31

Increased Consumer Response. Residential energy consumers have traditionally been reluctant to invest in energy efficiency, even with ample financial benefits. Many market barriers tend to create what are known as high hurdle rates for consumer investments in energy efficiency. As of 1993, 35 percent of all homes were occupied by renters," most of whom were responsible for paying energy bills but not for purchasing major energy-consuming appliances. Such households tend to buy the least expensive equipment on the market, which also tends to be the least energy-efficient. The same reasoning can be applied to many newly constructed homes as well, because the builders, not the occupants, are tasked with equipping them with most of the major energy-using appliances. Other barriers include equipment availability (e.g.. whether plumbing contractors have high-efficiency water heaters available when they make service calls) and lack of information. To examine the effects that lower hurdle rates could have on both energy prices and expenditures in the carbon reduction cases, and at the same time differentiate those effects from the effects of technological advances,

31 Energy Information Administration, Housing Characteristics 1993.

an increased consumer response sensitivity case vz analyzed. This sensitivity case includes assumptions lower discount rates, higher short-run elasticities demand, greater inclination to change fuels when pur chasing equipment, and lower growth in miscellane electricity use.

Impacts of Increased Consumer Response Advanced Technology. In order to gauge the impati assumptions regarding technological advancement consumer behavior with respect to delivered energ consumption, sensitivity cases were analyzed relative the 1990+9% case where delivered energy prices we the same across all cases. These cases serve to isolate impact of each of the key variables separately, and t understand the impact of implementing the sensitivite simultaneously. This section evaluates the relate impact that each of these concepts could have on futur energy intensity at a price level realized in the 1990-9

case.

Changes in technological development and the valu residential consumers place on energy related issues ca significantly affect the pattern of energy consum tion-and carbon emissions-in the future. The aval ability of high-efficiency technologies in itself does not guarantee increased energy efficiency. Without the will ingness of consumers to purchase the more efficient products, which usually cost significantly more, technology may not have much of an impact on future energy consumption patterns. Conversely, in a world where energy conservation was of paramount concert to energy consumers, yet at the same time highefficiency products were unavailable, future energy consumption patterns would probably not be greatly affected either.

Given the detailed nature regarding technological development and consumer choice with regards to dif ferent technologies, it is important to analyze the results at the technology level, as well as the overall level. With nearly 40 million households (38 percent) using electric water heaters in 1995, and given the relatively high intensity associated with using electric water heaters. the projected impact of increased energy efficiency can have a large impact on future electricity use for this serv ice. Electric resistance water heaters have traditionally exhibited slow growth in energy efficiency. In fact, the highest efficiency unit available today is not likely to see any efficiency improvement due to thermal limits and diminishing returns on controlling heat loss." This implies that future gains in efficiency for electric water

heating must be achieved through the increased penetration of electric air-source heat pump water heaters. which achieve higher efficiency levels by extracting heat from the air surrounding the unit. The current cost of this technology, however, is several times that of a traditional resistance unit, and coupled with observed implicit discount rates of over 100 percent, has led to very limited market penetration.

34

Assumptions regarding technological advances through improved performance and reduced cost, as well as changes in consumer behavior, can significantly affect the market penetration of emerging technologies. Figure 36 details the relative importance of varying assumptions regarding technological advances and consumer behavior with respect to the intensity of the electric water heating end use. Relative to the 1990+9% case, intensity drops faster when assumptions regarding consumer behavior are changed, as compared to changes in technology characteristics. Over time, however, the intensity decline in the technology case outpaces that projected for the behavior case as more and more equipment is purchased at higher efficiency levels. Combining both sets of assumptions, that is, changing both technology characteristics and consumer behavior together, results in over a 25 percent decline in energy intensity for electric water heating over time. This indicates that a combination of both technology and consumer behavior changes can bring about large declines in energy intensity for this service, all else being equal.

Overall annual energy consumption per household, or energy intensity, for these sensitivity cases follows the general pattern described for electric water heating. Again, technology advances exhibit a greater potential for energy intensity decline in the long run (Figure 37). but the combination of the two cases yields roughly half of the intensity decline projected for electric water heating. This is due to the fact that all other major technologies exhibit much lower observed hurdle rates and less range in terms of high-efficiency products. For example, natural gas furnaces, the largest energy consuming product class in terms of delivered energy in the U.S., has already matured in terms of product efficiency, and at the same time hurdle rates are at 15 percent.

The commercial sector is currently the smallest of the four demand sectors in terms of energy use, accounting for 11 percent of delivered energy demand in 1996. The commercial sector is also responsible for fewer carbon emissions than the other sectors, emitting 230 million metric tons, or 16 percent of total U.S. carbon emissions, in 1996. The sector has a larger share of emissions than its share of energy use because of the importance of commercial electricity use. The emissions associated with electricity-related losses are included in the calculation of emissions from electricity use.

