The Diffusion of Energy Efficiency Innovations among Residential Energy Consumers

Beginning of article

1. Introduction

Since 1987 the on-going energy sector reforms have lead to the corporatisation, deregulation and, in some cases, privatisation of energy supply. These reforms have curtailed the large, tax payer funded, supply-side expansions that have historically characterised the development of New Zealand's energy resources and removed the geographic monopolies at the retail level. The goal has been to create a competitive market where demand-side options, such as energy efficiency, compete with supply expansion to bring about a least cost energy future (Luxton, 1993; Bradford, 1998).

In the residential sector - the focus of this paper - there are significant economic savings to be made from increased energy efficiency. Harris et al (1993) found that minimum savings of 5PJ(2) per annum - 12 percent of total residential energy demand - could be expected by 2008 from the implementation of a range of measures with clear financial benefits(3). Similar conclusions have been reached by Wright and Baines (1986) and Cameron (1989). In addition to the financial benefits that these studies have considered, improved energy efficiency has also been widely cited as a means of reducing adverse environmental externalities such as carbon dioxide emissions.

In most cases the potential for energy savings has existed for many years but has not been taken up by consumers. The literature points to many financial and transaction cost impediments to the operation of a competitive market(4). These include the relatively low cost of electricity in New Zealand with prices being below the marginal cost of new generating capacity(5). High fixed charges also apply in some areas, eroding the financial rewards of energy efficiency and misleading customers as to the true costs of electricity supply. There are also high transaction costs associated with the adoption of energy efficiency innovations due to the historic reliance on supply-side options(6). For instance, both energy consumers and energy suppliers lack information, knowledge and experience with energy efficiency. This is also reflected in housing and rental markets where the energy efficiency of a home is rarely reflected in its price. Principle-agent problems may exist with the services of architects, builders, plumbers and shop assistants, who frequently make energy use related decisions on behalf of consumers. Limited access to financial resources constrains some consumers, even when energy efficiency has net economic benefits. Moreover, the discount rates applied by consumers to energy efficiency expenditure are typically very much higher than the rates applied by supply-side investors (Fitzsimons, 1990; Sioshansi, 1991; Hassett & Metcalf, 1993). This discrepancy means supply-side expansions may go ahead while consumers tacitly reject energy efficiency options with considerably higher rates of return. The persistence of these obstacles means that consumers are unlikely to adopt many economically viable energy efficiency measures without further encouragement from Government or commercial agencies.

While the energy sector reforms rely on financial incentives to bring about energy efficiency improvements (Luxton, 1993; Bradford, 1998), the literature points to a much wider range of influences on consumer behaviour. In a review of consumer decision processes for residential energy consumers, Dinan (1987) concludes that energy efficiency models and programmes based purely on financial gains have achieved disappointing results(7). Dinan suggests a more comprehensive framework, incorporating aspects of several models, is needed to improve policy formulation. Consumers act in response to a wide range of influences and change their behaviour without changes in prices or other monetary aspects of adoption. Non-financial measures can be more cost effective in changing consumer behaviour, and less economically damaging, than price increases (Heberlein & Warriner, 1983; Vine & Crawley, 1991). This is supported by evidence that suggests energy price and income elasticities are low and that price changes are slow to change behaviour (Van Raaij & Verhallen, 1983b; Eden et al, 1981).

The basis of this paper is that to achieve the full benefits of improved energy efficiency in the residential sector a better understanding of the consumer decision making process is required. While electricity sector reforms rely on financial incentives to bring about energy efficiency improvements the literature emphasises a much wider range of influences on consumer decision making. The dual objectives of this research are:

   To identify the major determinants of diffusion for energy efficiency
   innovations in the residential sector.

   To show how the rate of diffusion of these innovations could be increased.

A diffusion theory framework is used to analyse the influences of the perceived attributes, communication channels and a range of contextual variables at two separate stages of the consumer decision process. Data was sought on more than one device so that the results could be compared between devices. Compact fluorescent light bulbs (CFL's) and hot water cylinder wraps (HCW's) were selected for study because it was judged that they were widely applicable to households in the area, offered considerable potential for energy savings if widely adopted, and provided contrast in terms of type of use, attributes and awareness. Both devices may be described as discretionary purchases and had adoption rates of less than 10 percent.

2. Diffusion Theory

Diffusion should be distinguished from adoption. Diffusion refers to the spread of an innovation through a population of potential innovators. Adoption refers to the process that individuals go through from recognition of a need, to the acceptance, rejection, or even post-decision evaluation of the innovation.

The rate of diffusion varies widely between groups of potential adopters and between innovations. The pattern of diffusion is usually sigmoid (`S' shaped)(8). Technical substitution models (TSM's) have been used to estimate and forecast the diffusion patterns of a wide range of innovations, and provide strong support for the sigmoid pattern of diffusion. Most TSM' s are based on the models proposed by Mansfield (1961), Blackman (1974) or Bass (1969). The behavioural foundation of these models is that an innovation is first adopted by a few people, the innovators, who then influence others, the imitators, to adopt it (Teotia & Raju, 1986; Stoneman, 1983). There are relatively few innovators and the communication process is essentially one of epidemic learning through imitation (Stoneman, 1983). It is the domination of imitation over innovation that gives rise to the sigmoid pattern of diffusion in most TSM's. Stoneman (1983; 1987) labels this explanation of the pattern of diffusion as the `information approach', as it emphasises the spread of information (through personal communication) and the reduction of uncertainty in the diffusion process.

An alternative is the `difference approach' (Stoneman, 1983; 1987), where the pattern of diffusion reflects real differences in the economic rewards of adoption or the economic circumstances of potential adopters. The difference approach suggests that diffusion is an economic equilibrium process, with the difference in adoption times reflecting variations between potential adopters with respect to the level of economic benefits of adoption or the thresholds of economic benefits above which potential adopters will adopt. While this may explain differences between innovations, or between groups of innovators, this author found no empirical evidence to support its use as an explanation of the sigmoid pattern of diffusion for energy related devices. Although Hassett & Metcalf (1993) use such an approach the required distribution was assumed and no justification was given.

Despite …