"Energy Efficiency is at the heart of energy affordability." Tony Earley, Chairman, CEO and President of PG&E Corporation


Energy Efficiency Standards: Even Better in Hindsight

By Jonathan Marshall

“It’ll cost too much,” critics always charge whenever new regulations are proposed — and sometimes they’re right. But when it comes to energy efficiency standards for new appliances, the costs almost always come in lower than predicted, according to a new study published by the respected American Council for an Energy-Efficient Economy (ACEEE).

Assessments of national appliance standards dating back to the 1980s and early 1990s have consistently found that the Department of Energy (DOE) — not to mention industry groups — time and again overestimated the impact on product prices of meeting tougher efficiency standards. The good news is that consumers saved handsomely on energy without paying much of a price premium for their appliances.

Appliance manufacturers have an incentive to do better than DOE cost estimates in order to gain a competitive advantage, the study’s authors write..

Now the ACEEE researchers show the same finding holds true for government price estimates made during the more recent period 1996-2004, covering both Democratic and Republican administrations.

Looking at projected and actual costs of nine appliance and equipment efficiency standards, including refrigerators, clothes washers, water heaters, air conditioners, and fluorescent lamp ballasts, the analysts found that in every case actual prices came in well below the prediction, sometimes by a wide margin.

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For example, DOE experts predicted that a new standard for room air conditioners would boost unit prices by about $13. Instead they fell $162. Similarly, prices for clothes washers dropped $35 after new standards took effect, instead of increasing a predicted $54. In some cases, product prices did rise, but typically only a small fraction of the official forecast.

In short, if the regulation had merit based on official estimates of price impacts, think how much consumers ended up saving on energy when appliance price tags barely budged or even came down.

The authors point to the power of innovation and competition as an explanation for the DOE’s foggy crystal ball.

“In competitive markets,” they write, “manufacturers have an incentive to do better than DOE estimated in order to gain a competitive advantage. Other manufacturers generally track innovations by their competitors and it is common for such innovations to spread quickly among manufacturers. Modeling innovation is very difficult, but ignoring innovation tends to lead to overestimating prices.”

The same story turns up time and again in the history of product regulation. The Natural Resources Defense Council notes that with respect to auto pollution mandates, “unanticipated technological innovation dramatically lowered the actual compliance costs in many instances.”

For example, the auto industry predicted that catalytic converters would add about $2,800 to the price of a new vehicle after they were mandated in 1975. Regulators themselves figured the extra cost would top $1,800. In practice, the industry managed to incorporate the smog-cutting devices for less than $1,600 per vehicle.

Similarly, the 1990 Clean Air Act Amendments, which save an estimated 160,000 lives a year, ended up costing less than $200 per ton of sulfur dioxide pollution, contrary to industry estimates of more than $1,000 per ton.

This history lesson doesn’t call for turning a blind eye to the potential costs of mandates. The burden should always be on advocates to show cause. But these findings do warrant a degree of skepticism toward critics who insist we can’t afford a healthier environment.

Email Jonathan Marshall at jonathan.marshall@pge.com.

This story originally appeared on pgecurrents.com.