Humans have long been fascinated by the prospect of plentiful and inexpensive energy. Nikola Tesla, the inventor of alternating current electricity, dreamed of providing free inexhaustible energy by tapping into electrical charges beneath the earth’s surface. Contemporary proclamations of abundant and free renewable energy are reminiscent of promises made long ago that nuclear technology would lead to a future of electricity being “too cheap to meter”.

Yet there is a form of (essentially) free energy available today that continues to go underutilized: improving energy efficiency using existing cost-effective technology. Using less energy to provide the same services reduces the environmental impact without needing to produce new green energy. Further, if the value of the energy saved exceeds the cost of the efficiency improvement, then the investment pays for itself in reduced energy bills. Why would energy consumers not use technologies that would reduce their environmental footprint and save more money than they cost?

In this blog I will review the important potential for energy efficiency improvements to mitigate climate change and discuss some of the behavioural barriers inhibiting adoption of existing cost-effective technologies along with some possible solutions.

The Opportunity

Energy efficiency improvements that have been implemented worldwide since 2000 reduce current annual energy consumption by approximately 50 EJ/year – equivalent to the EU’s annual consumption of oil and natural gas combined or 20 times the amount of electricity produced by solar photovoltaic systems worldwide in 2019.

While an extraordinary amount of energy consumption has been abated, there remains immense potential for further efficiency improvements. The International Energy Agency (IEA) estimated that implementing existing cost-effective energy efficiency technologies would reduce global energy consumption in 2040 by an additional 120 EJ/year (chart below) – more than the total annual energy consumption of North America – and would provide average energy cost savings of three times the initial investment.

Annual global energy savings (EJ/year) in 2040 by sector that could be achieved by implementing existing cost-effective efficiency improvements. Source: IEA Energy Efficiency 2018.

Some of the key opportunities identified by the IEA were:

Transport

• increase fuel efficiency for passenger vehicles and freight

• vehicle electrification

Buildings

• improve insulation

• heat pumps

• reduce appliance energy consumption

Industry

• heat pumps

• improve electric motor efficiency

• increase scrap metal recycling

Energy efficiency improvements are a critical but understudied component of decarbonization pathways to mitigate climate change and are generally associated with lower risk and more co-benefits (e.g. reducing fuel poverty) than supply-side technologies. Implementing existing cost-effective energy efficiency improvements provides 44% of the additional global CO2 emissions abatement required in the IEA’s Sustainable Development Scenario to limit global warming in accordance with the Paris Agreement – roughly the same contribution as all renewable energy and carbon capture and storage combined (figure below).

Comparison of global CO2 emissions forecast by the IEA based on existing and planned government policies ("New Policy Scenario") and their "Sustainable Development Scenario" which is aligned with the Paris Agreement objectives. Coloured wedges indicate the contribution of each technology to achieving the required additional emissions abatement. Source: IEA Energy Efficiency 2018.

The untapped potential of existing energy efficiency technologies is startling. The rate of global greenhouse gas emissions continues to increase despite international efforts and prior commitments to reduce them, yet massive opportunities remain for energy consumers to save money and reduce emissions. How can this be?

The Problem

According to traditional economic theory, these efficiency opportunities should have already been implemented by people making rational choices to minimize the cost of the energy services that they utilize. However, actual decisions systematically deviate from expected outcomes because of a combination of social, psychological, and contextual factors which influence the decision-making process.

For example, one would expect that people that hold pro-environmental values would engage in pro-environmental behaviour leading to lower household energy usage. However, most studies have shown a weak or insignificant connection between pro-environmental values and actual household energy use – a dichotomy referred to as the value-action gap. Similarly, knowledge and awareness also do not reliably lead to reduced energy use (the knowledge-action gap). Meanwhile, socio-demographic factors have a complex role in energy usage: while higher income households on average consume more energy than lower incomes households, they also have more capacity to invest in improving energy efficiency. 

There are many different psychological and motivational variables which combine in individual and situation specific ways to influence adoption of energy efficiency technologies. However, some key factors which are consistently identified are:

• desire to conform to social norms and make relative social comparisons (video below),

• aversion to perceived losses such as a decrease in personal comfort or lifestyle quality,

• perception that future benefits are less valuable if further away in time,

• satisficing when overloaded with information or complexity, and

• tendency to avoid risk when faced with certain gains or uncertain loss but seek risk when faced with certain loss or uncertain gain.

Decision making within collective organizations such as businesses, although conventionally assumed to be rational and profit-seeking, is subject to similar social and psychological biases.  Individuals take on certain roles within groups governed by existing cultural norms, expectations, and policies which influence how people think and behave within the organization.

Potential Solutions

The most common approaches to encouraging energy efficiency typically place high emphasis on providing information and traditional financial instruments such as subsidies and loans to overcome upfront cost barriers (e.g. BC Hydro Power smart).  While these approaches can contribute, particularly for early adoption, they are normally not sufficient by themselves to induce widespread adoption.  However, the same social and psychological factors which can impede adoption of energy efficiency improvements can also be harnessed to increase adoption. 

For example, social influence can be used by advising consumers of peers which have successfully reduced energy consumption, providing relevant comparisons of energy consumption (figure below), or giving recognition with a focus on establishing desired positive norms. For example, BC Hydro and Enmax offer their customers optional energy consumption comparisons to similar nearby homes and FortisBC recognizes organizations in their service area which complete exceptional energy efficiency upgrades with annual awards.

Illustrative example of how comparisons could be presented on consumer energy bills to exert social influence to establish desired norm and encourage adoption of energy efficiency improvements.

Another solution is offering consumers alternative financing instruments aligned with typical risk avoidance/seeking behaviour. For example, on-bill tariff financing allows energy efficiency upgrades to be financed as part of the utility bill with the debt obligation assigned to the property. The repayment terms could be structured to ensure that the property owner realized a net reduction in their utility bill from the outset. A similar mechanism called property assessed clean energy (PACE) financing is offered to property owners by some municipalities to finance energy efficiency retrofits as part of the associated property tax bill. These structures link the cost of the improvement with the benefit of future reduced utility consumption and shift the risk from uncertain loss if the current owner/occupant moves before the investment is recovered to certain loss if they did not implement the improvement. PACE financing is available in 26 American states, and there are 9 municipalities in Nova Scotia which offer various PACE programs for energy efficiency and clean energy upgrades.

Moving Forward

Existing cost-effective energy efficiency improvements provide a huge opportunity for win-win climate change mitigation options that are expected to provide a large and necessary contribution towards meeting the Paris Agreement goals. However, social and psychological influences on human decision-making challenge the widespread adoption of these opportunities despite knowledge of the benefits and opportunities for energy consumers to save money.  Behavioural science offers insights into how the messaging and incentives to energy consumers could be reframed to develop more effective policies to increase market penetration of existing and yet to be invented technologies.  After all, the benefit of more technological solutions for climate change will be limited unless people are willing to use them. 

One aspect of energy efficiency discussed briefly by the IEA in their projections but deserving of more attention is the potential for rebound effects: cost savings and/or lower energy prices from reducing demand may stimulate increased consumption in other areas reducing the net benefit.  This needs further investigation particularly from the social science perspective to understand how psychological and motivational factors such as social norms could be utilized to mitigate this effect.