Modeling Household Energy Consumption and Adoption of Energy-efficient Technology Using Recent Micro-data

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This study develops a unified technology choice and energy consumption model (a "discrete/continuous model") that can be applied to study household energy use behavior. The model, stemming from consumer theory, ensures modeling of consumer short-run energy demand and long-run capital investment decisions in a mutually consistent manner. The model adopts a second-order translog flexible functional form that allows considerable flexibility in the structure of consumer preferences and in the exploration of interplays among energy uses and between energy demand and appliance choices. This study extends the discrete/continuous model developed by Dubin and McFadden (1984) and is the first known application of the second-order translog flexible functional form in joint discrete/continuous modeling of consumer energy demand and appliance choice.

Using a unique household-level dataset of 2,408 households served by the Pacific Gas and Electric Company in California, the model is applied to examine the roles of income, prices, household characteristics, and energy and environmental policy in household short-run energy use and long-run technology choices. The empirical analysis estimates a system of short-run household demand equations for electricity and natural gas and long-run technology choices with respect to clothes washing, water heating, space heating, and clothes drying. The results demonstrate the modeling framework is appropriate and robust in studying household energy use behavior.

Findings from the empirical analysis have important implications for policy design. This study confirms two important market failures with respect to household energy technology choice behavior: the principal/agent problem and information imperfection. In the case of clothes washer choices, the voluntary, information-based Energy Star program emerges as the most significant factor influencing the adoption of energy-efficient front-loading clothes washers, followed by energy efficiency standards. Surprisingly, financial incentives, such as the popular rebate programs used to lower the initial capital cost of energy-efficient appliances, are found to be far less effective in influencing adoption of energy-efficient appliances.

Furthermore, the study finds at the household level that the incentive for new technology adoption is greater under direct regulation than under market-based instruments, such as a carbon cap-and-trade program or emission taxes.