CREE. How do investments in heat pumps affect household energy consumption? Bente Halvorsen and Bodil Merethe Larsen. Working Paper 6/2013

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1 CREE Woking Pape 6/203 How do investments in eat pumps affect ouseold enegy consumption? Bente Halvosen and Bodil Meete Lasen Te CREE Cente acknowledges financial suppot fom Te Reseac Council of Noway, Univesity of Oslo and use patnes. ISBN: ISSN: ttp://cee.uio.no

2 Abstact in Nowegian: CREE - Woking Pape 06/203 How do investments in eat pumps affect ouseold enegy consumption? Bente Halvosen og Bodil Meete Lasen Økt enegieffektivitet ses ofte som den beste måten å edusee enegifobuket på. Kostnadseduksjonen som følge av et enegieffektiviseingstiltak kan imidletid undegave enegispaingspotensialet av tiltaket fodi en slik kostnadseduksjon nomalt vil medføe at man ønske å ende fobuket. Hvo sto del av spaepotensialet som spises opp av atfedsendingene, og va som e de støste divene bak atfedsendingene, e et empiisk spøsmål og kan vaiee mye. I denne studien utvikle vi en empiisk metode fo å identifisee og dekomponee atfedsendinge som følge av enegieffektiviseingstiltak. Metoden e baset på en betinget ettespøselsmodell anvendt på usoldningenes poduktfunksjon. Metoden bukes til å analysee effektene på usoldningenes enegifobuk av økt utbedelse av vamepumpe i Noske jem. Vi finne at spaepotensialet i stømfobuket av økt utbedelse av vamepumpe i noske bolige bli spist opp av fobuksøkningen som følge av at støm til oppvaming e billigee pe enet ved buk av vamepumpe enn i annen elektisk oppvaming. Denne eduksjonen i pisen på støm til oppvaming føe til at usoldningene velge å olde en øyee gjennomsnittstempeatu, buke minde av ande enegikilde (spesielt ved), samt gjennomføe fæe av ande type enegispaetiltak. Denne analysen gi ett eksempel på at investeinge i ny og me enegieffektiv teknologi ikke alltid medføe en eduksjon i fobuket av enegigode som e blitt me effektive i buk, selv om enegieffektiviteten a gått opp, på gunn av vidninge i fobuket.

3 How do investments in eat pumps affect ouseold enegy consumption? Bente Halvosen and Bodil Meete Lasen Abstact: Inceased enegy efficiency is often seen as te best way of educing enegy consumption. Howeve, te cost eduction esulting fom te efficiency incease can undemine te enegy-saving potential of te efficiency measues. In tis study, we develop a metod fo decomposing te beavioal esponses to inceased enegy efficiency based on a conditional demand model applied to a ouseold poduction famewok. We find tat te electicity savings potential of te inceased use of eat pumps in Nowegian omes is completely offset by canges in consumption. Houseolds wit eat pumps maintain ige indoo tempeatues, consume less altenative fuels and engage less in enegysaving beavio tan ote ouseolds. Tis analysis illustates tat subsidizing investments in new and moe enegy-efficient tecnology may not always be an effective means of educing enegy consumption. Keywods: Houseold enegy consumption, enegy-saving tecnology, eat pump, ebound effects. JEL specification code: C3, C34, D2, D3, Q4 Acknowledgements: We ae gateful to Teje Skjepen fo valuable comments on an ealie daft and fo financial suppot fom te Reseac Council of Noway toug te Renegi pogam. Wile caying out tis eseac, te autos ave been associated wit te Oslo Cente fo Reseac on Envionmentally fiendly Enegy (CREE). CREE is suppoted by te Reseac Council of Noway. Coesponding auto: Bente Halvosen, Statistics Noway, Reseac Depatment, P.O. Box 83 Dep, NO-0033 Oslo, Noway. btl@ssb.no

4 . Intoduction Inceasing enegy efficiency as been one of te main stategies fo combating te climate poblem. Seveal policy measues ave been intoduced tat focus on ouseold poduction. It is often assumed tat inceased enegy efficiency is a ceap and effective way of educing enegy consumption. Howeve, te full enegy-saving potential of an enegy-efficiency measue, as measued by te eduction in enegy needed to poduce te same amount of goods and sevices, will only be eaced if consumes o poduces do not cange tei beavio wen te new and moe enegy-efficient tecnology is intoduced. Tis is often assumed in analyses of te enegy-saving potential of vaious enegy-efficiency measues (as in, e.g., Li et al. 202a). Based on economic teoy, oweve, we expect beavio to cange since inceased enegy efficiency will educe te unit cost of poducing a good o a sevice. Tis will esult in a patial incease in demand fo te enegy souce tat as become moe efficient in use due to bot substitution and income effects. Te full enegy-saving potential of an enegy-efficiency measue will tus only be eaced if te demand fo enegy does not espond to canges in te unit cost of poduction. Seveal empiical studies indicate, oweve, tat suc unwanted beavioal canges as a esult of inceased enegy efficiency, o ebound effects, ae noticeable in seveal cases (Li et al. 202b, Gam-Hanssen et al., 202, Fondell et al., 2008). In Noway, one of te main uses of enegy in ouseold poduction is fo space eating. Depending on winte tempeatues, te popotion of enegy used fo eating vaies fom 40 to 50 pecent of ouseold stationay enegy consumption (Lasen and Nesbakken, 2004). One of te majo souces of inceased enegy efficiency in ouseold space eating in ecent times is te inceased use of eat pumps in Nowegian omes duing te last decade. In 2000, less tan one pecent of ouseolds owned a eat pump. In 202, a quate of Nowegian ouseolds owned a eat pump, appoximately 90 pecent of wic ae ai-to-ai eat pumps. Te question is ow tis majo cange in eating tecnology as affected ouseold electicity consumption and te mix of enegy consumed in Nowegian ouseolds. Wat beavioal canges as tis cange in tecnology esulted in? 2

