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Analysis & Projections

Behavioral Economics Applied to Energy Demand Analysis: A Foundation

Release date: October 15, 2014

 

Neoclassical economics has shaped our understanding of human behavior for several decades. While still an important starting point for economic studies, neoclassical frameworks have generally imposed strong assumptions, for example regarding utility maximization, information, and foresight, while treating consumer preferences as given or external to the framework. In real life, however, such strong assumptions tend to be less than fully valid. Behavioral economics refers to the study and formalizing of theories regarding deviations from traditionally-modeled economic decision-making in the behavior of individuals. The U.S. Energy Information Administration (EIA) has an interest in behavioral economics as one influence on energy demand.

Leidos Engineering, LLC (Leidos), previously known as Science Applications International Corporation (SAIC), conducted research on behavioral economics and energy demand, and reports the following in the contract report in Appendix A:

  • "Research revealing that energy consumption can vary widely (by a factor of nearly three) among homes and households with nearly identical characteristics1,2
  • Research revealing widespread and consistent disconnects between attitudes and behaviors regarding the importance of the impact of energy consumption on the environment and awareness regarding energy consumption or conservation behavior3
  • A variety of papers and studies suggesting energy efficiency policies and program adjustments to address the implications of particular irrational behaviors and cognitive limitations, such as labeling schemes, framing of energy efficient choices as avoiding losses rather than making gains, replacing small value rebates with larger value lottery-based awards, among other tactics4
  • Research suggesting that households that received reports regarding their consumption relative to neighbors were demonstrated to cut their usage by 2.5 percent, in a sustained manner.
  • Research work suggesting that a large portion of subsidies for hybrid automobiles and solar panels go to free riders, who would have adopted the more energy efficient technology anyway."

These above findings lend strong evidence to the need for the current National Energy Modeling System (NEMS) framework to continue keeping pace with either existing or developing best practices in energy economics with respect to consumer behavior. There is substantial research interest within the government, academia, and trade organization communities in consumer behavior with respect to energy demand and efficiency, especially as program funding targeting energy efficiency continues to increase. EIA hosted a technical workshop5 on behavioral economics and recently released a nationwide inventory providing detailed summaries of energy efficiency evaluation reports—commonly called evaluation, measurement, and verification (EM&V) reports6 —on electricity and natural gas programs. Energy efficiency program budgets have rapidly expanded, and in many states now approach supply-side capital investment in scale. Behavior is commonly considered a key aspect of energy efficiency programs.7

A key finding of the contract report, reflecting expert input from the technical workshop as well as subsequent research, is that the implementation of the modeling structures in NEMS has an inherent tendency to relax key assumptions in the neoclassical framework. While this finding supports the current implementation of demand modeling in NEMS, experimentation with aggregate demand specifications remains warranted. Preliminary approaches are described in the report.

The contract report in Appendix A characterizes and defines behavioral economics with respect to energy economics and demand analysis, and helps to both inform the public and to provide the information and foundational concepts for potential enhancements in EIA's statistical and modeling programs. When referencing the contract report in Appendix A, it should be cited as a report by Leidos Engineering, LLC prepared for the U.S. Energy Information Administration.

See complete report



Footnotes
1Parker, Hoak, Meier, and Brown. "How Much Energy Are We Using? Potential of Residential Energy Demand Feedback Devices," Proceedings of the 2006 Summer Study on Energy Efficiency in Buildings. American Council for an Energy Efficient Economy. Asilomar, CA. August 2006.

2Socolow, R. H. "The Twin Rivers program on energy conservation in housing: Highlights and conclusions," Saving Energy in the Home: Princeton's Experiments at Twin Rivers. Cambridge, MA; Ballinger Publishing Company.

3Logica Survey. (2007). Turning Concern into Action: Energy Efficiency and the European Consumer.

4Allcott H. and Mullainathan S. "Behavioral Science and Energy Policy," February 2010.

5U.S. Energy Information Administration, Technical Workshop on Behavior Economics Presentations, accessed September 25, 2014.

6U.S. Energy Information Administration, State Energy Efficiency Program Evaluation Inventory, accessed September 25, 2014.

7For example the annual Behavior, Energy and Climate Change (BECC) conference co-hosted by Stanford University, American Council for an Energy-Efficiency Economy, and the University of California has documented an expanding set of related research. http://beccconference.org/archives/ accessed September 26, 2014.