Market Barriers to Energy Efficiency: A Critical Reappraisal of the Rationale for Public Policies to Promote Energy Efficiency

This report reviews current perspectives on market barriers to energy efficiency. Ratepayer-funded utility energy-efficiency programs are likely to change in scope, size, and nature as the deregulation process proceeds; our research focuses on understanding to what extent some form of future intervention may be warranted and how we might judge the success of particular interventions, especially those funded by ratepayers. We find that challenges to the existence of market barriers have, for the most part, failed to provide a testable alternative explanation for evidence suggesting that there is a substantial "efficiency gap" between a consumer's actual investments in energy efficiency and those that appear to be in the consumer's own interest. We then suggest that differences of opinion about the appropriateness of public policies stem not from disputes about whether market barriers exist, but from different perceptions of the magnitude of the barriers, and the efficacy and (possibly unintended) consequences of policies designed to overcome them. We conclude that there are compelling justifications for future energy efficiency policies. Nevertheless, in order to succeed, they must be based on a sound understanding of the market problems they seek to correct and a realistic assessment of their likely efficacy. This understanding can only emerge from detailed investigations of the current operation of individual markets. We strongly recommend continued inquiry along these lines.