WEAI/AERE 2012 - Individual Paper Abstract
Title: Industrial Organization and the Energy Efficiency Paradox
Author(s): Louis-Gaetan GIRAUDET,Precourt Energy Efficiency Center, Stanford University, Yang and Yamazaki Environment & Energy Building, 473 Via Ortega, Room 387, Stanford, CA 94305, USA, giraudet@stanford.edu
Abstract:
It is now widely accepted that energy efficiency is a priority to mitigate carbon dioxide emissions. Against this background, it is also recognized that people under-invest in energy efficient devices compared to what would be technologically optimal. The investigation of this "energy efficiency paradox" is making progress, but still leaves some avenues unexplored. In particular, the barriers identified to date mostly relate to either consumers or energy producers, while letting aside a third economic agent involved in energy consumption, namely the producers of energy efficient durables. This issue is particularly acute when it comes to the thermal upgrade of existing dwellings, whereby the paradox manifests in two ways. First, actual technology adoption patterns are not consistent with commonly assumed cost-effectiveness merit order; for instance, evidence from France suggests that the adoption of efficient glazing is more frequent than wall insulation, although the latter delivers energy savings more cost-effectively than the former. Second, measures on the envelope and the heating system tend to be undertaken in isolation, although a better coordination through "whole house retrofits" would increase the cost-effectiveness of energy savings.
Differing levels of integration along that value chain might be responsible for the "first manifestation" of the paradox. Following the French example, the higher adoption of efficient glazing relative to insulation can be narrowed to a stronger vertical integration of manufacturers, retailers and installers on the former industry. Furthermore, some horizontal organization issues may contribute to the "second manifestation" of the paradox. A horizontal integration enabling installers to deal with insulation, glazing and heating systems altogether could generate economies of scope. Overall, both vertical and horizontal integration seems desirable in the home retrofit industry. However, its potential economic efficiency gains have to be weighed against potential losses from increased market power, which would allow for price discrimination among energy efficient options. This paper addresses this trade-off in an analytical model that jointly represents the industries of insulation, glazing and heating systems. It provides an expression for the optimal level of integration that minimizes both the cost of delivering thermal upgrades of dwellings and the market power of the integrated structure.