EUF > Policy Analysis > Exploring the Energy-Efficiency Gap

Exploring the Energy-Efficiency Gap

Project Description

In this project, we consider possible answers to the question, "Why do consumers and firms forego apparently cost-effective investments in energy efficiency?" It has long been documented that consumers and firms appear to discount future savings of energy-efficiency investments at rates well in excess of market rates for borrowing or saving. This pattern, often referred to as the energy-efficiency "gap", has been the subject of intense debate among energy policy analysts for some time, and is now a critical issue for climate change policy as well. Our ongoing research on the energy-efficiency gap focuses on topics that help us to better understand

  1. The characteristics of markets for energy-efficient technologies,
  2. The nature of institutional energy-related decision-making, and
  3. The nature of an individual consumer's energy-related decision-making.

The ultimate goal of this work is to integrate technology studies with economic methods to improve analyses of the performance of markets for energy efficiency.

Reports #1, 2, 3, 4, 5, 7, 10, and 12, listed under "Publications" below, discuss market barrier issues and the efficiency gap in general.

Market Issues: Manufacturers, builders, designers, and suppliers all face market-related barriers that inhibit the adoption of energy-efficient technologies. These barriers include organizational inertia and reluctance to change, design and production cycles, the inability of a company to capture all the benefits of their own R&D because competitors can copy their designs, and perverse fee structures that penalize engineers and architects for energy efficient designs and technologies.

In Report #4, listed under "Publications", Koomey examines market issues related to energy efficiency in new office buildings.

Institutional Issues: As discussed by Kulakowski (see #6 under "Publications" below), potential factors involved in the decisions of large institutions to make energy-efficient investments include: inconsistent application of budgeting procedures, predominance of payback period as a decision-making tool, existence of split incentives, moderate transaction costs facing certain energy-efficiency project proposals, effective communication to management of the results of energy-efficiency programs, and particular incentive problems faced by firms with on-site power generation.

Also see Report #4, listed under "Publications", for discussion of institutional issues related to energy efficiency in new office buildings.

Individual Consumer Issues In attempting to understand consumer decision-making with respect to the purchase of energy-using technologies, we examine issues such as the following:

  • the effects of transaction costs on consumer decision-making,
  • the tendency of consumers to overemphasize initial appliance cost at the expense of future benefits,
  • the lack of importance, for certain consumers, of the relatively small dollar savings achieved through energy-efficient investments, and
  • the role of uncertainty regarding future benefits from efficiency investments.

See Publications #8, 9, and 11, listed under "Publications" below, for discussion of individual consumer decision-making.

Narrowing the Gap: Numerous policies and programs can be helpful in closing the efficiency gap; these include minimum efficiency standards for equipment, tax credits for efficient equipment, building codes, and EPA's and DOE's ENERGY STAR® voluntary labeling programs, which are designed to identify and promote energy-efficient products.

In Report #4, listed under "Publications" below, Koomey examines the justifications for policies to promote energy efficiency in new office buildings. The report discusses technical evidence for market failures and other sources of divergence from optimal energy efficiency, and explores design, construction, and leasing processes to determine key leverage points for policies.

Project Staff

Alan H. Sanstad
Jonathan Koomey

Key Data

Analysis spreadsheets documenting the internal rate of return calculations for both F40 ballasts and F96 ballasts as reported in Koomey et al 1995 (#5 in Pubs list below). Each file is in Excel 97/98 format, and each is about 2.5 MB.



Graph depicting how transaction costs can make an individual's incentive to purchase a more energy and cost-efficient technology diverge from society's interest in the individual purchasing a more energy-efficient device. It also depicts how targeted programs and policies can reduce transaction costs for the more efficient product, and make the individual's interest coincide with society's interest. In Microsoft PowerPoint 97/98 format.


1. Golove, William and Joseph Eto. 1996. "Market Barriers to Energy Efficiency: A Critical Reappraisal of the Rationale for Public Policies to Promote Energy-Efficiency." Berkeley, CA: Lawrence Berkeley National Laboratory. Report No. LBL-38059. March. Download file. | Other publications by this group.

2. Howarth, Richard B., and Alan H. Sanstad. 1995. "Discount Rates and Energy Efficiency." Contemporary Economic Policy 13(3): 101-109.

3. Huntington, Hillard, Lee J. Schipper, and Alan H. Sanstad, editors. 1994. "Markets for Energy Efficiency" (Editorial). Special Issue of Energy Policy. October.

4. Koomey, Jonathan G. Energy Efficiency in New Office Buildings: An Investigation of Market Failures and Corrective Policies. 1990. Doctoral Dissertation for the Energy and Resources Group at the University of California, Berkeley. Download pdf file.

5. Koomey, Jonathan G., Alan H. Sanstad, and Leslie Shown. 1995. "Magnetic Fluorescent Ballasts: Market Data, Market Imperfections, and Policy Success." Berkeley, CA: Lawrence Berkeley National Laboratory. Report No. LBL-37702. December. (A condensed version of this study was published in Contemporary Economic Policy (vol. XIV, no. 3, pp. 98-111) in July 1996 under the title "Energy-Efficient Lighting: Market Data, Market Imperfections, and Policy Success." A summary of this paper is also available.

6. Kulakowski, Susan L. 1999. "Large Organizations' Investments in Energy-Efficient Building Retrofits." Berkeley, CA: Lawrence Berkeley National Laboratory. Report No. LBNL-40895. May. Abstract | 280k pdf file

7. Levine, Mark, Jonathan G. Koomey, James E. McMahon, Alan H. Sanstad, and Eric Hirst . 1995. "Energy Efficiency Policy and Market Failures." Annual Review of Energy 20: 535-555.

8. Sanstad, Alan. 1998. "Is Energy Efficiency Worth it? Individual Decision-Making and the Losses from Under-Investment." Draft paper prepared for the Environmental Protection Agency Workshop on Energy Efficiency and Microeconomics in Berkeley, CA, December 1998. LBNL report in progress.

9. Sanstad, Alan H., Carl Blumstein, and Steven Stoft. 1995. "How High are Option Values in Energy-Efficiency Investments?" Energy Policy 23(9): 739-744.

10. Sanstad, Alan H., Jonathan G. Koomey, and Mark D. Levine. 1993. "On the Economic Analysis of Problems in Energy Efficiency: Market Barriers, Market Failures, and Policy Implications." Berkeley, CA: Lawrence Berkeley National Laboratory. Report No. LBL-32652. January.

11. Sanstad, Alan H., and Richard B. Howarth. 1994. "Consumer Rationality and Energy-Efficiency." In Proceedings of the 1994 ACEEE Summer Study on Energy-Efficiency in Buildings, Volume 1: Human Dimensions. Washington, DC: American Council for an Energy-Efficient Environment.

12. Sanstad, Alan H. and Richard B. Howarth. 1994. "'Normal' Markets, Market Imperfections, and Energy Efficiency." Energy Policy 22(10): 811-818.

Other Resources

U.S. Department of Energy, Energy Efficiency and Renewable Energy Network (EREN): This part of DOE promotes the development and adoption of efficiency and renewable energy technologies. It also works with EPA to design voluntary programs to promote energy efficiency and reduce pollution.


EPA's Green Lights Program

Website of Stephen DeCanio, professor of economics at University of California at Santa Barbara. This site has links to numerous papers about the market for energy efficiency, institutional behavior, and consumer behavior.