Motivation for the research

Exploring the Homeowner's Decision in Favor of a Residential Heating System - A Discrete Choice Analysis for Germany Christian Michelsen and Reinhard Madlener Institute for Future Energy Consumer Needs and Behavior (FCN) Chair of Energy Economics and Management School of Business and EconomicsRWTH Aachen University, Aachen, Germany

Motivation for the research • Residential heating demand accountsfor a large fraction of a private household’s energy consumption in Germany • Innovative residential heating systems (RHS) for 1-2 family homes have improved efficiencies and gained increasing market shares in the past years in Germany • Policy framework in Germany favors gas- or oil-fired condensing boilers with solar thermal support, heat pumps and wood pellet-fired boilers • There are important differences in technical and comfort characteristics and associated costs =>Useful to study different technologies • Differences in adopters’ needs, preferences and behavior regarding innovative RHS =>Useful to study micro-data • Relatively few econometric studies of RHS adoption

Research questions • What determines the homeowners’ decisions in favor of a specific type of residential heating system (RHS)? • What is the relative influence of (1) preferences about specific attributes of RHS, (2) socio-demographic, (3) home or (4) spatial characteristics on the probability to adopt a certain RHS? • Are there any differences between different types of RHS and groups of homeowners (e.g. newly-built vs. existing homes)?

Outline • Introduction • Background: The case of residential heating systems in Germany • Literature review: Energy and energy appliance choice • Survey procedure and data description • Model specification • Results and conclusions

Existing stock of RHS in Germany (2008) => Conventional RHS still dominate the existing stock of RHS Source: Own illustration, based on data from BDH (2010)

Annual market shares of newly installed RHS in Germany => Rapid structural change => Increasing market shares of innovative RHS over the years Source: Own illustration, based on data from BDH (2009, 2010)

Modeling residential energy and energy appliance choice • Discrete-continuous choice approach: • Mostly based on ownership data from existing surveys (revealed preferences data) • Mostly logit models to analyze the choice decision • Focus on socio-demographic characteristics, features of the home, spatial attributes, energy prices • Examples: • Dubin and McFadden (1984), Liao and Chang (2002), Mansur et al. (2008), Nesbakken (1999), Vaage (2000), Goto et al. (2011)

Modeling residential energy and energy appliance choice • Willingness to pay (WTP) approach: • Based on data from surveys or choice experiments (stated preferences data) • Logit / probit models to analyze the influence of certain variables on the WTP • Focus on product attributes and socio-demographic characteristics • Examples: • Banfi et al. (2008), Scarpa and Willis (2010), Claudy et al. (2011)

Modeling residential Energy appliance and RHS choice in Germany • Limited number of studies on heating system choice in Germany • Little research on the determinants of the adoption decision (in particular on the formation of preferences) • Examples: • Braun (2010), Mills and Schleich (2009), Rehdanz (2007), Rehdanz and Stöwhase (2008), Schuler et al. (2000), Achtnicht (2010)

Summary of the literature review: Relevant determinants of RHS choice • Four categories of determinants of energy appliance / RHS choice • Main focus on socio-demographic, home and spatial characteristics • Preferences about RHS-specific attributes considered less

Development and implementation of the questionnaire • Goal: Creation of a unique dataset on the homeowners’ adoption decision in favor of a heating system in Germany • Mail survey among homeowners who received a BAFA grant • Cooperation with Federal Office of Economics and Export Control (BAFA) • Installation of a heating system in a newly-built or existing 1-2 family homes between January 2009 – August 2010 • 4 groups of adopters • 5000 participants (stratified sample) • Overall response rate: 59.7% (N=2985)

Model specification • Multi-nominal logit model (MNL): Unordered choice model with four alternative RHS as dependent variable • Utility of RHS j: • Choice probability of homeowner i for RHS j: • Marginal effect of a change in variable xi:

Model specification • Dependent variable: adopted RHS • Gas- / Oil-fired condensing boiler with solar thermal support • Heat pump • Wood pellet-fired boiler • Independent variables: 4 categories

Results for the full sample Socio-demographic Home Spatial Cost considerations Preferences

