“Why it pays to pay for things that pay for themselves”

I regulary encounter the oft-repeated criticism of efficiency programs: “Efficient products shouldn’t need to be subsidized to sell—if people aren’t buying them, it’s because they just aren’t good enough.”

The argument makes sense, but based on a history of efficiency program successes, it is unsubstantiated. Providing incentives to encourage desired behavior is one of the best-proven ways to positively influence economic choice.

Consumer resistance to purchasing efficient products is often based on cost barriers. The reason is clear: the expense of developing products and equipment with an efficient edge inevitably ends up in the price tag. The cost associated with the design, production, and distribution of newer and better products is incrementally higher than the typical baseline product. In the same way that someone buying a solar panel system pays up front for the electricity the system will eventually generate, efficient products designed to create a lifetime of savings cost more at retail. However, unlike solar panels, which are highly visible components for household energy savings, many efficient products often look exactly like their less-efficient counterparts. 

Fortunately, better but initially more expensive efficiency measures and products ultimately pay off. This reality means that entities such as utilities can buy-down these incremental capital costs and later benefit from the operational savings embedded in the product.

Best practices for effective program incentive design include the following features:

  • Strategy – A program’s goal is to drive adoption of efficiency measures into the mainstream. This involves identifying starting points and end targets, while considering what impact incentive interventions might have on the market. Collaborative efforts that reinforce and bolster existing market channels make the practice more sustainable and are preferable over short-term, stand-alone efforts. The broad goal of “market transformation” will maintain efficiency level penetration rates even when incentives are later removed. To avoid instability and other detrimental effects, there needs to be a plan to monitor and evaluate the role incentives play in pushing adoption of efficient products and services. The  Environmental Protection Agency offers a great resource on efficiency program incentives.

  • Research – To properly set the financial incentive, market research identifies the actual incremental costs between baseline and efficient products. This is typically done on a product-category basis because the level of incentive depends upon the economic value of the savings. Highly cost-effective measures (in which greater savings imply a higher incre mental cost) are often in the 50 – 100% range . However, more efficient units might include non-energy features that contribute to the incremental cost. In these cases, market data may indicate that levels of 10 – 25% would be more appropriate. Although the research can be quite involved, at a minimum it should include some real-world price checks. For sufficiently sized programs, it is important to consider the incentives’ interactive effects on pricing. Plan to monitor, evaluate, and adjust incentives accordingly. A good starting point is the Energy Star Products & Program Requirements.

  • Visibility – If consumer incentives aren’t visible, they might as well not be there. Incentive programs that are effectively implemented use a marketing and communications strategy to allow customers to see the “sale.” This assures that buyer ignorance doesn’t make the compelling prompt of a discount ineffective. In-store displays and point-of-sale signage are excellent ways to make incentives known to consumers.

Please check back soon for more insight into how incentives interact with social norms to improve efficiency adoption.

Content for this Blog post courtesy of Nick Lange, Vermont Energy Investment Corporation