5 Te extensive substitution possibilities tat exist fo space eating is inteesting in te Nowegian case, since most ouseolds can use moe tat one type of eating equipment to eat tei esidence. Of te ouseolds in ou data, 86% can use moe tan one type of eating equipment, and a combination of fiewood and electicity is most common (75%), wile 36% can use tee o moe eat souces, and 20% can use a combination of eat pumps, electic eates and fiewood. Tee ae also extensive substitution possibilities in elation to electicity used fo space eating puposes, as 24% can use eat pumps and electic eates. Tis means tat most ouseolds ave bougt a eat pump as an addition to te eating equipment tey aleady ave in tei esidence. One eason fo tis could be tat, in te cold Nowegian winte, it is not sufficient to ely on an ai-to-ai eat pump fo eating, as many of tem stop woking at tempeatues below -5 o C. All tese substitution possibilities make it easy to switc between eat souces and enegy caies. As a esult, we would expect to find lage ebound effects of inceased use of eat pumps in Nowegian omes. In tis pape, we examine wete ouseolds tat own a eat pump ave lowe aveage electicity consumption, ceteis paibus, o wete te enegy-saving potential is eaten up by ebound effects. In te ebound liteatue on tanspotation, infomation about te enegy efficiency of a veicle is often available (e.g., Fondell et al. 2008). It is tus possible (unde some assumptions) to infe te cange in te unit cost of poducing tanspot sevices tat te enegy-efficiency measue esults in. Tis is muc moe difficult in te case of eat pumps, as te enegy efficiency of a pump vaies acoss time and ouseolds wit outdoo tempeatue, umidity, installation and utilization of te pump. Tus, we ae not able to obseve te ouseolds actual unit cost of using electicity fo eating puposes in te case of eat pumps. Te ebound effects will be eflected in vaious beavio canges, oweve, suc as canges in te consumption of altenative fuels and indoo tempeatue, wic ae obsevable. Newe and moe expensive ai-to-ai pumps will still wok in cold tempeatues, but in suc case tei enegy efficiency is moe like tat of an odinay electic eate. 3

6 To quantify te ebound effects esulting fom tese beavioal canges, we develop a beavioal model based on a conditional demand model (Pollak 969, Bowning and Megi 99, Halvosen et al. 200) tat is adapted to a ouseold poduction famewok (Becke 99, Lancaste 966, Halvosen and Lasen 200). Tis model is used to decompose te effects of owning a eat pump on ouseold electicity consumption into diffeent beavioal canges: Do ouseolds tat own a eat pump maintain a diffeent indoo tempeatue tan ote ouseolds, and/o as it canged tei enegy-saving beavio? It is also inteesting to analyze wete tey use less fiewood and wood pellets tan ote ouseolds, since te govenment also aims to incease te use of bio-enegy fo space eating. Tis conditional demand model is estimated using a sample of ouseolds fom te Nowegian Suvey of Consume Expenditue fo 2009, wit an additional questionnaie on enegy consumption. In te liteatue, we find studies tat discuss investment decisions concening eat pumps in Nowegian omes based on mico data (Sopa et al. 200, Lillemo et al. 203). Te liteatue (Bjønstad 202) also contains analyses of ouseolds satisfaction wit tei eat pumps, based on pefeences stated in a suvey. To ou knowledge, oweve, no study as attempted to identify ebound effects of eat pump ownesip by tacing its effects toug beavioal canges in ouseold poduction and enegy demand, and applying econometic analysis to obseved mico demand data. Tis analysis elps us to undestand ow Nowegian ouseolds ave adapted tei abits and beavio wen tis new tecnology is intoduced. Ou esults indicate tat, in te case of inceased use of eat pumps in Nowegian ouseolds, canges in consumption may ave completely offset te enegy-saving potential of te eat pump, since ouseolds wit a eat pump ave a lowe consumption of fiewood and fuel oils and a ige indoo tempeatue, and make less enegy-saving effots tan ote ouseolds. 4

7 2. Teoetical foundation To analyze ow ouseolds cange tei beavio afte investing in a eat pump, we model ouseold poduction as a conditional demand model. Hee, we only give a bief desciption of te model. Fo a moe detailed desciption, see Appendix A. 2. Te conditional demand model In ou model, we assume tat ouseolds can use two diffeent enegy caies, electicity ( x ) and altenative enegy souces ( x 2 ), to poduce te ouseold sevice space eating ( z ), depending on te capital stock ( K ): zx,x ;K z 2. Tis stock can involve diffeent tecnologies poducing te same sevice, using a diffeent o te same enegy caie (e.g., eat pumps and electic eates). In tis model, we only look at te sot-tem poblem of utilization, wee te stock is given. Tus, we do not discuss investments in new equipment. We assume tat te consumption of tese enegy caies is decided simultaneously, given tat consumes minimize tei costs of poducing a given sevice ( z ): min px p2x2 s.t. z z x,x2;k, () x,x2 Tis minimization poblem yields te conditional demand fo x as a function of te demand fo x 2 and te sevice poduction level z, and te demand function fo x 2. Inseting te demand function fo altenatives to electicity fo eating ( x ) into te conditional demand function fo electicity gives te 2 optimal demand fo electicity fom te minimization poblem ( x ) as a function of pices, te capital stock, and te level of sevice poduction: x p,x p, p,z;k,z;k x p, p,z;k x To find te oveall optimal demand fo electicity ( x ), we need to find te optimal level of sevice poduction ( z ). Tis depends on te coice of poducing sevices at ome and ote consumption, 5

8 given ouseold income and te pices of ote consumption, and te cost of ouseold poduction. Based on te minimization poblem, we can calculate te total cost of poducing z, given by: p, p,z;k/ z cp, p,z;k c C 2 2. Te ouseold is ten assumed to maximize its utility (U ) fom te consumption of sevices (z) and ote goods ( x 3 ), given tat te expenditues ae less o equal to ouseold income ( y ) and given te pices of ote consumption ( p 3 ), te unit cost of ouseold poduction in optimum ( c ), and caacteistics of te ouseold ( a ): max z,x3 U 3 p, p2,z;kz p3x3 U( z,x ;a ) s.t. y c. (2) Assuming an intenal solution, tis utility maximization poblem gives te optimal demand fo ote goods ( x ) and te optimal poduction of sevices ( z ) as a function of all pices ( p, p2, p3 ), 3 ouseold caacteistics ( a ), te stock of capital ( K ), and income ( y ). If we inset te function fo te optimal poduction of ouseold sevices z into te conditional demand function fom te cost minimization poblem ( x ), we get an expession fo te conditional demand function tat will equal te demand fo electicity in te oveall optimum, given by: p,x p, p,zc, p,y;a,k ;K,zc, p,y;a,k ;K x p, p, p,y;a,k x x (3) In bot tese optimization poblems, we ave assumed an intenal solution. Cone solutions ae nomal, oweve, bot wit espect to te coice of eat poduction and demand fo altenative enegy goods to electicity. Tus, tese functions give te demand fo ouseolds wit a positive consumption. Fo ouseolds coosing a cone solution, te consumption equals zeo. 6

