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EMF WP 13.4: Models of Individual Energy Technology Choice: Their Implications for Energy Technology Market Participants and Policy-Makers

In order to effectively influence individual end-use energy technology choices, energy technology vendors, service providers and policy-makers must understand the decision process of technology adopters. This requires that the technology characteristics which consumers consider to be important be identified, along with the consumer’s level of awareness of available technology alternatives, and the costs and benefits they believe to be associated with the refinement of their technology choice. At present, this decision process is most commonly represented by a simple net present value criteria which assumes that the decision maker has full, costless information and seeks only to minimize the expected life cycle cost, regardless of technology service quality differences or relative levels of uncertainty about technology cost and performance. The unreasonableness of these assumptions, together with the widely noted descriptive failings of such models, motivates the more careful analysis of the characteristics of energy technology decisions and the development of alternative decision models found in this paper. In particular, seven principle characteristics of energy technology choices are identified, and are used to motivate four different types of models. The appropriate model for a given energy technology decision can then be determined by identifying the subset of the seven characterizes pertinent to the technology in question, and then choosing the model type most capable of addressing those characteristics. A sample calculation for each of the model types above is presented in the appendices.

Both the seven decision characteristics identified and the improved modeling methods presented provide new insight into consumer energy technology choices. The “paradox” of the apparent in efficiency of many individual energy technology decisions is found to result primarily from the small scale and infrequent nature of the energy technology decisions of individuals, rather than from market failures. However, the conclusions of the economic theory regarding the efficiency of market outcomes are not found to hold for most energy technology markets, since energy technology investment opportunities are for the most part proprietary (because they live in private homes and buildings) rather than freely available, as the efficiency theorems of economics require.

If energy technology investment opportunities were freely available, they could be optimally exploited by large firms run by energy technology experts, operating at a scale sufficient to legitimize the assumption that the fixed cost of developing energy technology expertise can be ignored for individual decisions. Instead, given the proprietary nature of most energy technology investment opportunities, the key to improving the quality of energy technology decisions, and to the realization of profits by energy technology experts, exists the provision of expert advice and services to individual decision makers, whose own energy technology investment opportunities are not of sufficient scale to make their own development of energy technology expertise worthwhile to them. Policy makers can best contribute to this process by seeking ways to facilitate and encourage methods of substituting the energy technology decision making capacity of a third party expert for that of the non-expert possessor of the energy technology investment opportunity.