Opinion: our strange and biased appraisal of the future plays a role in why we are unwilling to invest in energy-saving technologies

By James CarrollTCD

We have an untrusting relationship with the future. Most of us know the negative effects of unhealthy foods, alcohol and inactivity - and yet most of our weekends include some combination of all three. Such examples are blunt and familiar, but nonetheless highlight an unwillingness to trade a certain pleasure today for a, more than likely, higher gain at some unknown point in the likely distant future. Indeed, some devaluing of an uncertain future is right and rational, but when our internal assessment mechanisms take this too far, the result is missed opportunities to increase wellbeing.

The field of behavioural economics explores such anomalies. For example, Prospect Theory tells us that our appraisal of uncertainty is heavily dependent on whether it is presented to us as a gain or a loss (that is, how it is framed) compared to the status quo (the reference point). Generally speaking, our human brains tend to inflate the potential doom associated with a possible loss and downplay the benefits of a potential gain (relative to the less risky alternative).

Such "biases" have major implications for the rate of energy efficiency investment. New energy-saving technologies – heat pumps, solar panels or electric cars – are, well, new, and this makes them riskier than the status quo. When the time comes to potentially switch from, say, your old trusty oil boiler (your reference point) to a new energy-saving heat pump, two main uncertainties may weigh heavily upon your mind. First, will this new technology actually save as much money as the salesperson promises (this is the uncertain gain)? And second, will this new technology breakdown after a few years (this is the uncertain loss)?

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According to Prospect Theory, many of us will psychologically inflate the anticipated pain associated with a potential breakdown and, what's worse, we will probably tone down the energy savings, too. The implications on the rate of adoption are obvious: skewed expected costs and benefits at the point of sale, and energy investment levels which are lower than policymakers expected. Is it harsh to label such decisions are "irrational"? Perhaps the true bias in adoption forecasts stems from the omission of actual human decision processes.

The EU-funded CONSEED project, coordinated by Trinity College Dublin, is exploring these potential biases in energy-related decisions. When Irish households are asked how much money they would need to save per year to invest in a hypothetical energy saving device ( say, new heating controls), most gave a response which produces a payback of just four years. Think about that for a minute: households look for a four-year payback for an energy-saving technology which will likely last decades. It’s even shorter for firms.

Surveys from CONSEED partners across the EU (Spain, Greece, Norway and Slovenia) asked similar questions and found the same result. Obviously there are more private benefits associated with energy efficiency improvements than just monetary savings (such as comfort and health), but nonetheless, on a pure financial basis, our time horizons are simply way too short.

From RTÉ One's Six One News, a report on a bungalow in Co Mayo which was certified in 2018 as Europe's most energy efficient home

The time horizons of our financial system could be short-sighted, too. For example, take a household that has overcome these biases and decided to take the energy efficiency plunge. If they have no internal cash reserves, they will need to borrow, and if they borrow, they could be looking at a consumer loan.

There are two key elements of a loan: the interest rate and the term (number of years). Interest rates clearly matter for affordability, but the term is critical given that most energy efficiency investments require at least ten years to break-even (and sometimes more). The shorter the term, the higher the probability that the non-energy expenditure of the borrower will take a hit, as average monthly energy savings will be lower than monthly loan repayments.

In this regard, there has been some innovations internationally. Research shows that occupants of more energy efficient properties are less likely to default on their mortgages. While it is difficult to control how the "responsible person" effect could be driving this result, the cash-saving effects of energy efficiency must also be playing some role. Such findings could be the motive for banks, like Barclays in the UK, to offer lower interest rate mortgages on more energy efficient homes. Spreading the repayment of energy efficiency investment over such long durations helps households, particularly given what we know about the costs today and the likely stream of energy savings in the long-run.

Energy efficiency savings rarely account for subsequent behavioural changes

The low adoption rate of energy efficiency over the past twenty years is, for many, a puzzle (The Energy Paradox). Some of the discussion has focused on potential errors in the researcher’s assumptions. For example, energy efficiency savings rarely account for subsequent behavioural changes and therefore often fall-short of engineering forecasts. Plus, we rarely incorporate (nor can we account for) the immediate non-financial costs (time, effort and stress) and long-run non-financial benefits (a more comfortable and healthier building for years). However, our strange and potentially biased appraisal of the future is unquestionably playing a role.

Dr James Carroll is a postdoctoral research fellow in energy economics at Trinity College Dublin


The views expressed here are those of the author and do not represent or reflect the views of RTÉ