9 2.2 How does eat pump ownesip affect ouseold electicity demand? By using te conditional demand function in Equation (3), we can decompose te effect of owning a eat pump dk as follows: dx dk x K x x 2 x2 K x z 2 z K z c c x K z z K z c c K (4) We see fom te conditional demand model tat owning a eat pump can affect te optimal demand fo electicity ( x ) in diffeent ways. Fist, we ave te diect effect on electicity consumption of te x eat pump ( K ), as te fact tat tee ae moe possibilities will cange consumption. Second, owning a eat pump will cange elative pices of poduction of space eating, affecting te demand fo altenative enegy goods ( x ). Tis effect can aise eite diectly o indiectly toug canges in 2 ow we poduce te sevice ( z ), as it canges te unit cost of poducing eat (electicity fo space eating becomes ceape wit a eat pump). It is likely tat te main effect esulting fom canges in te consumption of ote enegy goods is te esult of canges in elative enegy pices fo eat poduction. Tid, tee is an effect on electicity consumption as a esult of canges in te cosen level of sevice poduction afte acquiing a eat pump ( z x ). Tese effects can also be diect, since a eat pump makes it possible to poduce new types of sevices, suc as cooling duing te summe. Finally, owning a eat pump also as an effect on eat poduction as a esult of canges in te unit z cost ( c c K ), since te cost eduction due to te enegy efficiency of te eat pump may educe enegy-saving beavio. Tis may esult in an inceased indoo tempeatue and educed use of nigt setback and ote tempeatue egulation to save money and enegy. 7

10 3. Te data In tis analysis, we use data fom te Nowegian Suvey of Consume Expenditues (SCE) fo te yea 2009, and data fom an additional questionnaie concening enegy consumption. Te data used in te analysis ae fom ouseolds constucted aound individuals andomly dawn fom te Nowegian population. We ave infomation about ouseold electicity consumption collected fom te ouseolds electicity supplie, ouseold and esidence caacteistics, infomation about ownesip of eating equipment and electical appliances, and infomation about enegy-saving beavio undetaken by te ouseolds. Unfotunately, we do not ave infomation about ouseold income in tis data. We teefoe use te ouseold s total expenditue as a poxy fo consumption oppotunities. Te additional questionnaie also contains infomation about indoo tempeatue and te insulating quality of walls, windows and te oof of te ouse. Infomation about outdoo tempeatues, measued in eating degee days, is collected by te Nowegian Meteoological Institute and meged wit te ouseold infomation by municipality. 2 As we do not know te exact enegy efficiency of te individual eating equipment in eac ouseold, fuel pices ae used as a poxy fo te cost of utilizing te eating equipment. Pices of enegy goods ae calculated using infomation about expenditues and consumption fom te SCE. Wee consumption infomation is not available, e.g., because te ouseold s enegy bill is paid by te employe o is included in te ent, o we do not ave infomation about te consumption fo te entie 2-mont peiod, te consumption is estimated based on te mean consumption of simila ouseolds. Tis pedicted consumption is te basis fo te calculation of enegy pices fo tese ouseolds. In te estimations, we include coection vaiables to captue any systematic unde- o ove-pediction of consumption fo tese ouseolds. 2 Heating degee days ae calculated as te summaized deviation between te mean tempeatue duing te last 24-ou peiod and 7 o C. 8

11 Desciptive statistics of te main vaiables used in tis analysis ae povided in Table. Tis table sows tat te main enegy caie in Nowegian omes is electicity, but te vaiation in electicity consumption is consideable. We also see tat fiewood is popula as well, and some ouseolds pucase quite a lot of fiewood and fuel oils, and tey may old substantial stoes of tese enegy goods. Te mean epoted living oom tempeatue is sligtly above 2 o C. Wit espect to te electicity pice, we see tat te mean pice is 83 øe pe kw, but te pice vaies consideably. Tis is because it is calculated on te basis of espondents electicity expenditues and consumption. Electicity bills often consist of a fixed and a vaiable cage (depending on consumption). Te pice pe kw will be ig fo ouseolds wit tis picing stuctue and vey low consumption. Fo ouseolds wee te electicity bill is paid by otes (e.g., govenment suppot), te pice equals zeo. We see te same patten as egads vaiation in te pice of ote enegy goods, as some ave ig fixed costs (e.g., due to feigt cages) o get tei enegy goods fee (cop tei own fiewood, gifts, etc.). Table. Desciptive statistics, ouseolds 2009 Mean St. dev Min Max Electicity consumption (kw) Fiewood pucases (kw) Fuel oil pucases (kw) Indoo tempeatue ( o C) Electicity pice (NOK/kW) Fiewood pice (NOK/sack) Fuel oil pice (NOK/lite) Total expenditue (NOK) Own a eat pump Own a cental eating system Common cental eating system Own a pellets stove Can use fiewood fo eating Indoo tempeatue in tis study is based on te answes to te question about indoo tempeatue in te living oom on a cold winte day. 9

