Assistant Professor Dylan Brewer's paper "Household Responses to Winter Heating Costs: Implications for Energy Pricing Policies and Demand-Side Alternatives" was published in the journal Energy Policy. Brewer writes:
In energy consumption data, some households respond very little to increases in their energy prices. When energy prices rise, economists expect families to reduce energy consumption by changing the thermostat, buying more energy-efficient appliances, or practicing other energy conservation behavior. Thus, it is surprising that in many studies, close to half of households do not appear to respond to price increases at all. This has led many economists to suggest that families do not understand the cost of energy consumption or have a "behavioral misperception" of energy costs.
To study this puzzle, I surveyed individuals about what thermostat settings they would choose if they faced a hypothetical cost of changing the thermostat. I found that even when individuals are fully informed about energy costs, many still do not deviate from their favorite or "bliss point" temperature. Moreover, we find that households have a reasonable perception of what the cost of changing the thermostat is.
These findings suggest that households simply do not like being uncomfortable (even at very high costs), which has very different policy implications from households not perceiving the energy cost. For example, if families do not know what the cost of energy is, it would suggest that policies changing the price of energy would not be surplus-maximizing. If households simply have very strong preferences for energy consumption even at high costs, it suggests that pricing policies are indeed surplus-maximizing because the benefits from energy consumption exceed the costs (even if the costs rise).
During energy emergencies, however, my findings suggest that demand response policies that allow the utility to temporarily override smart thermostat settings remotely might be a more effective way to reduce energy consumption for these price-unresponsive individuals.
I conduct a survey that presents research subjects with hypothetical costs to adjust their thermostats. I estimate responses to the cost of heating and analyze the causes for heterogeneity in household demand for energy services using the survey results as a complete-information baseline. I find that even at the highest price level ($8 per 5 °F or 2.8 °C), half of the participants exhibit zero response to price. On average, a 100 percent increase in the marginal cost of heating the home induces a 0.31 to 0.97 degree Fahrenheit (0.17 to 0.51 °C) reduction in the winter heating level, corresponding to a −0.005 to −0.014 elasticity. Further, I find that participants’ survey behavior with complete information can explain observed real-world temperature settings, suggesting a limited role for informational barriers or salience issues in energy-service demand heterogeneity. Inelastic demand suggests that energy efficiency policies may have high returns and that centralized demand–response policies may be required to address winter energy emergencies.
Read more: https://doi.org/10.1016/j.enpol.2023.113550