COST-BENEFIT ANALYSIS OF DOMESTIC ENERGY EFFICIENCY J. PETER CLINCH, JOHN D. HEALY (2001)

1. COST-BENEFIT ANALYSIS OF DOMESTIC ENERGY EFFICIENCYJ. PETER CLINCH, JOHN D. HEALY (2001) Petra Woods

2. Objectives • To advance the literature and develop a template for ex-ante economic analyses of large-scale domestic energy-efficiency programmes. • Provide insights into the methodological difficulties and solutions for addressing the social efficiency of such programmes.

3. Ex-ante economic evaluation of a programme to bring the thermal standards of the Irish housing stock up to the 1997 building regulations over a ten year period – i.e. retrofitting the 1.2million dwellings built prior to 1997 with various technologies and upgrades

4. Energy Assessment Model (EAM) Bottom up model – 1824 representative dwellings 8 dwelling types 6 categories of insulation 19 types of heating systems Cost-Benefit Model (CBM) was added to provide monetary amounts. Discount rates 0% to 10% D/Finance 5% key rate METHODOLOGY - Model

6. COSTS - Materials Treatments chosen and priced with assistance from QS on basis of cost-effectiveness: • Fitting of lagging jacket • Roof insulation/upgrade • Draught-stripping • Cavity-wall insulation • Central heating • Heating control upgrade • Low-emissivity double glazing

7. Tried to develop an efficient mix of skilled workers and retrained unemployed people Year 2000 – skills shortage in construction a big factor, as is very low unemployment rate Some works assumed to be undertaken by people who would be otherwise unemployed, remainder by specialists Estimated approx. 4900 full-time equivalent jobs over ten years, or 49,000 job years Costs per job year (€51k) somewhat higher than in other comparable studies COSTS – LABOUR NUMBERS

8. COSTS: VALUING LABOUR INPUT • Shadow price of labour • Where the market clears, shadow price = market price (displacement potential) • Where there is high unemployment, potential for additionality, shadow price = zero • Authors conclude: market price for skilled workers, zero for previously unemployed people

9. Costs – sensitivity analysis • Identified 2 competing pressures: • Downward pressure on prices caused by increase in competition in the market as more firms enter and specialise • Upward pressure on prices caused by capacity constraints • 3 Scenarios • High cost • Medium cost (where upward and downward pressures cancel) • Low cost

10. BENEFITS – ENERGY USAGE • Consumer welfare will increase as a result of energy efficiency improvements • Energy benefits / increased comfort • 70-75% in energy savings on average • 60% low-income households, (UK studies) • EAM attempts to mirror this by assuming benefits are taken as comfort up to average temperature of 17.7ºC and then taken as reduced energy use

11. BENEFITS – ENERGY VALUES Monetary value placed on savings Sensitivity analysis Identified pressures on energy prices Deflationary pressures: improved technology; increased availability of renewables; impending deregulation of sector Inflationary pressures: rapid economic growth/increased demand; carbon taxation/ETS; oil shock etc. 3 scenarios Annual real price increase of 1% Annual real price decrease of 1% No change (upward and downward pressures cancel)

12. BENEFITS - ENVIRONMENT Volume: EAM used to estimate reductions in CO2, SO2, Nox, PM10 Value: Used benefits-transfer approach and assigned values on the basis of damage estimates from literature Set estimates and upper and low ranges

13. BENEFITS - MORTALITY More people die in winter than at other times of year – “excess winter mortality: CVD and RD Comparison with Norway Proportion of excess winter mortality attributable to poor thermal standards estimated to be: CDV 50% (381 deaths) RD 57% (271 deaths)

14. BENEFITS - MORTALITY Value of statistical life (VSL) – “ the sum of individuals’ own valuations of reductions in risks to their own lives” – involves aggregating up from a willingness to pay for risk reduction. On the basis of substantial review of literature: VSL estimate of 3.03million for under-65s and 2.18million for over 65s Do look at age-adjusted VSL – and value of a life year VoLY but note the problems and conclude best to use standard approach.

15. BENEFITS - MORBIDITY Again on basis of CVD and RD Objective is to assess avoided cost to individual who would have been ill if their house was colder Assess the avoided cost to wider society from that person avoiding illness Using those assessments to derive society’s willingness to pay for reducing such morbidity. Hospitalisation and drugs – i.e. cost-of-illness approach Loss of productivity/RAD

16. BENEFITS - COMFORT Difficulties in valuing due to subjectivity Very little empirical work Note from literature that “evidence demonstrating the positive impact of improved housing on reported psychological distress is now well established” Benchmark of 17.7ºC as safe and comfortable Proportion of energy savings foregone, as a proxy for the value placed on increased comfort Comfort benefits accrue mainly to low-income households

17. RESULTS For 5% discount rate: Costs = €1,601m Benefits = €4,723m

18. WEAKNESSES Necessary to make assumptions on household behaviour – need to predict combination of energy saving and comfort that will be chosen Future energy prices cannot be predicted with certainty Cannot predict future technological benefits Health benefits particularly difficult Estimate physical numbers of deaths and illnesses attributable to inadequately heated homes Choose appropriate coefficients for reduced risk of death and disease Comfort benefits also very difficult to value