Debate over Furnace Efficiency Standards Heats Up

The Department of Energy (DOE) recently proposed increasing energy efficiency standards for residential gas furnaces. While the regulation pursues multiple goals, the agency's case for establishing the standard ultimately rests on its claim that forcing consumers to purchase more energy-efficient furnaces will save consumers money. However, the agency's approach to energy efficiency is flawed. Studies suggest that the agency's estimates may be too optimistic, and consumers may not actually realize the promised energy savings. In addition, a growing market for products that helps consumers chose more efficient products renders the DOE's regulation redundant.

The DOE estimates that the new energy standard would make consumers pay an extra $494 for a more efficient model, but would save about $636 in lower operation costs. Consequently, the agency assumes that it would be rational for most consumers looking to upgrade their furnace to opt for the efficient model.

Yet, this leads us to a puzzle: If it is rational and highly beneficial for consumers to purchase a more efficient furnace model, why would they need to be forced into this decision through a federal regulatory standard? One possible explanation for the seemingly irrational consumer behavior is that the problem is not with consumers, but with the DOE's estimates.

One recent study examined the DOE's Weatherization Assistance Program, which helps low-income families improve energy efficiency of their homes by, among other things, paying for furnace replacement. The study found that the DOE's models used to calculate the expected energy savings actually overestimated the savings 2.5 times. The study notes that the DOE uses similar models to estimate the energy savings for energy-efficiency standards for residential appliances. Other studies similarly found that actual energy savings received by consumers are only a fraction of the original estimates.

Another problem is that consumers are different. Given the wide variety of consumers' income levels, access to credit and energy usage patterns, some consumers would not benefit from paying a higher price for the most energy-efficient furnace. According to the DOE's analysis, one in five consumers would be worse off as a result of the standard. This ratio is even higher for low-income consumers.

The DOE asserts that consumers are myopic and, left to their own devices, will underestimate the projected energy savings from buying a more efficient furnace model. Yet, even if that were the case, there are less intrusive ways to help consumers account for the future energy costs. For example, the Energy Guide label, which most appliances have to display, provides consumers the furnace's energy-efficiency rating. Since all furnaces use the same rating system, the label allows consumers to easily compare energy efficiency across different models. Studies found that the label increased consumers' willingness to pay for more efficient appliances in order to reduce future energy costs. The effect was large enough to offset consumers' myopia.

In addition, private companies provide tools that consumers can use to easily compare the energy savings from more efficient furnaces. For example, Opower teams up with utilities around the country to provide utility customers feedback on energy use through its Home Energy Report, which is included with the monthly utility bill. The distinct feature of the report is that it not only provides information on the household's energy consumption, but also shows how the household stacks up against its neighbors. The company harnesses the power of social norms to incentivize consumers. As a result, Opower's customers have reduced energy use by approximately 2 percent, in many cases by upgrading their appliances.

The advantage of market solutions is that they do not impose a single solution on all consumers. Given the difference among consumers and the possibility that the DOE overestimated the potential energy savings, it is important to let consumers decide what purchasing decision makes sense in their specific circumstances. Instead of imposing a single standard on all consumers, the DOE should let markets help consumers make an informed choice.