Expert Commentary

Investing in energy efficiency: Research on when it pays

Investments in efficiency are most cost-effective when electricity prices are highest. Smart meters are helping economists better estimate when electricity is needed to meet consumer demand.

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Investments in efficiency are most cost-effective when electricity prices are highest. Smart meters are helping economists better estimate when electricity is needed to meet consumer demand.

The issue: Imagine: It’s a hot August evening, people are returning home from work and switching on their air conditioners. Electricity demand spikes.

If supply cannot keep pace with demand, we have blackouts. To avert this, the utility company produces more electricity; maybe more than necessary. The marginal cost per kilowatt rises — as do, in many situations, greenhouse gas emissions.

This period of peak demand is when efficiency is most valuable to the economy. But traditionally, utilities were unable to pinpoint it. So they charged consumers – whose old meters did not measure exactly when electricity was consumed – a flat rate per kilowatt hour.

New smart meters record usage data hourly or even more often and this information is automatically sent to the electricity producer, enabling it to better plan and save money. The data also offer economists a way to track demand and better their understanding of how and when people use electricity. Since 2007, the number of homeowners with smart meters has jumped by about 40 percent, say the authors of a new paper.

An academic study worth reading: “Do Energy Efficiency Investments Deliver at the Right Time?” published by the National Bureau of Economic Research, January, 2017.

Study summary: Judson Boomhower of Stanford University and Lucas Davis of the University of California at Berkeley investigate how peak energy demand changed following a rebate program for energy-efficient air conditioners in southern California between 2012 and 2015. Using smart-meter data from over 6,000 homes — rather than average usage across previous days or weeks, as traditional meters offer — the economists were able “to precisely characterize the savings profile both across seasons and hours of the day.”

The economic value of the dropping demand varies widely depending on the time of day and when different appliances are used, they find. Moreover, with the granular detail offered by smart meters, they were able to predict more accurately hours of peak demand than previous models had.

Key takeaways:

  • Peak savings from the energy-efficient air conditioners occurs during July and August evenings between 6 and 7 p.m., not between 4 and 5 p.m. as previous models (based on traditional meters) had predicted. “This seemingly small difference has important implications for electricity markets given growing concern about meeting electricity demand during the early evening hours as the sun sets and solar generation decreases.”
  • In southern California, the value of the savings from energy-efficient air conditioning units is 48 percent higher than previous models showed, because they are being used at a period of peak demand, when wholesale prices (and marginal costs) are highest.
  • Across six major markets, this method of measurement suggests that energy-efficient air conditioning units save, on average, 29 percent on peak electricity.
  • These “timing premiums” for commercial heat pumps and chillers are 29 percent and 25 percent, respectively.
  • The savings is lower for efficient refrigerators and freezers, which must run all the time, through periods of peak and low demand.
  • Energy-efficient light bulbs also have a lower “timing premium,” reflecting that the savings comes largely at night and in the winter “when electricity tends to be less valuable.”
  • The authors estimate, based on U.S. Department of Energy figures, that electric utilities in the U.S. spent $36 billion on efficiency programs between 2006 and 2015. The federal government has forfeited $12 billion in revenues since 2009 on efficiency tax credits.

Helpful resources:

The Energy Information Administration at the Department of Energy is a clearinghouse of information on energy usage and production around the world.

Electric utilities in the U.S. have spent tens of billions of dollars in recent years on efficiency upgrades, Boomhower and Davis wrote. But there are few options to efficiently store electricity — created by, say, solar panels — to use during periods of peak demand, when generating electricity is most expensive. Journalist Steve Levine’s 2015 book The Powerhouse looks at the race to build a better battery.

Other research:

  • This 2015 paper by researchers at the Lawrence Berkeley National Lab – run by the University of California and funded by the Department of Energy — calculated that energy efficiency standards saved Americans $60 billion in 2014 alone.
  • This 2015 paper in the Proceedings of the National Academy of Sciences estimates the increasing demand for air conditioning — and thus electricity — around the world, especially in developing countries.
  • Homeowners with smart meters reduce their electricity consumption by approximately 3 to 5 percent, according to this 2013 paper.

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