12 Mean St. dev Min Max Numbe of oil-buning stoves Numbe of electic eates Numbe of wood-buning stoves Own electic floo eating Aea wit electic floo eating (m 2 ) Use te pump fo cooling duing summe Can use eat pump to eat te entie esidence Use less fuel oil afte installing a eat pump Numbe of substitution possibilities Use of nigt setback Own an economy sowe Numbe of layes in windows Te esidence is well-insulated Self-owned detaced ouse Famouse Multifamily esidence Live in a block of flats Net floo space (m 2 ) Numbe of ouseold membes Numbe of income contibutos Electicity bill paid by employe Numbe of yeas in cuent esidence Enegy expenditues included in ent Souce: Nowegian Suvey of Consume Expenditue, In ou sample, appoximately 25 pecent of ouseolds own a eat pump. Along wit electic eating (bot panel eates and electic floo eating) and wood-buning stoves, eat pumps ae te most common types of eating equipment owned by Nowegian ouseolds. Wate-distibuted systems, suc as self-owned and commonly owned cental eating systems ae elatively ae, as ae stoves based on paaffin and pellets. Te most common enegy-saving beavio is te use of nigt setback and economy sowes. Most Nowegian ouseolds live in detaced ouses, and te mean net floo space is 4 m 2. 0

13 4. Econometic specification Te data descibed above ae used to estimate te conditional demand fo electicity in Equation (3). Te estimation is done in a tee-stage pocess. Fist, te sevice poduction is estimated. Te poduction of eating sevices by te ouseold is appoximated by a linea function, given by: I IT 0 HP HP i HCi. (5) i In tis estimation, we use infomation about te indoo tempeatue (IT) fom te additional questionnaie as a poxy fo te poduction of eating sevices. Te stock of eating equipment is modeled as a set of dummies fo wete te ouseold owns te equipment o not. Te dummy fo eat pump ownesip is sepaated (HP), weeas te ote equipment ownesip dummies ae included in a vecto of caacteistics of te ouseold and esidence (HC I = HC,, HC I ). Table 2 sows te complete list of vaiables. is te eo tem, wic is assumed to be independently and identically distibuted wit a zeo expectation and a constant vaiance. Te esults fom tis estimation ae ten used to pedict eat poduction fo eac ouseold, wic is used as an instument fo sevice poduction in te estimation of te consumption of altenative fuels to electicity (fiewood and fuel oils). Te demand fo fuel oils and fiewood is appoximated by a linea function, given by: AF FO FO 0 FO HP HP FO IT ITˆ J j FO j HC j FO (6) AF FW FW 0 FW HP HP FW IT ITˆ M m FW m HC m FW (7) wee FO AF is te ouseold s demand fo fuel oils, FW AF is te ouseold s demand fo fiewood, I Tˆ is te ouseold s pedicted indoo tempeatue fom te fist stage, HC J and HC M ae vectos of

14 caacteistics of te ouseold and esidence fo te demand fo fuel oils and fiewood, espectively, and FO and FW ae eo tems assumed to be independently and identically distibuted wit a zeo expectation and a constant vaiance. Te esults fom tese estimations ae ten used to pedict te demand fo fiewood and fuel oils fo eac ouseold, wic ae used as instuments in te estimation of te conditional demand fo electicity, given in Equation (3). Te conditional demand function fo electicity is appoximated by a linea function, given by: N HP HP IT FO FO FW FW EL 0 0 j D j HP ITˆ AFˆ AFˆ n HCn (8) j n wee EL is te ouseold s consumption of electicity, D j epesents diffeent beavioal aspects conditional on owning a eat pump, suc as use of te eat pump fo cooling duing te summe monts, FO A is te pedicted ouseold demand fo fuel oils, Fˆ AFˆ FW is te pedicted ouseold demand fo fiewood, HC N is a vecto of caacteistics of te ouseold and esidence in elation to te demand fo electicity, and is te eo tem assumed to be independently and identically distibuted wit a zeo expectation and a constant vaiance. 4 Because te pobability of owning a eat pump inceases wit electicity consumption, we could expeience biased esults if we do not account fo tis coelation in te data. Since equipment can only be utilized afte it is bougt, and tis is a sot-tem model fo a given stock of equipment, ownesip of te eat pump will be exogenous in te estimation of te conditional demand function. As a esult, tis self-selection poblem collapses to a poblem of omitted vaiable bias (Lee 200), wic can be contolled by including all elevant exogenous vaiables in te estimation. Fo tat 4 Tis ecusive estimation of te conditional demand fo electicity implicitly assumes tat te eo tems in te fou equations ae independently distibuted. 2

15 eason, we include seveal caacteistics of te ouseold and esidence in ode to contol fo te self-selection bias. If we ae able to coect te estimation fo all elevant vaiables, te esults fom tis estimation will ave a beavioal intepetation. Howeve, since we cannot exclude te possibility tat some impotant vaiables in elation to explaining te decision to invest in a eat pump ae omitted due to te lack of elevant infomation in te data, we will only intepet te esults as compaing beavio in diffeent sub-samples, wit and witout a eat pump. We do not ave infomation about te unit cost of poducing eating sevices, because we cannot obseve te enegy efficiency of vaious eating equipment in individual omes. Tus, we ae not able to estimate diectly te ebound effects esulting fom canges in te unit cost of eat poduction. Howeve, we ae able to identify te ebound effects indiectly toug te sum of all effects associated wit eat pump ownesip: bot diectly and indiectly toug te eat poduction and te demand fo fiewood and fuel oils. Tis implies tat ebound effects of te inceased enegy efficiency HP of eat pumps will fall into te coefficients 0, HP j, IT, FO, FW, HP, FO HP and FW HP. Te sum of all effects of eat pump ownesip, bot diect and indiect, yields te total effect of eat pump ownesip on electicity consumption (see Equation 9 fo ow tis is calculated). 5. Results We ave estimated te conditional demand model in Equations (5) to (8) ecusively in ode to analyze ow eat pump ownesip affects ouseold enegy consumption, coecting fo possible omitted vaiable bias due to te self-selection poblems in te data. Te esults fom tese estimations ae pesented in Tables 2 and 3. Tese estimation esults ae used to calculate te diffeent beavioal components and obtain te oveall effect on electicity consumption of eat pump ownesip. Te esults fom tese calculations ae epoted in Table 4. 3

