Abstract:

 In this article we study household’s incentive to improve its domestic energy efficiency. We develop and estimate a structural dynamic model of household’s retrofitting investment decision. The model explicitly accounts for the dynamic nature of the retrofitting with high cost of investment occurred at the time of retrofitting and with payoffs being realized delayed in time. The model allows for changes in household’s energy consumption that result from higher efficiency levels after a modernization and allow us to quantify the expected long-run utility gain and cost from retrofitting investment.  We find that retrofitting investment is costly leading to low investment rates by households. Once conducted, energy efficiency investment has a substantial impact of reducing domestic energy requirements for heating. Simulations of public policy shows that subsidizing investment cost increases in the investment rate, does however little to reduce the household's energy consumption. A household with low energy requirement for heating pay less for thermal comfort, hence will increase their demand for warmth. However, a household facing high energy prices has more incentive to save energy. An increase in energy price of 10 percent increases the probability of investment substantially and reduces household’s energy consumption by 6 percent.