Sustainability Science Program

Is There an Energy-Efficiency Gap? Measuring Returns to Efficiency with a Field Experiment in India


Is There an Energy-Efficiency Gap? Measuring Returns to Efficiency with a Field Experiment in India

Nicolas Ryan, Department of Economics, Yale University

Policymakers frequently favor energy-efficiency improvements as a near-term means of carbon emissions abatement. Reports of the Intergovernmental Panel on Climate Change (IPCC) have long stressed the importance of energy efficiency in any climate change mitigation strategy, and the head of the UN Climate Change Secretariat has hailed energy efficiency as "the most promising means to reduce greenhouse gases in the short term.” This favored position is based on the poorly tested idea that energy-efficiency investments are a low-cost or even no-cost form of abatement, as energy savings make such investments profitable for firms.

The study tests this idea rigorously by conducting a randomized controlled trial of industrial energy audits in India, a fast-growing developing country whose future emissions will be important for global climate change. The project has been carried out among small and medium sized, energy-intensive industrial plants in the state of Gujarat; their technology choices and energy use were tracked against a comparable group of control firms. The study measures the relation between engineering projections for energy savings and actually achieved savings. It also tests two leading economic hypotheses for why industry may not adopt technologies that appear privately profitable: information market failures – based on asymmetries or undersupply – and skill constraints that inhibit technology adoption.

In the energy audit intervention, half of a total sample of interested factories received energy audits, during which auditors suggested investments to improve the efficiency of energy use and prioritize such investments by their expected economic return. This tests the pervasive hypothesis that two types of informational market failures prevent the adoption of efficient technology: 1) asymmetric information between firms and service providers may deter adoption of efficient technologies, and 2) information about efficiency may be undersupplied in the market because it is a public good. The energy audit intervention overcomes these obstacles by providing information about energy efficiency, specific to each plant and free of cost.

In the energy manager intervention, half of the sample of audited plants was randomly chosen to receive energy managers – skilled engineers – who stayed on in the plant part-time for approximately three months to implement audit recommendations. These energy managers liaised with service providers, oversaw equipment installation, and trained plant staff on new technology. This tests the relation between skilled labor and technology adoption. If plants are skill-constrained, then those provided energy managers should adopt a broader set of technologies and save more energy than those provided audits alone.

The research team has added a third aspect to the study: to study the impact of audits on the pricing variation of the final products of the industries. The aim of the study is to solve the puzzle of how firms with low productivity (i.e., high energy use) and poor management survive in the sector. The team has collected pricing data from 200 industries and is connecting it with the audit and survey data to draw correlations.

The research team has completed the energy-efficiency endline survey and has now started working on analyzing the data. Study results will indicate what government policies might cost-effectively promote energy efficiency. The Initiative supports, in part, staff time devoted to survey design and management, analysis of survey data and dissemination of results. The dissemination process will focus on informing the policies of the Gujarat Energy Development Agency (GEDA) and the Bureau of Energy Efficiency (BEE), the agencies responsible for promoting energy efficiency at the state and national levels, respectively. The Bureau of Energy Efficiency has run large audit programs across India but not measured their effects, so this trial will be immediately relevant for national policy.