16 5. Indoo tempeatue and demand fo fuel oils and fiewood Te conditional demand model in Equation (8) is a function of te pedicted eat poduction and te pedicted demand fo fiewood and fuel oils. To assess te indiect effects of owning a eat pump, we fist look at ow it affects tese factos. Due to an extensive numbe of zeo obsevations fo te demand fo fuel oils and fiewood, te demand functions fo fuel oil and fiewood ae estimated using a discete continuous likeliood function (Dubin and McFadden 984, Cagg 97) to distinguis between consumes wit and witout expenditues on tese goods. A desciption of te likeliood function in tis estimation is povided in Appendix A2. We assume tat all dependent vaiables ae nomally distibuted, tat te expected demand functions ae given by Equations (6) and (7), and tat te expected net utility of consuming fiewood and fuel oils ae appoximated by a linea function. Te esults of te maximum likeliood estimation of te indoo tempeatue, and fiewood and fuel oil demand ae sown in Table 2. Te fist column of te table sows te esults fom an estimation of te indoo tempeatue, te second column sows te esults fo fuel oil demand, and te last column sows te esults fom te estimation of fiewood demand. Te estimation esults fo ouseolds wit positive expenditue on fuel oil and fiewood (te continuous pat of te likeliood function) ae sown in section A of Table 2, weeas te esult fo te estimation of te pobability of aving zeo expenditues on fuel oil and fiewood (te discete pat of te likeliood functions) is sown in section B of te table. Paametes included in te calculation of te effects of eat pump ownesip on electicity consumption ae maked in bold pint. Looking at te esults fom te estimation of indoo tempeatue, we see tat ouseolds wit a eat pump ave a significantly ige indoo tempeatue tan ote ouseolds, almost 0.4 o C ige. Te effect on fuel oil demand and fiewood demand of owning a eat pump is twofold. Fist, tee is a diect effect, wic is negative in bot cases, but only significant fo fiewood consumption. Te second effect is te effect owning a eat pump as on indoo tempeatue, as pedicted indoo 4

17 tempeatue also as a significant effect on fiewood and fuel oil demand. Tis effect is complex, as te tempeatue effect diffes between diffeent types of ouses. 5 Table 2. Maximum likeliood estimation of indoo tempeatue, and fuel oil and fiewood demand. o C, kw Vaiable A. Continuous function Indoo tempeatue ( o C) Fuel oil demand (kw) Fiewood demand (kw) Constant Own a eat pump (0, ) Pice of electicity (NOK pe kw) Pice of fuel oils (NOK pe lite) Pice of fiewood (NOK pe sack) Total expenditues (NOK 0 000) Numbe of ouseold membes Electicity as main enegy caie (0, ) Cental eating system (0, ) Common cental eating system (0, ) Numbe of oil-buning stoves Numbe of electic eates Numbe of fiewood stoves 43 Electic floo eating (0, ) -873 Heating degee days in Januay Heating degee days in July Te esidence is well-insulated (0, ) Economy sowe (0, ) Tee-laye windows (0, ) 0.38 Electicity bill paid by employe (0, ) Numbe of yeas in cuent esidence 59 Te yea of moving into te esidence Mecanic ai ventilato (0, ) Use of nigt setback (0, ) Te total pedicted indiect effect of owning a eat pump on fiewood and fuel oil demand, as a esult of ige indoo tempeatue, is epoted in Table 4. 5

18 Vaiable Indoo Fuel oil Fiewood tempeatue demand (kw) demand (kw) ( o C) Automatic system fo nigt/day setback (0, ) Self-owned detaced ouse (0, ) Live in a block of flats (0, ) Famouse (0, ) Semi-detaced ouses (0, ) Pedicted indoo tempeatue ( o C) Pedicted indoo temp. in detaced ouses ( o C) Standad deviation B. Pobability of zeo demand Constant Fuel oil as main enegy caie (0, ) Fiewood as main enegy caie (0, ) Heating degee days in Febuay Numbe of ouseold membes Numbe of fiewood stoves Significant at 0%, significant at 5%, significant at % Wit espect to te estimation of indoo tempeatue, we see tat especially espondents wo own a common cental eating system togete wit ote ouseolds ave a significantly ige indoo tempeatue tan otes; almost one degee Celsius ige. Tis is also tue fo ouseolds wee te employe pays te electicity bill, altoug tis effect is somewat smalle. Tis indicates tat tese ouseolds engage in less enegy-saving beavio tan ouseolds tat pay te cost of tei own eating and benefit fom tei savings diectly. We also tested te effects on te indoo tempeatue of owning diffeent types of equipment, and engaging in diffeent types of enegy-saving beavio. Fo instance, we see tat a ouseold wit a well-insulated ome tat uses nigt setbacks maintains a significantly lowe indoo tempeatue tan ote ouseolds. Moeove, indoo tempeatue fluctuates ove te yea, being colde in te winte and wame in te summe. 6

19 Wit espect to te demand fo fiewood and fuel oils, we also see tat caacteistics of te esidence and coice of eating system ae of significant impotance to demand. Pice effects ae paticulaly impotant fo fiewood, weeas income effects ae moe impotant to demand fo fuel oils. Fom te discete pat of te estimation, we see tat te pobability of obseving a zeo demand fo fuel oils and fiewood vaies significantly wit te stock and utilization of te eating equipment, as well as wit outdoo tempeatue. 5.2 Conditional demand fo electicity Te estimation esults pesented in Table 2 ae used to pedict te indoo tempeatue and demand fo fiewood and fuel oils fo eac ouseold, wic ae used as explanatoy vaiables in te estimation of te conditional demand function fo electicity. Te esults fom a maximum likeliood estimation of Equation (5) ae pesented in Table 3. Te estimated coefficients and tei associated p-values ae sown in te fist and second columns. Te effects on te constant tem ae sown in section A of te table. We include bot vaiables descibing te eteogeneity acoss ouseolds and vaiables coecting fo measuement poblems in te dependent vaiable. Pice and income effects ae epoted in section B, te effects of ownesip of eat pumps on electicity consumption ae sown in section C, and, finally, sections D and E sow te effects of te pedicted indoo tempeatue and demand fo fiewood and fuel oil, and te estimated standad deviation. Table 3. Maximum likeliood estimation of electicity consumption. kw Vaiables Coefficient p-value A. Effects on te constant tem Constant Net floo space (m 2 ) Own a detaced ouse (0, ) Famouse (0, ) Heating degee days in Januay Common cental eating system (0, ) Own a pellets stove (0, ) Numbe of income contibutos Numbe of electic eates

