Heat and light as services

2006-10-29

in The environment

Yesterday, I read about a rather clever idea. Right now, individual homeowners (or renters) make the decisions about what kind of heating, lighting, and insulation to use. Utility firms simply sell them electricity, oil, and gas in order to meet their demands. As such, the firms have no incentive to help people conserve and, despite possible financial incentives to be more efficient, few homeowners will do so. The latter problem is clearly more acute with renters.

The alternative presented is for utility firms to sell a package of lighting and heating services instead. Then, they would have an incentive to cut power consumption and upgrade to more efficient infrastructure. They would also benefit from being able to do so at a much larger scale than individual consumers. Apparently, firms are already doing this in Woking and London.

Given how incredibly wasteful homes are when it comes to energy usage, especially in the UK, this seems like a smart way to changing incentives. Households in the UK use 25% of the total electricity generated, and produce an equivalent amount of CO2. 60% of that energy is used for heating, often in houses that are poorly insulated and were never designed to be kept at today’s room temperatures throughout.

{ 6 comments… read them below or add one }

Tristan Laing October 30, 2006 at 4:20 am

Couldn’t the same goal be achieved by charging people proportionately more for more oil or electricity, based on a logrythm that takes into account their house’s square footage and charges them extra for the ‘extra’ fuel they use to heat the house hotter/less efficiently than a relativly efficient house would need? Then the base rate for fuel can decrease, and people who spend lots to make their houses more energy efficient can save. Allowing firms ot sell a package of lighting and heating services only works for new houses, a very small proportion of the total.

Milan October 30, 2006 at 12:01 pm

Tristan,

Old houses could also sign up for the services.

As for an algorithm of the kind of describe, if studies like the one described in the linked article saying that the average UK home could save £300 a year by insulating better, I really doubt such a complex system would pass the world along better. Plus, there would be considerable costs involved in calculating all the factors you describe.

Anonymous Economist October 30, 2006 at 12:35 pm

Neither an algorithm nor a logarithm is required: a simple formula will do.

Define a standard of heating efficiency for each metre of house circumference. Assign a quantity of heating oil, or gas, or electricity sufficient to heat that area. Then, charge more for usage above that level.

Of course, as Milan indicates, this would involve calculations for every house in the country. It would also not take into account the possibility that some people (say, seniors or those in cold places), might need to use more even if their houses are efficient. Such as the downsides of Stalinist state-control economic models.

The biggest problem with ‘lighting and heating as service’ systems is that they might encourage people to over-consume both. This will, however, be automatically checked. If firms see such behaviour, they can establish their own pricing systems that retain profitability, probably by charging heavy users top-up fees, in the manner of many internet service providers now.

Anonymous@Wadham October 30, 2006 at 2:29 pm

Individual, tradable carbon permits would help solve this and many other problems. Even harder to implement though.

. November 20, 2010 at 6:08 pm
. October 13, 2021 at 5:06 pm

Would you prefer to rent rather than own your new heating system? Insights from a discrete choice experiment among owner-occupiers in the UK

https://www.sciencedirect.com/science/article/abs/pii/S0301421521003931

By offering to rent energy technologies, energy suppliers and other companies may tap into new market segments, allowing them to preserve or increase market shares. Because such rental services can help overcome capital-related and other barriers to energy efficiency, they may also contribute to achieving ambitious energy and climate targets. Yet, empirical analyses of renting energy technologies are scarce. Employing a large-scale discrete choice experiment among owner-occupiers in the United Kingdom, this study explores households’ willingness-to-pay for renting compared to owning their new heating system. The findings obtained from mixed logit models suggest that, on average, participants strongly dislike renting compared to owning their new heating system, in particular owner-occupiers who are older than 70 years. However, about a third of the sample is estimated to prefer renting. On average, participants also value heating cost savings associated with energy-efficient heating systems and longer warranty periods. Finally, the paper discusses implications for policy-makers and for providers of heating system rental services.

Leave a Comment

{ 2 trackbacks }

Previous post:

Next post: