Energy consumption in the end-use demand sectors—residential, commercial,
industrial, and transportation—generally shows only limited change when
energy prices increase. Several factors that limit the sensitivity of end-use
energy demand to price signals are common across the end-use sectors. For
example, because energy generally is consumed in long-lived capital equipment,
short-run consumer responses to changes in energy prices are limited to
reductions in the use of energy services or, in a few cases, fuel switching;
and because energy services affect such critical lifestyle areas as personal
comfort, medical services, and travel, end-use consumers often are willing
to absorb price increases rather than cut back on energy use, especially
when they are uncertain whether price increases will be long-lasting. Manufacturers,
on the other hand, often are able to pass along higher energy costs, especially
in cases where energy inputs are a relatively minor component of production
costs. In economic terms, short-run energy demand typically is inelastic,
and long-run energy demand is less inelastic or moderately elastic at best
[90].
Beyond the short-run inelasticity of demand in the end-use sectors, several
factors make the long-run demand response to changes in energy prices relatively
modest, including:
- Infrastructure—such as the network of roads, rails, and airports—that is
unlikely to be substantially altered even in the long term
- General lack of fuel-switching capability in capital equipment
- Unattractive attributes of some energy-saving equipment, such as differences
in quality or comfort and high cost
- Structural features of energy markets—including builder/owner versus buyer/renter
incentives; incomplete information on energy-using equipment, such as consumption
levels and potential savings; and inadequate price signals to consumers,
resulting from rate design or other issues [91]
Uncertainty with regard to the value of potential energy savings and the
opportunity costs of technology choices for long-lived equipment.
Buildings Sector
In the buildings sector, which includes residential and commercial end
uses, building structures are long-lived assets that affect energy consumption
through their overall design and “shell integrity” against unwanted heat
transfers in or out of the building. A typical building may remain in the
stock for 75 years. Beyond the structure itself, the energy-consuming equipment
in a building typically lasts from 10 to 30 years. As a result, adjustments
to the stock of buildings and equipment take many years, even if energy
prices change dramatically. Because most previous disruptions in energy
prices have been transitory, there is little evidence to indicate how quickly
and how much the buildings sector could respond to a decades-long trend
of increasing energy prices.
Limited capability for fuel switching is the rule rather than exception
for equipment in buildings. In the residential sector, consumers have some
limited choices between electricity and other fuels for a given energy
service. For example, the thermostat on a natural gas water heater can
be adjusted to reduce the use of the electric heating element in a clothes
washer or dishwasher. In the commercial sector, some boilers have true
dual-fuel capability; however, fuel-switching opportunities are available
for only 3 percent of commercial buildings, accounting for 16 percent of
total commercial floorspace, which use both oil and natural gas as fuel
sources [92].
In some cases, energy services provided by more efficient equipment may
be less desirable, and consumers may be slow to adopt the more efficient
option when energy prices are high. For example, early versions of compact
fluorescent lights (CFLs) had several quality issues, including bulky sizes
that did not fit standard fixtures, poor light quality (flickering, poor
color rendering, low light levels), and premature failures that caused
life-cycle energy savings to be less than advertised [93]. Today’s CFLs
typically perform much better than the early models, and they are much
less expensive. Even with those gains, however, some of their features
remain less desirable than those of incandescent lights. CFLs typically
have a warmup period, requiring several seconds to reach full output, and
they cannot be dimmed. Other examples include lower outlet air temperatures
for heat pumps than for other heating equipment and slower recovery times
for heat pump water heaters.
Structural features of energy markets also contribute to the limited demand
response. For example, investment decisions often are made by home builders,
landlords, and property managers rather than the energy service consumers.
In such cases, the decisionmakers may prefer to purchase and install less
costly, less efficient equipment, because they will not pay the future
energy bills. Builders may choose less efficient equipment or offer fewer
options to buyers in order to reduce design costs and increase profitability,
even though consumers might be willing to pay higher home purchase prices
or higher rents if they could lower their energy bills over the long term.
A related issue arises from the inability of most consumers to evaluate
the tradeoffs between capital cost and efficiency. Green building rating
systems, such as the EPA’s ENERGY STAR and DOE’s Building America, do attempt
to provide reliable information on the energy efficiency of buildings and
potential energy savings [94].
In addition, because building equipment generally is expected to last for
more than 10 years, many tenants will move before their cumulative energy
savings can make up for the added expense of installing energy-efficient
equipment. Residential homeowners on average stay in the same house for
only 8 years [95], and while the value of potential energy savings might
be expected to increase the sale price of a house, there are no guarantees
(although there is some evidence that energy efficiency investments are
capitalized in a home’s market value) [96].