20 Vaiables Coefficient p-value Aea wit electic floo eating (m 2 ) Numbe of tumble dyes Numbe of feezes Numbe of PC s Coection vaiables: Moved into cuent esidence in cuent yea (0, ) Can use fiewood fo eating (0, ) Electicity bill paid by te employe (0, ) Enegy expenditues included in ent (0, ) B. Pice and income effects Pice of electicity (NOK pe kw) Pice of fuel oils (NOK pe lite) Pice of fiewood (NOK pe sack) Total expenditues (NOK 000) C. Ownesip of eat pumps Constant Use te pump fo cooling duing summe (0, ) Can use eat pump to eat te entie esidence (0, ) Use less fuel oil afte installing a eat pump (0, ) Numbe of substitution possibilities D. Pedicted instuments Indoo tempeatue ( o C) Fuel oil consumption (kw) Fiewood consumption (kw) E. Standad deviation We see fom section D of te table tat all te estimated coefficients fo te pedicted vaiables ae significant. Fist, electicity consumption inceases by moe tan a tousand kw annually fo eac degee Celsius te indoo tempeatue is inceased by. Also, fo eac kw fiewood and fuel oil demand is educed by, electicity consumption inceases by 0.2 and 0.3 kw. Tis entails an incease 6 We suspect tat tis esult is due to eat leakages toug te cimney wen te fieplace in not in use. Howeve, we do not ave infomation at ouseold level tat allows us to test tis ypotesis. 8

21 in te oveall enegy efficiency of te ouseolds enegy consumption wen using electicity fo eating puposes. 7 Focusing on te effects of owning a eat pump on ouseold electicity consumption (se section C of te table), we find many significant effects. Inteestingly, te effect of using te eat pump fo cooling in te summe is not significant, but it as a lage estimated coefficient. Te eason fo te lack of significance is pobably because we ave vey few obsevations of te pump being used fo cooling puposes duing te summe (only six pecent of te sample). Being able to eat te entie esidence using eat pumps alone inceases electicity consumption by moe tan 600 kw compaed to ote ouseolds tat own a eat pump. Howeve, te biggest effect on electicity consumption of owning a eat pump is found in ouseolds tat state tat tey use less fuel oil afte acquiing te eat pump. Tese ouseolds use almost 3500 kw moe electicity tan ote ouseolds tat own a eat pump. Since we ave included te pedicted fuel oil consumption as an explanatoy vaiable in te estimation, tis coefficient epesents te additional effect of educed fuel oil consumption fo ouseolds wo state tat tey ave switced eat souces fom fuel oils to a eat pump. Finally, we see tat ouseolds tat ave many substitution possibilities fo eating tei esidence in addition to te eat pump use significantly less electicity tan ote ouseolds tat own a eat pump. We believe tat tis is because tese ouseolds can use altenatives to electicity fo eating puposes in vey cold peiods duing winte, wen te enegy efficiency of te pump is low o wen it is so cold tat te pump does not wok at all. If te ouseolds do not ave ote substitution possibilities tan electicity, tee is little o no enegy-efficiency gain of owning a eat pump duing tese peiods. 7 Tis is not te same as saying tat using electicity is five times moe enegy efficient tat, e.g., fiewood, since consumption can cange wit te equipment: peviously uneated aeas can now be eated, tempeatue can be inceased and be moe stable ove te day, and fiewood can still be used. 9

22 5.3 Decomposition of te total effect Ou estimations illustate diffeent effects of owning a eat pump on ouseold electicity consumption, bot diect and indiect. To find te oveall effect, we can sum up all te effects on te estimated conditional demand fo electicity of owning a eat pump. Te total effect of owning a eat pump, and te impotance of te vaious components in Equation (4), is calculated as follows: ˆ ˆ ˆ ˆ FO FO FW FW IT ˆ ˆ IT ˆ ˆ IT ˆ dhp HP del ˆ D ˆ j j FO HP IT HP FW HP IT HP IT HP (9) j Using te estimated coefficients in bold pint in Tables 2 and 3, and infomation about mean values fom Table, we can calculate te effect on te electicity consumption of te mean ouseold of owning a eat pump ( dhp ). 8 Tese pedicted effects ae pesented in Table 4. Table 4. Decomposition of te pedicted effect on electicity consumption of owning a eat pump fo te mean ouseold. kw A. Diect effects of eat pump ownesip Constant Use te pump fo cooling duing summe (0, ) Can use eat pump to eat te entie esidence (0, ) Use less fuel oil afte installing a eat pump (0, ) Numbe of substitution possibilities B. Indiect effects of eat pump ownesip Indoo tempeatue Fuel oil consumption Fiewood consumption C. Total effect on electicity consumption of owning a eat pump Effect on electicity consumption (kw) Tis is a ypotetical ouseold wit mean values fo all explanatoy vaiables. 20

23 Looking at te esults, we find many stong ebound effects of owning a eat pump, including te indiect effects esulting fom inceased indoo tempeatue and educed consumption of fiewood and fuel oils. We also see tat te main enegy savings ae made by ouseolds wit many substitution possibilities in elation to eating tei esidence, since tese ouseolds can adapt bette to vaiations in outdoo tempeatue. Te constant tem will captue all ote diect effects of owning a eat pump on electicity consumption, e.g., because of educed enegy-saving beavio and an incease in te popotion of te esidence eated duing te winte. We see tat tis effect is te lagest diect ebound effect. Summing up all diect and indiect effects, we find a small incease in electicity consumption fo te mean ouseold as a esult of owning a eat pump. Te effect is small compaed to te uncetainty in te estimated coefficients, and we cannot teefoe conclude tat a ouseold tat owns a eat pump as an electicity consumption tat diffes fom ote ouseolds consumption. Tis implies tat tee ae consideable ebound effects and tat te entie enegy-saving potential in tems of electicity consumption embedded in te eat pump is eaten up by beavioal canges as a esult of te educed unit costs of poducing eating sevices. Howeve, te esults also indicate tat te switc fom fuel oils and fiewood to electicity fo space eating as a esult of eat pumps as inceased te oveall enegy efficiency of ouseold eat poduction. 6. Conclusions In tis analysis, we ave used a mico econometic appoac to examine wete eat pump ownesip in Nowegian ouseolds as educed electicity consumption, ceteis paibus, o wete te potential saving is eaten up by ebound effects. We find significant evidence tat ouseolds tat own a eat pump use less of ote eating souces. In paticula, ouseolds tat ave invested in a eat pump use significantly less fiewood tan ote ouseolds. Tey also maintain a ige indoo tempeatue compaed to ote ouseolds. All tese diffeences in eating beavio esult in ige electicity consumption, ceteis paibus. We also find tat, of ouseolds wit eat pumps, it is only 2