Several factors determine energy use and, consequently. carbon emissions in the commercial sector. One of the most important is floorspace. Building location, age, and type of activity also affect commercial energy use. Currently, total commercial floorspace in the United States exceeds the area of the State of Delaware and amounts to about 200 square feet for every U.S. resident. Mercantile (retail and wholesale stores) and service businesses are the most common type of commercial buildings, and offices and warehouses are also common."

35

Because of the relatively long lives of buildings, the characteristics of the stock of commercial floorspace change slowly. Over half of the commercial buildings in the United States were built before 1970, and the reference case used for this analysis projects that total commercial floorspace will grow at about the same rate as popula tion, 0.8 percent annually, through 2020. This limits the effects that new, more efficient building practices can achieve in the near term, but as time passes and building stock "turnover" occurs, current and future building practices will have a greater effect on commercial energy

use.

The composition of end-use services is another determinant of the amount of energy consumed and the type of fuel used. The majority of energy use in the commercial sector is for lighting, space heating, cooling, and water heating. In addition, the proliferation of new electrical devices, including telecommunications equipment, personal computers, and other office equipment, is spurring growth in electricity use. Electricity use currently accounts for 45 percent of delivered energy consump tion in the sector, and that share is projected to grow to about 48 percent by 2010 in the reference case.

Consideration of end-use services leads to another determining factor in commercial energy consumption-the effects of turnover and change in end-use technologies. The stock of installed equipment changes with normai turnover as old, worn-out equipment is replaced and new buildings are outfitted with newer versions of equipment that tend to be more energy-efficient.

Equipment with even greater energy efficiency is expected to be available to commercial consumers in the future. Energy prices have both short-term and long term effects on commercial energy use. Fuel prices influ ence energy demand in the short run by affecting the us of installed equipment and in the long run by affecting the stock of installed equipment.

Legislated efficiency standards also affect energy use, by imposing a minimum level of efficiency for purchases several types of equipment used in the commercial se tor. Two mandates currently affect commercial appl ances: the National Energy Policy Act of 1992 (P.L. I 486, Title II, Subtitle C, Section 342), which specifically targets larger-scale commercial equipment and fluores cent lighting, and the National Appliance Energy Con servation Amendments (NAECA), which affec commercial buildings that install smaller residential style equipment. Examples include standards for heal pumps, air conditioning units, boilers, furnaces, water heating equipment, and fluorescent lighting. Effects of Technology Availability

and Choice

The degree to which energy-efficient equipment can affect energy consumption, and in turn carbon emis sions, in the commercial sector is limited by the level of efficiency available to commercial consumers and the rate at which more efficient equipment is purchased Technologies for all the major end uses (lighting heat ing, cooling, water heating, etc.) are defined by their installed cost, operating cost, efficiency, average useful life, and first and last dates of availability. These parameters are considered, along with fuel prices at the time of purchase, in the selection of technologies that provide end-use services. Commercial consumers are not assumed to anticipate any future changes in fuel prices when choosing equipment. The commercial sec tor encompasses a wide variety of buildings, and not all consumers will have the same requirements and prion ties when purchasing equipment. Major assumpoons that take these differences in behavior into account and affect commercial technology choices are described

below.

In making the tradeoffs between equipment cost and equipment efficiency, the purchase behavior of the com mercial sector is represented by distributing floorspace over a variety of hurdle rates. Rates of return on invest ments in energy efficiency (referred to in financial par lance as "internal rates of return") are required to meet or exceed the hurdle rate. Floorspace is distributed over hurdle rates that range from a low of about 18 percent to rates high enough to cause choices to be made solely by

tember 1998).

1

= ? minimizing the costs of installed equipment (l.e., future potential energy cost savings are ignored at the highest hurdle rate). The distribution of hurdle rates used in all the cases for this analysis is not static: as fuel prices increase, the nonfinancial portion of each hurdle rate in the distribution decreases.