Results for existing homes Income Previous RHS and infrastructural constraints East and South Grant Energy savings, independence from fossil fuels, comfort

Results for newly-built homes Wood pellet different Size and low energy home Rural, East and South Grant Energy savings, independence from fossil fuels, environment, comfort

Summary of the main results • Importance of determinants differs across groups of homeowners Existing homes Newly-built homes Determinants influencing the decision Individual characteristics and spatial level (socio-demographic, home and spatial characteristics) Spatial characteristics and preferences about general attributes of the home and heating system Implications Limited influence of preferences Less design constraints on the individual level

Summary of the main results • Importance of preferences differs across heating systems • Model specification tests: • Hausman test: IIA assumption holds • LR-test: No improvement of the quality of the model

Conclusions • Homeowners are heterogeneous • Preferences more important for the case of newly-built homes • Specific preferencesdiffer a lot by type of heating system • Individual characteristics of wood pellet adopters are very different from others • Findings have important implications: • Likely future diffusion of residential heating systems • Design of climate policy measures for the residential building sector • Marketing strategies of residential heating system manufactures

Selected literature Achtnicht, M. (2010), Do Environmental Benefits Matter? A Choice Experiment Among House Owners in Germany, FCN Working Paper No. 27/2010, Institute for Future Energy Consumer Needs and Behavior, RWTH Aachen University (also published as ZEW Discussion Paper 10-094). Banfi, S., Farsi, M., Filippini, M. and Jakob, M. (2008), Willingness to pay for energy-saving measures in residential buildings, Energy Economics, 30, 503-516. Braun, F. (2010), Determinants of households’ space heating type: A discrete choice analysis for German households, Energy Policy, 38, 5493-5503. Claudy, M.C., Michelsen, C., O’Driscoll, A. (2011), The diffusion of microgeneration technologies – assessing the influence of perceived product characteristics on home owners‘ willingness to pay, Energy Policy, 39(2), 1459-1469. Dubin, J., McFadden, D. (1984), An econometric analysis of residential electric appliance holdings and consumption, Econometrica, 52 (2), 345-362. Goto, H., Goto, M. and Sueyoshi, T. (2011), Consumer choice on ecologically efficient water heaters: Marketing strategy and policy implications in Japan, Energy Economics, 33, 195-208. Liao, H.-C., Chang, T.-F. (2002), Space-heating and water-heating energy demands of the aged in the US, Energy Economics, 24 (3), 267-284. Mansur, K., Mendelsohn, R., Morrison, W. (2008), Climate change adaptation: a study of fuel choice and consumption in the US energy sector, Journal of Environmental Economics and Management, 55 (2), 175-193.

Selected literature Nesbakken, R. (1999), Energy Consumption for Space Heating: A Discrete-Continuous Approach, Scandinavian Journal of Economics, 103(1), 165-184. Michelsen, C. and Madlener R. (2010), Integrated Theoretical Framework for a Homeowner's Decision in Favor of an Innovative Residential Heating System, FCN Working Paper No. 2/2010, Institute for Future Energy Consumer Needs and Behavior, RWTH Aachen University. Rehdanz, K. (2007), Determinants of residential space heating expenditures in Germany, Energy Economics, 29, 167-182. Rehdanz, K. and Stöwhase, S. (2008), Cost Liability and Residential Space Heating Expenditures of Welfare Recipients in Germany, Fiscal Studies, 29(3), 329-345. Scarpa, R. and Willis, K. (2010), Willingness to pay for renewable energy: Primary and discretionary choice of British households’ for micro-generation technologies. Energy Economics, 32, 129-136. Schuler, A., Weber, C. and Fahl, U. (2000), Energy consumption for space heating of West-German households: empirical evidence, scenario projections and policy implications, Energy Policy, 28, 877-894. Vaage, K. (2000), Heating technology and energy use: a discrete continuous choice approach to Norwegian household energy demand, Energy Economics, 22 (6), 649-666.

Thank you very much for your attention! This research will soon be published as FCN Working Paper No. 9/2011 (available on RePEc, www.repec.org and SSRN www.ssrn.com) Contact: Christian Michelsen cmichelsen@eonerc.rwth-aachen.de

Motivation for the research