Replacement of equipment before failure is uncommon in buildings, especially
in the residential sector. An example often cited is replacement of water
heaters. Typically, a consumer waits until the water heater completely
fails before replacing it. Because the failure creates considerable inconvenience,
the consumer is likely to buy a new water heater as quickly as possible,
without comparing price and efficiency tradeoffs before making a purchase
decision. In the commercial sector, an exception is lighting retrofits,
which often are made before the existing equipment wears out.
The potential for disruption of operations during equipment replacement
can also affect decisions by purchasers, especially in the commercial sector,
where energy costs are only a small fraction of business expenses for a
typical commercial establishment. Efficiency investments may not be seen
as cost-effective if the cost of the disruption outweighs potential savings,
as is often the case with retrofits to improve the efficiency of building
shells.
Demand response can also be attenuated by price signals that are incomplete
or do not represent marginal costs. For example, because residential renters
often pay electric bills but not natural gas bills, they may see the costs
of air conditioning (electric) but not heating (natural gas, except for
the electricity that powers the fan in a forced-air furnace). In commercial
buildings, energy consumption choices (turning off computers or lights,
for example) often are made by office workers who see no cost implications.
Residential consumers, who typically see only monthly electric bills based
on average costs, have no incentive to reduce their use of air conditioning
on peak days. Under nonseasonal time-of-use rates, they would pay the higher
marginal cost; but nonseasonal time-of-use rates currently are available
in only about 5 percent of the residential market. For commercial customers,
who tend to be larger consumers of electricity, the additional cost of
more sophisticated demand metering or nonseasonal time-of-use metering
is less significant, and their rates more often approximate the marginal
cost of the electricity they use.
Industrial Sector
The industrial sector is more responsive to price changes for all inputs;
however, the speed at which operational changes can be introduced to mitigate
the cost impacts of rising energy prices is limited. Limitations arise
from the fuel mix required by the existing capital stock (for example,
it is not feasible in general to operate a natural-gas-fired boiler using
coal), slow stock turnover, and falling capital investment rates. In addition,
a strategy to reduce the demand for energy services by reducing production
rates could prove to be more costly than the value of the energy savings
if the reduction in output increased the probability of losing market share,
reduced overall profitability, or led to contractual penalties.
Over a longer period, existing equipment could be scrapped and replaced
with new equipment that uses different fuels or uses the same fuel more
efficiently. The investments required to implement such changes would,
however, compete with other uses of the funds available. Given the inherent
uncertainty of energy prices, firms may be less than eager to invest in
such measures as alternate fuel capability. Because most energy prices
rise and fall together, dual-fuel investments may not be expected to have
attractive paybacks. If high energy prices were sustained, however, companies
might find previously neglected opportunities to reduce energy losses resulting
from poor maintenance or other housekeeping items. Further, firms might
find low-cost or no-cost options for reducing energy expenditures while
maintaining the same level of energy services [97]. Successful examples
include motor system optimization and steam line insulation, with implementation
costs recovered in less than 1 year [98].
Energy costs account for only 2.8 percent of annual operating costs for
U.S. manufacturing [99]. As a result, energy-saving investments may be
less important than other factor-saving investments. Indeed, if energy
prices rose substantially, corporate cash flow and the financial capital
available for such investments could be reduced.
According to EIA’s 2002 Manufacturing Energy Consumption Survey (MECS),
more than 90 percent of petroleum consumption in the manufacturing sector
is in the form of feedstocks [100]. In 2002, the sector’s petroleum consumption
for energy totaled only 450 trillion Btu, of which 140 trillion Btu was
reported as switchable. Consumption of natural gas in the manufacturing
sector totaled 6.5 quadrillion Btu in 2002, about 10 percent of which was
used for feedstock. The 2002 MECS data indicate that 18 percent of the
natural gas used for energy could be switched to another fuel, primarily
petroleum. If all such switching did take place, the sector’s petroleum
consumption for energy would more than triple, increasing by 1 quadrillion
Btu.
In summary, the manufacturing sector does respond to higher factor input
prices, including energy prices, but energy expenditures do not constitute
a large portion of most manufacturers’ operating costs. Over time, however,
the overall energy intensity of manufacturing does tend to decline in response
to higher energy prices [101].
