CBA of the Home Energy Saving scheme

The SEAI has released its cost-benefit analysis of the Home Energy Saving scheme, which concludes that for every euro invested, five euros were earned. More money to the SEAI so, and the economic crisis will soon be over.

Intriguingly, the results for the HES are in sharp contrast to the evaluation of the Warmer Homes Scheme — which found that the subsidies had no statistically significant impact on behaviour — and the evaluation of the Green Homes Scheme — which found net losses.

The evaluation of the HES leaves some things to be desired. For optical reasons, it may be better to commission an independent outsider to do the evaluation. Instead, SEAI staff evaluated an SEAI programme.

The cost is assumed to equal the sum of the public and private expenditure. The HES is a price subsidy. It increases the consumer surplus, by less than the total subsidy. The net cost is the difference. Private expenditure does not enter that calculation.

The study ignores changes in producer surplus. These are probably small, if we assume that investment is displaced.

Benefits are the energy savings and the avoided carbon dioxide, . The study assumes that only 18% of the investment in energy saving would have been made without the subsidy. This is in contrast to the Greener Homes evaluation, which finds that roughly half of the investment would have been made anyway, and the Warmer Homes evaluation, which finds that almost all of the investment would have been made without the subsidy.

Energy saved and CO2 avoided are discounted at 4%. If only that were the opportunity cost of public investment.

The study accounts for the VAT paid on energy. Surprisingly, the carbon tax is omitted from the analysis. The HES subsidy is double regulation: Carbon dioxide emissions are taxed, and emission reductions are subsidized. In other sectors of the economy, there is single regulation (carbon tax, or ETS permit price). The HES subsidy thus introduces a distortion in Ireland’s CO2 abatement policy: We abate too much in home energy use and too little elsewhere. This distortion is not quantified in the study.

In sum, this CBA of the HES does not tell us much that is useful. Its conclusions are not supported.

One can assess the HES based on first principles. It is a second-best intervention: Carbon dioxide emission are regulated already. It is an inefficient intervention: It is a fixed subsidy on investment, unrelated to the emissions avoided. It may well be that the HES addresses some imperfection in the market for home improvement (e.g., constrained access to borrowing) but, if so, it is a second-best intervention in that problem too.

If the SEAI had concluded that there was a benefit of 80 cents for every euro invested, I probably would have believed them.

10 thoughts on “CBA of the Home Energy Saving scheme”

  1. Not that it effects the substance of any of your points, and correct me if I’m wrong, but from my reading the authors do not assume “that no investment in energy saving would have been made without the subsidy”. Page 16:

    “It is possible that, as well as stimulating additional take-up, the HES scheme includes some households that would have taken measures without the scheme being in place (deadweight)….In line with an evaluation of the UK Energy Efficiency Commitment (EEC), an 18% deadweight adjustment has been included to reduce benefits (energy and CO2 savings) attributed to the HES scheme… No upwards adjustment is made to savings estimates for potential spill-over effect.”

  2. Energy saved and CO2 avoided are discounted at 4%. If only that were the opportunity cost of public investment.

    The opportunity cost of Irish public investment is the marginal interest rate on Irish public borrowing. Both the IMF and the EU lend to Ireland at below 4%.

    The IMF rate is based on the weighted average of of yields on three-month Treasury bills for the United States, Japan, and the United Kingdom, and the three-month Eurepo rate. (below 3.5%)

    The EFSM and EFSF are lending to us at cost (below 3%).

  3. It is an interesting set of opinions to believe the figures and praise the SEAI when their report agrees with one’s pre-existing beliefs, i.e. Warmer Homes, but to throw out without any evidence one’s own figure to believe and criticise the SEAI when their report doesn’t agree with one’s pre-existing beliefs.

  4. @ Richard

    “One can assess the HES based on first principles”.

    So it works in practice, but it will never work in theory?

  5. @Joseph
    For programmes like the HES, there is a well-established theory and many previous impact studies. Any new estimate should be placed in that context and, if the findings differ from previous estimates, work hard to explain why.

  6. @Richard
    Although the findings/results may be flawed, is the very fact that a CBA has been done and published not broadly speaking positive in its own right?. It would be lovely to see all those Metro North/Dart Unerground CBAs that have been done so we could pick apart the methodlogy, findings etc.

    Also “For optical reasons, it may be better to commission an independent outsider to do the evaluation”. Agree here to some extent, although the optics never look good when the papers lead with “SEAI (insert any public sector organisation/agency as appropriate) spends X on consultants”

  7. @Anon
    I agree on your first point. SEAI should be commended for its openness.

    On your second point, SEAI spent 60 million euro on the HES. Surely, they can spare 0.1% of the budget to hire a consultant?

  8. I recently got a grant of €640 from S.EAI for installing a new
    high-efficiency gas boiler and all the SEAI recommended controls.

    This should save 10% annually on fuel due to the new gas boiler, plus 9%
    saving a year on fuel due to the new controls (according to “Good
    Practice Guide 302”), a total saving of 19% of my annual gas heating
    bill of €1500 annually. Discounting annual savings of say €300 per year
    at 4% over 20 years boiler life (as per footnote 18 of the SEAI report),
    gives a return of €6 in energy-saving per euro of the €640 SEAI grant.

    This is a similar order of magnitude to the €5 per euro claimed by SEAI

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