24 tose tat can use altenatives to electicity fo eating puposes tat ae able to save a significant amount of electicity, ceteis paibus. If we summaize all ou estimated effects on ouseold electicity consumption of owning a eat pump, including te effects on indoo tempeatue and fiewood and fuel oil demand, we find a small incease in ouseold electicity consumption. In tis analysis we find tat, fo te mean ouseold, te pedicted ebound effects ae as geat as te enegy-saving potential of te eat pump, so tat te total electicity saving is close to zeo. Tis is not necessaily a bad ting, as te enegy efficiency of total eat poduction and te ouseolds utility ave isen. Te esults indicate tat ouseolds wit a eat pump ave cosen to spend te money tey save on eating costs on living moe comfotably: aising te indoo tempeatue, educing te labo involved in copping and caying wood, eating a lage pat of tei esidence, and using ai conditioning. Tis is clealy wat te Nowegian public wants, as te popotion of ouseolds tat own a eat pump as isen fom vitually zeo to appoximately one quate in only twelve yeas. Tis as occued almost entiely witout govenment subsidies. 9 Note tat, in tis analysis, we only look at te initial ebound effects esulting fom canges in ouseold beavio. Tese beavioal esponses could ave additional ebound effects via te enegy makets if te canges ae lage enoug to sift aggegate enegy demand. Tese maco ebound effects via te enegy makets could cange elative enegy pices, and tus ceate an additional beavioal esponse in ouseolds. Altoug potentially impotant, suc maket effects ae beyond te scope of tis pape. One impotant implication of te esults of tis analysis is tat enegy-efficiency measues ae not always a ceap and effective way of combating te climate poblem. Enegy-efficiency measues 9 Tee was a gant in 2003, but it only lasted one yea. Now, tee ae only gants fo lage eat pumps. Howeve, vey few ouseolds coose tese lage pumps, and te popotion of ouseolds owning a eat pump ote tan an ai-to-ai pump is less tan tee pecent in

25 tigge beavioal canges because tey educe te costs of poducing goods and sevices. Te size of te unwanted beavioal esponses is an empiical question. Empiical analyses ave sown tat tey can vay fom case to case, and fom county to county. It is also difficult to know befoeand ow tey will affect beavio, as most new tecnologies do not only cange costs, but also esult in new consumption oppotunities and cange abits and beavioal pattens. Te ebound effects will incease in magnitude if investments in moe enegy-efficient tecnology ae subsidized, as a subsidy will incease te income effects. It may be desiable to subsidize new tecnology fo ote easons; eite to compensate fo positive extenalities, o fo industy policy o distibution easons. Howeve, te enegy savings accomplised by suc subsidies ae fa fom clea. 23

26 Refeences Becke, G.S. (99): A teatise on te family, Cambidge, Mass.: Havad Univesity Pess. Bjønstad, E. (202): Diffusion of enewable eating tecnologies in ouseolds. Expeiences fom te Nowegian Houseold Subsidy Pogamme, Enegy Policy 48, Bowning, M. and C. Megi (99): Te Effects of Male and Female Labou Supply on Commodity Demands, Econometica 59, Cagg, J.G. (97): Some Statistical Models fo Limited Dependent Vaiables wit Application to te Demand fo Duable Goods, Econometica 39, Dubin, J.A. and D.L. McFadden (984): An Econometic Analysis of Residential Electic Appliance Holdings and Consumption, Econometica 52, Fondell M., J. Petes and C. Vance (2008): Identifying te Rebound: Evidence fom a Geman Houseold Panel, Te Enegy Jounal 29, Gam-Hanssen, K., T.H. Cistensen and P.E. Petesen (202): Ai-to-ai eat pumps in eal-life use: Ae potential savings acieved o ae tey tansfomed into inceased comfot?, Enegy and Buildings 53, Halvosen, B. and B.M. Lasen (200): Te flexibility of ouseold electicity demand ove time, Resouce and Enegy Economics 23, -8. Halvosen, B., B.M. Lasen and R. Nesbakken (200): Is tee a win-win situation in ouseold enegy policy?, Envionmental and Resouce Economics 45, Lancaste, K.J. (966): A new appoac to consume teoy, Jounal of Political Economy 74, Lasen, B.M. and R. Nesbakken (2004): Houseold Electicity End-Use Consumption: Results fom Econometic and Engineeing Models, Enegy Economics 26, Lee L.-F. (200): Self-selection, in B.H. Baltagi (ed.): A Companion to Teoetical Econometics, Blackwell, Oxfod. 24

27 Li, X., W. Wu, X. Zang, W. Si and B. Wang (202a): Enegy saving potential of low tempeatue ot wate system based on ai souce absoption eat pump, Applied Temal Engineeing 48, Li, S., J. Linn and E. Spille (202b): Evaluating Cas-fo-Clunkes : Pogam Effects on Auto Sales and te Envionment, Jounal of Envionmental Economics and Management, ttp://dx.doi.og/0.06/j.jeem Lillemo, S.C., F. Alfnes, B. Halvosen and M. Wik (203): Houseolds eating investments: Te effect of motives and attitudes on coice of equipment, Fotcoming in Biomass & Bioenegy. Pollak, R.A. (969): Conditional Demand Functions and Consumption Teoy, Quately Jounal of Economics 83, Sopa, B.M., C.A. Klöckne, G. Skjevak and E.G. Hetwic (200): Nowegian ouseolds peception of wood pellet stove compaed to ai-to-ai eat pump and electic eating, Enegy Policy 38,

