Title: Economic Incentives in the Purchase and Use of Energy-Using Products: Past Practices and New Developments

This paper reviews the set of analytical tools commonly used to describe the purchase and use of energy-saving technologies and compares them with recent advances in applied microeconomics. Its goal is to determine if supplementing or replacing parts of the traditional tool kit will better equip the Department of Energy's Office of Energy Efficiency and Renewable Energy (EERE) to design and promote the superior energy-using technologies of the future. The paper was prepared at the request of EERE's Jerry Dion, and is part of a larger set of white paper's intended to inform EERE's senior managers and program officers about the state of the art on a number of topics of special relevance to the EERE program. The advances in applied microeconomics discussed herein can be generally described as the theory of investment under uncertainty, behavioral economics, and the economics of asymmetrical information. While these concepts are quite familiar to economic methodologists and well entrenched in many applied topics, they are only now beginning to be applied to the field of energy technology analysis. If this work proves accurate, the new concepts would appear to hold substantial interest for those designing energy-saving technologies and promoting their penetration into markets. Two principal lessons arise from this exercise: First, because consumer demands for energy technologies are usually derived from their demands for products that make use of energy services, energy technologies are rarely evaluated in isolation. Hence, the analysis would benefit from much greater attention to the context and circumstances in which the technologies would be used. Second, in considering products that contain advanced energy technologies, consumers bring with them constrained budgets and competing demands for budget resources, face uncertain information, and are wary about advice on how to spend their money. Thus, decision-making is less mechanical and much more complex than that implied by traditional approaches. These lessons lead to the conclusion that technological change is far less automatic than that implied by simpler models, which presume fully informed and ''rational'' purchasers who are hypersensitive to marginal opportunities to save energy. The lessons also imply a set of policy guidelines with the potential to improve the attractiveness of energy-saving technologies to the marketplace. Numerous reviewers provided advice and guidance in preparing this paper. Jerry Dion suggested the topic and helped focus it to meet EERE needs. Marilyn Brown of Oak Ridge National Laboratory (ORNL) provided insightful comments on various drafts, as did Milton Russell of the Joint Institute for Energy and Environment (JIEE). Other colleagues at ORNL and JIEE, including but not limited to, Barbara Ashdown, Melissa Lapsa, Lee Grier, Robert Shelton, and Don Jones have also been supportive and have contributed useful comments and correction. A number of other colleagues contributed comments on earlier drafts. Naturally, the author retains full responsibility for any remaining shortcomings.