestic energy-efficiency programmes. A comprehensive cost–benefit analysis of a programme to retrofit various energy-efficiency technologies and heating upgrades to the Irish dwelling stock is taken as a case study. The study demonstrates how energy savings, environmental benefits, and health and comfort improvements may be assessed. In so doing, it provides insights into the methodological difficulties and solutions for assessing the social efficiency of large-scale domestic energy-conservation projects.

Introduction

Behind energy efficiency, there lies an array of so-called ‘driving forces’. In recent times, the Kyoto Protocol has been the most prominent in bringing energy efficiency to the fore. The Gothenburg Protocol on the reduction of acidification precursors also provides an incentive for European countries to improve energy efficiency and thereby reduce environmental emissions. In some countries, the domestic/residential sector has been highlighted as an area with considerable potential for improved energy efficiency. Improving energy efficiency in the domestic sector also has the potential to contribute to the resolution of a number of other social ills, principal of which are high rates of winter mortality which result from poor thermal standards of housing and the existence of fuel poverty, i.e. the inability to heat the home to an adequate (safe and comfortable) temperature, owing to low household income and poor household energy efficiency.

However, prior to the implementation of energy-conservation measures in the domestic sector, it is important to assess whether such interventions are socially efficient. There are a number of studies which have endeavoured to evaluate monetarily the benefits of domestic energy conservation. The seminal work of Pezzey (1984), along with other notable studies by Henderson and Shorrock (1989) and van Harmelen and Uyterlinde (1999), show the clear net benefits of individual retrofitting technologies. At the macro level, Arny et al. (1998), Blasnik (1998), Brechling and Smith (1994) and Goldman et al. (1988) demonstrate the benefits of comprehensive retrofitting programmes. However, most studies tend to evaluate energy savings alone. At best, environmental emissions (usually in the form of CO2) are quantified, but the other potential benefits of domestic energy-efficiency programmes, such as improvements in health and comfort, tend to be omitted from any cost–benefit analysis. The chief difficulty, succinctly identified by Blasnik (1998), is that “although many of these benefits have been demonstrated to exist, most have never been fully quantified because of considerable methodological issues in assessing them”.

The research presented in this paper attempts to advance the literature on the economic evaluation of domestic energy-efficiency programmes by carrying out a comprehensive evaluation of a range of costs and benefits using an example. It thereby develops a template for carrying out ex ante analyses of large-scale domestic energy-efficiency programmes. In so doing, it provides insights into the methodological difficulties and solutions for assessing the social efficiency of such programmes.

Section snippets

Case study

Ireland is an interesting case study of domestic energy-conservation opportunities for a number of reasons. Firstly, the rate of fuel poverty in Ireland, at 12%, appears to be the highest in northern Europe (Whyley and Callender, 1997). Secondly, the rate of excess winter mortality in Ireland, at 15%, is the highest in northern Europe1 and may be the result of poor thermal efficiency in the dwelling stock (Eng and Mercer, 1998). Finally, Ireland is having extreme

Methodology

A computer model was developed to calculate some of the programme's physical costs and benefits.2 The model takes a similar approach to those attempts to model the energy performance of the residential sector in the UK (BRE, 1998) and Belgium (Hens et al., 1998). The Energy-Assessment Model (EAM) was based on the UK's Standard Assessment Procedure (SAP) but tailored considerably to meet Irish conditions. The EAM

Costs of the proposed energy-efficiency programme

The costs of the energy-efficiency programme are comprised of materials and labour costs.

Energy savings vs. comfort benefits

The primary difficulty in calculating the reduced expenditure on energy that would result from the energy-efficiency programme is that there is a trade-off between energy/emissions savings and comfort/health benefits. Suppose the insulation of a house is improved. All else being equal, this makes it cheaper to heat the house. The householder has two options: keep the internal temperature of the house at the same level and benefit from reduced heating bills or allow the temperature to rise,

Environmental benefits

The energy-assessment model was used to estimate the physical reductions in emissions of CO2, SO2, NOx and PM10 (in physical units) as a result of implementing various retrofitting measures. Monetary values were placed on these using a benefits-transfer approach.

19 was chosen as a mid-range value to reflect the benefit of reducing emissions of carbon by 1 tonne (from Fankhauser, 1995) which translates to a value for reducing a tonne of CO2 emissions of
5.19. Upper and lower bound estimates of

Mortality benefits

Each year, the number of deaths during the winter season in Ireland is far greater than during any other season. This surplus mortality can be denoted ‘excess winter mortality’. Cold exposure is cited as the major cause for this seasonality and indoor cold exposure (through the inability to heat the home to an adequate, i.e. safe and comfortable, temperature) is believed to be a significant cause for concern in this regard. A cross-country comparison was used to quantify the proportion of

Morbidity benefits

The incidence of infections and sickness increases dramatically during the winter months in Ireland. As with excess winter mortality, epidemiologists have demonstrated that it is the increased exposure to cold and damp which causes the vast majority of this seasonal variation in morbidity.8 The problem with cold, damp houses is that high relative humidity (70% or more) leads to condensation and moulds on cold surfaces; these

Comfort

Valuing comfort is, perhaps, the most difficult part of a cost–benefit analysis of a domestic energy-efficiency programme, primarily because of its inherent subjectivity and also because there has been so little empirical work undertaken in the area. Comfort encompasses more than simply increased levels of warmth in the home. There are many attendant effects that are very hard to capture monetarily. Henwood (1997) concludes that evidence demonstrating the positive impact of improved housing on

Overall results

Table 6 illustrates the overall results of the cost–benefit analysis of the domestic energy-efficiency programme at various discount rates. The figures represent the predicted scenario in the case of each cost and benefit, i.e. the ‘middle-bound’ estimates. It is important to note that the morbidity benefits estimates are conservative, since RADs are not included, as this might lead to double-counting with comfort benefits, i.e. it is likely that people's willingness to pay to increase comfort

Conclusion

The research summarised in this paper has attempted to build on existing research on the economic evaluation of energy-efficiency projects by presenting a template for undertaking comprehensive cost–benefit analyses of domestic energy-conservation programmes. The case study chosen was a programme to retrofit the Irish housing stock with energy-conservation measures such that it would be brought up to the standards of the latest building regulations. The programme was subjected to cost–benefit

Acknowledgements

The authors are grateful to: Vivienne Brophy, Frank Convery, Ciarán King, and Owen Lewis for helpful contributions; University College Dublin, Energy Action, and the Government of Ireland Council for the Humanities and Social Sciences for financial support; an anonymous referee for useful comments.

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