Transportation Sector
In the transportation sector, when consumers seek out energy-saving products
and other cost-effective ways to service their travel needs, the energy
cost savings are weighed against the perceived value of other factors considered
in the decisionmaking process. Those factors include—but are not limited
to—mobility, safety, comfort, quality, reliability, emissions, and capital
cost.
The transportation sector is served primarily by four modes of travel:
highway, air, rail, and water. Most of the energy consumed in the transportation
sector is for highway vehicle travel, which accounts for approximately
85 percent of total consumption, followed by air (9 percent) and rail and
water (6 percent combined). Energy consumption in the transportation sector
consists almost exclusively (98 percent) of petroleum fuels. Thus, when
there are appreciable increases in fuel prices, opportunities for reducing
fuel expenditures through fuel switching are limited. As a result, savings
can be realized only through reductions in travel demand, mode switching,
improvements in system efficiency, and/or improvements in vehicle fuel
efficiency.
The amount of efficiency improvement that could potentially be achieved
varies greatly across modes and is limited by infrastructure constraints,
vehicle lifetime and use patterns, and vehicle design criteria. For example,
rail is a very energy-efficient way to move freight, about 11.5 times more
energy-efficient on a Btu per ton-mile basis than heavy trucks. Opportunities
for efficiency improvement in the rail mode are minimal, limited primarily
to increases in system efficiency through higher equipment utilization
and more efficient equipment operation—for example, by using unit and shuttle
trains and by reducing locomotive idling. Limits are imposed by very long
equipment lives, available infrastructure, and vehicle duty cycles. Similarly,
waterborne travel is very efficient, and opportunities for energy savings
are limited to improvements in system efficiency.
Air travel is serviced by a very competitive industry with significant
investments in long-lived capital stock that operates in a constrained
infrastructure. Immediate improvements in fuel efficiency can be gained
through increased utilization of available infrastructure and increased
load factors (ratio of passengers to available seats), but the desire of
each company to maintain or increase market share limits opportunities
for market players to act.
Long-term efficiency gains in air travel are realized through the adoption
of technologies that improve either infrastructure efficiency (increased
aircraft throughput at gates) or aircraft fuel efficiency (improved engine
efficiency and lightweight materials); however, efficiency losses that
result from changes in market structure to meet continued demand for increased
flight availability and convenience generally cancel out efficiency gains.
For example, the amount of air travel serviced by regional jets, which
are about 40 percent less efficient than narrow-body jets, continues to
increase as consumers look for improved destination and flight availability.
As the share of the market served by regional jets increases, the overall
fuel efficiency of the active aircraft stock is reduced, regardless of
gains in the efficiency of larger aircraft.
Unlike the other transportation modes, highway vehicles have a relatively
short life. The average age of the existing passenger car fleet is 9 years,
and the average age of trucks (light and heavy) is 8 years, reflecting,
in part, the shift toward light trucks for personal transportation over
the past decade. In addition, the car stock turns over at a rate of about
6 percent per year. Heavy truck stocks turn over at a much slower rate,
approximately 4 percent per year. Those slow stock replacement rates, coupled
with consumer attitudes toward fuel economy improvement relative to other,
more highly desired vehicle attributes, make it difficult to realize short-term
increases in fuel economy for the vehicle stock as a whole.
Further limiting increases in vehicle fuel economy is the scarcity of cost-effective
alternatives within the vehicle categories preferred by consumers. Whether
the consumer rates the desirability of a vehicle purchase by quality, safety,
seating capacity, storage capacity, towing capacity, luxury, or performance,
once the criteria are established they limit the vehicle types considered.
For example, someone shopping for a van or sport utility vehicle is unlikely
to view a compact as a viable alternative.
In addition to efficiency improvements made within a mode, transportation
efficiency can be improved by switching to more efficient modes of travel.
For example, passenger and freight travel can be served by a variety of
travel modes (highway, air, and rail), with mode selection determined by
cost of service, access, convenience, mobility afforded, and time budgets.
When energy prices increase, consumers seeking reductions in travel costs
examine the expected savings associated with alternative mode choices in
relation to the values placed on other considerations. For most consumers,
alternative mode choices are limited, providing little opportunity for
cost reductions. For others, the cost savings that would result from the
choice of an alternative mode of travel are likely to be outweighed by
the value placed on travel time, convenience, and mobility.
Notes and Sources
Contact: Crawford Honeycutt
Phone: 202-586-1420
E-mail: crawford.honeycutt@eia.doe.gov |