28 Appendix A. Te conditional demand function We assume tat ouseolds can use two diffeent enegy caies ( x, x2 ) to poduce ouseold sevices ( z ) suc as space eating: zx,x ;K z 2. Some ouseolds can only use one enegy caie, wile otes can use two o moe, 0 depending on tei capital stock ( K ). Tis stock can involve diffeent tecnologies poducing te same sevice, applying diffeent enegy caies o te same enegy caie (e.g., eat pumps and electic eates). In tis model, we only look at te sottem poblem of utilization, wee te stock is given. Tus, we do not discuss investments in new equipment. Since many ouseolds can use altenative tecnologies to poduce te same sevice, as in te case of space eating, te consumption of a paticula enegy good ( x ), eeafte efeed to as te good of inteest, will depend on te degee of substitution, and tus on te consumption of altenative enegy caies ( x 2 ), eeafte efeed to as conditioning goods. Wic enegy caie is cosen is detemined by te unit pice of using tis enegy caie to poduce a given amount of tis sevice, depending on te diffeent popeties of te tecnology. In ou model, we assume tat te consumption of tese enegy caies is decided simultaneously, given tat te consumes minimize tei costs of poducing a given sevice ( z ): min px p2x2 s.t. z z x,x2;k, (A) x,x2 0 In ou example, we include te consumption of all altenatives to electicity fo eating in te vaiable x 2. 26

29 wee p i is te pice of enegy good i. Assuming an intenal solution to tis poblem, te conditional demand function is found by solving te fist ode conditions wit espect to x. In combination wit te budget constaint, tis yields te demand fo x as a function of te demand fo x 2 and te poduction of sevices z, and te demand function fo x 2 : x 2 x p,x,z;k (A2) x 2 2 x2 p, p,z;k. (A3) Inseting te optimal demand function fo te altenative enegy caies ( x 2 ) in Equation (A3) into te conditional demand function fo x in (A2) yields te optimal demand fo te good in question ( x ) as a function of pices and te capital stock, fo a given level of poduction of sevices z : p,x p, p,z;k,z;k x p, p,z;k x x (A4) To find te oveall optimal demand fo te good in question ( x ) given optimal sevice poduction ( z ), we need to inset te optimal coice of poduction of sevices into Equation (A4). Tis depends on te coice of poducing sevices at ome and ote consumption, given ouseold income and te pices of ote consumption and te cost of ouseold poduction. Based on te minimization poblem, we can calculate te total cost of poducing z : p, p,z;k p x p, p,z;kcp, p,z;k C px (A5) Te unit cost of poducing z is ten given by Cp, p,z;k/ z cp, p,z;k te cost of poducing z in te utility maximization poblem. c 2 2. Tis will be 27

30 Te ouseold is assumed to maximize its utility (U ) fom te consumption of sevices (z) and ote goods ( x 3 ), given tat te expenditues ae less o equal to ouseold income ( y ) and given te pices of ote consumption ( p 3 ), te unit cost of ouseold poduction in optimum ( c ) and caacteistics of te ouseold ( a ): max z,x3 U 3 p, p2,z;kz p3x3 U( z,x ;a ) s.t. y c. (A6) Assuming an intenal solution, tis utility maximization poblem yields te optimal demand fo ote goods ( x ) and te optimal poduction of sevices ( z ) as a function of all pices ( p, p2, p3 ), 3 ouseold caacteistics ( a ), te stock of capital ( K ), and income ( y ). If we inset te function fo te optimal poduction of ouseold sevices z into te conditional demand function in Equation (A4), we get an expession fo te conditional demand function tat will equal te demand fo te good in question in oveall optimum, given by: p,x p, p,zc, p,y;a,k ;K,zc, p,y;a,k ;K x p, p, p,y;a,k x x (A7) Tis function tells us ow te demand fo te good of inteest in te oveall optimum ( by te optimal consumption of altenatives in ouseold poduction ( x ) is affected x 2 ) and te cosen level of ouseold poduction ( z ). Te demand fo te good of inteest is also conditional on a vecto of ouseold caacteistics ( a ), and vaiables indicating te pesent stock of eating equipment and duables (K). 28

31 Appendix A2. Te likeliood function Due to an extensive numbe of zeo obsevations fo te demand fo fuel oils and fiewood, te demand functions fo fuel oil and fiewood ae estimated using a discete continuous likeliood function (Cagg, 97) to distinguis between consumes wit and witout expenditues on te good. In a discete continuous model, te pobability density is a mixtue of consumes wit positive expenditue and consumes wit zeo expenditue on a paticula good: f f AF if AF 0 AF, (A8) f0 if AF 0 wee AF is te ouseold s consumption of altenative fuel (= fuel oils and fiewood), te discete component, f 0, is te pobability mass measued at zeo expenditue, and te continuous component, f AF, is te density fo consumes wit a positive expenditue (see, e.g., Cagg 97, Smit 2002 o Gacia and Labeaga 996). Te pobability of positive expenditue on good is given by PAF 0, and te pobability of zeo expenditue ( 0 f ) is given by PAF 0 continuous pat of te distibution is ten given by: f AF f AF AF 0PAF 0. Te, wee f AF AF 0 is te tuncated density function of AF. Assuming expenditues to be independently and identically distibuted, te likeliood function in te DH model is te poduct of all densities fo all ouseolds, tat is: L f AF f0 f AF AF 0PAF 0 PAF 0 0 0, (A9) 29

32 Te fist pat of te likeliood function calculates te popeties of te demand fo ouseolds wit a positive consumption ( ), weeas te last pat estimates te popeties of te pobability of obseving zeo demand fo ouseolds coosing a cone solution ( 0 ). We expess te pobability of obseving zeo consumption of altenative enegy good fo consume as a function of wete te indiect utility of consuming te good ( V AF ) is geate o equal to zeo: P AF 0 PV, (A0) 0 AF wee te indiect utility of consuming altenative enegy good is assumed to be a linea function of its expected value ( ) and a stocastic eo tem ( ), wic is assumed to be independent and V AF identically distibuted wit a zeo expectation and a constant vaiance, and is te standadized eo tem. Te indiect utility of consuming altenative enegy good is assumed to be given by V. Tis gives te following likeliood function to be estimated: AF V AF L i AF 0 AF AF i i AF 0 (A) 30