Presentation on "energy literacy" of private consumers. Paper abstract: with the residential sector accounting for some one-fifth of global energy consumption -- resulting from the requirements to heat, cool, and light residential dwellings -- energy efficiency in private dwellings has again gained interest in recent years. In this paper, we examine the importance of awareness and behavior of households with respect to their residential energy use. Using a detailed survey across 1,721 households, we measure the extent to which consumers are aware of their energy consumption and whether they have taken measures to reduce their energy bill. Our results show that “energy literacy” among respondents is low: just 56 percent of the respondents are aware of their monthly charges for energy consumption, and 60 percent appropriately evaluate investment decisions in energy efficient equipment. We document that energy literacy, consumer ideology and attitude towards energy conservation have a direct effect on behavior regarding heating and cooling of the home. The impact of the moderating factor, measured by thermostat settings, ultimately results in strong variation in the energy consumption of private consumers.

1. Residential Energy Literacy and
Capitalization
Dirk Brounen, Nils Kok, and John M. Quigley
AREUEA Annual Meeting
Chicago, January 7 2012

2. Energy consumption and the built environment
Energy dependence starts in buildings
80%
Small improvements in buildings can have large effects
 Carbon emissions and buildings are closely related
70%
– At least 30 percent of global greenhouse gas emissions stem from
60% buildings (construction and subsequent economic life)
– Buildings account for 74 percent of U.S. electricity consumption
50%
 Built environment offers largest potential for greenhouse gas abatement
40%
Impact of energy costs directly affects private consumers
30%
 Energy costs are a large expense
20% – 10 percent of net income (in our sample)
 Salience can only increase with rising energy prices
10%
0%
1960 1970 1980 1990 2000
Energy Consumption in Buildings Of Which Residential

3. Energy consumption and the built environment
Energy dependence starts in buildings
Small improvements in buildings can have large effects
 Carbon emissions and buildings are closely related
– At least 30 percent of global greenhouse gas emissions stem from
buildings (construction and subsequent economic life)
– Buildings account for 74 percent of U.S. electricity consumption
 Built environment offers largest potential for greenhouse gas abatement
Impact of energy costs directly affects private consumers
 Energy costs are a large expense
– 10 percent of net income (in our sample)
 Salience can only increase with rising energy prices

4. US energy demand: 37 percent from housing
Energy efficiency debate again prominent in policy circles
How to reduce energy consumption in the residential housing
market?
1. Stricter building codes and subsidizing retrofits
– Works, but mostly for new construction, and effects are small
• Building codes are effective at saving energy (Jacobsen and Kotchen, in
press)
– Fiscal tight-belting constrains subsidies
1. Stimulating market efficiency through energy labels
– Investments in energy efficiency may lead to:
• Save on current resources, insure against future price increases
• Higher transaction prices
– Labels seem to have the desired effect (Brounen and Kok, 2011)
2. Social norms and signals
– Providing feedback (Schultz et al., 2007; Alcott, 2011)

5. Energy efficiency literature assumes rationality
Commercial investors may be different from private agents
 Current policies to reduce energy consumption assume rational
decision-making by informed investors
 That seems to hold for sophisticated investors in commercial property
– Labels have financial implications (Eichholtz, Kok, Quigley, 2010, 2011)
– Or maybe labels are not even necessary (Jaffee, Wallace, Stanton, 2011)
…but recall the “energy efficiency paradox” (Jaffe and Stavins, 1994)
 What if consumers:
– Are not aware of their energy consumption
– Are not rational in their investment decisions
– Have “wrong” default settings
 The current literature ignores “energy literacy,” and policies may be
based on wrong assumptions

6. Our contribution
The (missing link) between policy and outcomes
Energy awareness
Financial (il)literacy
- Do you know?
Lusardi and Mitchel (2007)
Energy literacy Lusardi and Tufano (2009)
- Investment decision
Energy behavior
- Thermostat setting (level)
- Changing night temperature
(discrete choice)
• Demographics: lifestyle and family cycles
(Fritzsche,1981; Van Raaij and
Verhallen, 1983) Energy bill
• Home characteristics - Energy consumption
(Brounen, Kok, Quigley, 2012; Costa and
Kahn, 2011)
• Ideology and attitudes (Kahn, 2007)

7. Data
 Dutch National Bank Household Panel
– CentERdata (Tilburg University)
– Well-established panel (see, for example, Van Rooij et al., 2011)
 50 questions on:
– Demographics
– Financial background
– Home characteristics
– Residential energy consumption and literacy
 Link to recent surveys on attitude and ideology (smaller sample):
– Personality
– Political preferences
– Spending behavior
 Executed in 2011, N = 1,721 (out of 2,028)

8. Energy Awareness and Literacy (I)
44 percent of the respondents has “no idea”

9. Energy Awareness and Literacy (I)
44 percent of the respondents has “no idea”

10. Regression results (logit)
Explaining energy awareness

11. Energy Awareness and Literacy
40 percent or the respondents does not know or makes
“irrational” choice

12. Energy Awareness and Literacy
40 percent or the respondents does not know or makes
“irrational” choice

13. Regression results (logit)
Explaining energy literacy

14. Energy behavior
Thermostat settings
 Outcomes of energy awareness and literacy can be measured in
….behavior
….and consumption:
(2)
– Ei is the logarithm of gas consumption in euros for dwelling i
– Di is a vector of demographic characteristics, including age and gender of the
head of the household, household composition, education and income
– Xi is a vector of the hedonic characteristics of building i, including dwelling
size and period of construction

15. Energy behavior
Thermostat settings
 Outcomes of energy awareness and literacy can be measured in
….behavior
….and consumption:
(2)
– Ei is the logarithm of gas consumption in euros for dwelling i
– Di is a vector of demographic characteristics, including age and gender of the
head of the household, household composition, education and income
– Xi is a vector of the hedonic characteristics of building i, including dwelling
size and period of construction

16. Regression results (II)
Behavior, demographics, and attitude

17. Regression results (III)
Energy conservation, home characteristics, and behavior

18. Conclusion and implications
Energy literacy is still low
 Small improvements in buildings can have large effects
– Energy consumption and buildings are closely related
 Current policies to reduce energy consumption assume rational
decision-making by informed investors
 Energy literacy among private consumers quite low (in line with general
findings on energy literacy – Lusardi and Mitchell, 2008)
– 44 percent of our sampled households is not aware of their utility bill
• In this case stimulating energy savings is difficult
• Predominantly young spenders that are poorly organized
– 40 percent of households is not able to tradeoff short term outlays with long
term savings
• Less efficient investment, lower upfront costs
• Predominantly the lower educated households
– Raising awareness on energy consumption – providing feedback
(“OPOWER” experiments)

19. Conclusion and implications
Default behavior is “wrong”
 Thermostat settings matters for the utility bill
– High evening settings increase the bill (which is the case among the elderly
and the wealthy)
– Lowering the night settings substantially decreases the bill
…but, 28 percent of the households do not lower their thermostat
during night
– They ignore the low hanging fruit of energy conservation
– Comparable to “woodhead” behavior of mortgage holders (Quigley and
Deng, 2002)
• Energy conservation as the implicit default setting
• Smart meter rollout offers opportunity
 Next steps: randomized field experiment
with utilities