Impact of standards and labeling program on

consumer discount rate

40th Annual IAEE International Conference

Manisha JainProf. Anand Rao and Prof. Anand Patwardhan

Interdisciplinary Program on Climate Studies, IIT Bombay

June 21, 2017

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Outline of the presentation

1 Background

2 Method

3 Results

4 Conclusion

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End use e�ciency

Demand side management (DSM) to promote adoption ofenergy e�cient technology

Trade-o↵ between initial higher capital cost and future energysavings.

Cash flows spread over time- use of discount rates

Econometric models and techno-economic studies showconsumer apply high discount rates

High implicit discount rates indicate presence of marketimperfections

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Market imperfections and policy intervention

Inadequate information - Appliance labeling, e�ciencystandards, consumer awareness

Indi↵erence to energy costs - E�ciency standards, voluntaryagreements

Lack of access to capital - Financial incentives - rebates, loans

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Estimates of discount rates

Hausman (1979): 20% in air conditioner purchase decision -1975-76; Energy guide- 1980; ENERGY STAR -1992

Gately (1980): 45-300% in refrigerator purchase decision; beforeintroduction of labels

Meier and Whittier (1983): -20% - 120% in refrigerator purchasedecision; before introduction of labels

Train (1985): review of studies estimating discount rates tillmid-1980s

Min et al. (2014): >100% in light bulbs; consumers are shown theinformation on the labels and not the labels

Matsumoto and Omata (2017): 11.7% - 312% in air conditioner;prior to mandatory labeling

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Appliance labeling

Labels provide information onelectricity consumption

Studies show that consumersplace positive value on labels

Research on consumerwillingness to pay for highere�ciency as indicated onlabels is limited

Impact of appliance labels onconsumerpreferences/discount rates

Important input to the designof DSM programs

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Research Questions

Do consumers use information on labels to trade-o↵ betweencapital and operating costs?

What are the discount rates implied from their purchasedecisions?

Does awareness about star labeling program impact consumerdiscount rate (CDR)?

Are the CDR and the impact of S&L program on the CDRsimilar for the two chosen appliances?

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Standards and labeling program in India

Launched in 2006 by the Bureau of Energy E�ciency (BEE)

Comparative star-labeling system - higher numbers of stars implylower electricity consumption for same level of service

21 appliances covered; mandatory for four appliances including roomair conditioners and refrigerators

4-star rated air conditioner 3-star rated refrigerator

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Market share of di↵erent star rating

Air conditioner

Refrigerator

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Research design

Discrete choice model; statedpreference method; estimates WTP fordi↵erent star ratings

Di↵erence in the WTP for di↵erent starratings gives the marginal WTP for onestar rating over the other

Operating cost -using informationgiven on labels

Incremental price for every unit savedin operating cost - CDR is calculated

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Calculation of WTP and CDR

WTP = WTP5�star

�WTP3�star

Saving = OC3�star

� OC5�star

; OC is the operating cost inRs/year

wtp = WTP

Saving

wtp = 1(1+r) +

1(1+r)2 + ....+ 1

(1+r)n ; n is the life of the appliance

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Study area and data

Sample survey - 302 households in Mumbai suburban district

Total population in Mumbai suburban district as per 2011 censuswas 9.36 million and number of households were 2 million

Mean household size of the population is 4.4; the mean householdsize of the sample is 3.7

Mean number of dwelling rooms in the population is 1.5; the meannumber of dwelling rooms in the sample is 1.8

Mean age of the population (age greater than 18 years) is 38; themean age of the respondents in the sample is 37.2

The proportion of females in the population is 46%; the proportion offemales in sample is 37.4%

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Label awareness and belief

Do you believe higher starrating models consume less

electricity?

Do you know that star labelsconvey information on

electricity consumption?

Have you heard about starrating label on electrical

appliances?

0 50 100

150

200

250

300

YesNoCan’t say

Prior knowledge about star rating interacted with the star ratingattributes

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Results (1/3)

Implicit values on star rating (|) WTP for higher star rating (|)

Air conditioner

2-star 3-star 5-star 3-star 5-star

-562 3,669 8,497 2-star 4,231 9,0603-star 4,829

Refrigerator

3-star 4-star 5-star 4-star 5-star

3,144 2,409 6,482 3-star -735 3,3384-star 4, 073a

Estimates in bold are statistically significant at 95% confidence levela Significant at 90% confidence level

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Results (2/3)

WTP for higher star rating (|)

Air conditioner

Heard Not Heard

3-star 5-star 3-star 5-star

5,468 11,724 1,400 2,961

6,256 1,561

Refrigerator

4-star 5-star 4-star 5-star

24 6,633 2,501 4,327

6,609 1,827

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Results (3/3)

Air conditionerI Consumer trade-o↵ between capital and operating cost using

star rating; discount rate - 16-23%I Consumer unaware are indi↵erent to star ratingI Consumer aware have higher WTP- discount rate - 10-15%

RefrigeratorI Consumer place positive value on 5-star rating onlyI Consumer unaware are indi↵erent to star ratingI Consumer aware have high WTP -

F discount rate - <4%F WTP is similar irrespective of star rating

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Conclusions

It is likely that in the absence of appliance labels consumers maynot di↵erentiate between di↵erent levels of e�ciency in bothappliances

Trade-o↵ between capital and operating cost in air conditionersfacilitated by information on labels

I High energy consuming applianceI Seasonal; prior perception about energy cost

High preference for e�ciency independent of the savings inrefrigerators

I Consumer perception - high e�ciency correlated with otherdesirable attributes

I Not seasonal - inadequate information on energy costs

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Acknowledgement

This work is supported by the Department of Science andTechnology, Government of India, through project titled ”IITB-Centreof Excellence in Climate Studies (11DST078)”.

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Thank you for your attention!

Questions, comments and suggestions!email: manisha0109@gmail.com

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References

Gately, D. (1980). Individual discount rates and the purchase and utilization of energy-usingdurables: Comment. The Bell Journal of Economics 11(1), 373–374.

Hausman, J. A. (1979). Individual discount rates and the purchase and utilization ofenergy-using durables. The Bell Journal of Economics 10(1).

Matsumoto, S. and Y. Omata (2017). Consumer valuations of energy e�ciency investments:The case of Vietnam’s air conditioner market. Journal of Cleaner Production 142,4001–4010.

Meier, A. K. and J. Whittier (1983). Consumer discount rates implied by purchases ofenergy-e�cient refrigerators. Energy 8(12), 957–962.

Min, J., I. L. Azevedo, J. Michalek, and W. B. de Bruin (2014). Labeling energy cost on lightbulbs lowers implicit discount rates. Ecological Economics 97, 42–50.

Reddy, A. K. N. (1991). Barriers to improvements in energy e�ciency. Energy Policy , 953–961.

Train, K. (1985). Discount rates in consumer’s energy related decisions: A review of theliterature. Energy 10(12), 1243–1253.

Train, K. (2002). Discrete Choice Methods with Simulation. Cambridge University Press.

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