For a proportion of commercial consumers, it is assumed that newly purchased equipment will use the same fuel as the equipment it replaces. This proportion varies by building type and by type of purchase--whether it is for new construction, to replace worn-out equipment, or to replace equipment that is economically obsolete. Purchases for new construction are assumed to show the greatest flexibility of fuel choice, while purchases for replacement equipment have the least flexibility. For example, when space heating equipment in large office buildings is replaced, 8 percent of the purchasers are assumed to consider all available equipment using any fuel or technology, while 92 percent select only from technologies that use the same fuel as the equipment being replaced. The proportions used are consistent with data from EIA's Commercial Buildings Energy Consumption Survey and from published literature. Considerations such as owner versus developer financing, past experience, ease of installation, and fuel availability all play a role in fuel choice. This assumption also accounts for some of the factors that influence technology choices but cannot be measured. For example, a hospital adding a new wing has an economic incentive to use the same fuel that is used in the existing building. The availability and costs of advanced technologies affect the degree to which they can contribute to future energy savings and carbon emission reductions. Many efficient technologies currently available to commercial consumers could significantly reduce energy consumption; however, their high purchase costs and the current low level of fuel prices have limited their penetration to date. As more advanced technologies mature over time. their costs are expected to decline (compact fluorescent lighting is an example). New technologies, beyond those available today, may also enter the market in the future. For example, the high technology sensitivity case, described below, assumes that by 2005 a triple-effect absorption natural-gas-fired commercial chiller will be widely available, and that "typical" heat pump water heaters will cost 18 percent less than assumed in the reference case.

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The combination of technology and behavior assumptions determines the commercial-sector price elasticity for each of the major fuels—that is, how commercialsector demand projections are affected by changes in energy prices. Specifically, the commercial-sector price elasticity for a particular fuel is the percent change in demand for that fuel in response to a 1-percent change in its delivered price. In the reference case, short-run price elasticities for fuel use in the commercial sector are -0.34 for electricity, -0.39 for natural gas, and -0.39 for distillate fuel oil. Long-term price elasticities in the reference case are higher, reflecting changes in both the use of existing equipment and the adoption rates for more efficient equipment: -0.36 for electricity, -0.44 for natural gas, and -0.45 for distillate fuel oil." The similarity of the short-run and long-run elasticities for electricity has two main causes. First, electric equipment becomes more efficient even with the reference case assumptions, thus reducing opportunities for further reductions when prices are higher. For example, electric lighting efficiency in the reference case increases on average by 0.6 percent per year from 1996 through 2020. Electric space cooling and ventilation improve on average by 1.1 and 0.7 percent per year, respectively, over the same period. Second, miscellaneous electric end uses capture a growing share of commercial electricity consumption and exhibit the same response in the long run as in the short run. Building codes, equipment standards, and improvements in technology costs and performance contribute to reduced energy intensity in the commercial sector (i.e., annual energy consumption per square foot of floorspace) even in the absence of price changes. With constant real energy prices, energy intensity declines on average by 0.1 percent per year through 2010.

Carbon Reduction Cases

In the 1990-3% case, commercial sector energy use in 2010 is projected to be below the 1996 level (Figure 38). and carbon emissions attributable to the commercial sector are projected to be 29 percent below their 1990 levels (Figure 39), despite 1-percent annual growth in commercial floorspace from 1996 to 2010. Projected fuel prices in 2010 in the 1990-3% case are more than twice as high as the reference case projection, and they are higher in real terms than they have been in any year since 1980 (Figure 40). As a result, energy consumption in 2010 is 22 percent lower in the 1990-3% case than in the reference

Reference

1990+24%

1990+14%

1990+9%

1990

1990-7%

1.0

0.9

1996 Reference 1990 1990 1990 +24% 49%

Sources: History: Energy Information Administration, State Energy Price and Expenditure Report 1994, DOE/EIA-0376(94) (Washington, DC, June 1967) Projections: Office of Integrated Analysis and Forecasting, National Energy Modeling System runs KYBASE.D080398A, FD24ABV.D0803988, FDORAB D0803968, and FD038LW.D0803988

Floorspace expansion in the commercial sector will lead to growth in energy consumption if other factors remain the same. Figure 41 removes the effects of floorspace growth by presenting commercial energy intensity in terms of delivered energy consumption per square foot of commercial ficorspace. Although total energy consumption continued to increase when energy prices were rising from 1970 through 1982, commercial energy intensity declined by about 12 percent. Delivered energy intensity in the reference case is projected to remain essentially flat throughout the forecast. Projected commercial sector growth is offset by the availability and continued development of energy-efficient technologies, existing equipment efficiency standards, and voluntary programs such as those for the Climate Change Action Plan. In the carbon reduction cases, with higher energy prices, the energy intensities projected for 2010 are below the 1996 level. The projections for commercial delivered energy intensity in 2010 in the 1990+24%, 1990+9%, and 1990-3% cases are 5 percent, 13 percent, and 21 percent below the reference case projection, respectively.

When energy prices rise, consumers are expected to reduce energy use by purchasing more efficient equip ment and by altering the way they use energy consuming equipment. In addition to buying more effi cient boilers and chillers, commercial customers in the 1990-3% case are expected to choose more heat pumps. heat pump water heaters, and efficient lighting technologies than they would in the reference case (Table 6). The same trends toward purchasing efficient technolo gies and monitoring energy use are projected in the 1990+9% case and in the 1990+24% case, but to a lesser degree than projected for the 1990-3% case.