Investment in energy efficiency: do the characteristics of investments matter?

Catherine Cooremans

doi:10.1007/s12053-012-9154-x

Abstract

Abstract “Investment in energy efficiency: do the characteristics of firms matter?” In their famous 1998 paper, DeCanio and Watkins raised the question and answered it affirmatively. Our paper addresses a parallel question: “Investment in energy efficiency: do the characteristics of investments matter?” To answer this question, we first describe our new investment decision-making model, applicable to all investment types. We then discuss our research results, based on questionnaires submitted to finance managers of 35 major electricity consumers in various commercial and industrial sectors. We show how characteristics other than profitability play an important role in investment choices. The investment category influences profitability evaluation, profitability requirement, and, ultimately, the decision made. For half of the firms in our study, energy-efficiency investments did not exist as a category. However, wide diversity regarding investment behavior is observed between firms. Our findings lead to a different explanation of the energy-efficiency gap and open the way for a new approach to promoting energy-efficiency investments, which is briefly discussed in the conclusion.

Highlights

Energy-efficiency gap According to mainstream neoclassical economics, investment decisions are strictly based on investment profitability, and firms should undertake all investments with a positive net present value
This situation is known as moral hazard, a form of information asymmetry theorized by the agency theory
DeCanio mentions a survey conducted by the Environmental Protection Agency (EPA) which showed that “the median pay-back required for one class of energy investment was 2 years

Summary

Introduction

According to mainstream neoclassical economics, investment decisions are strictly based on investment profitability, and firms should undertake all investments with a positive net present value. Energy-efficiency investments are not decided upon by profit-seeking firms because of their low real profitability (among others, Anderson and Newell 2004; Golove and Eto 1996; Jaffe and Stavins 1994; Sutherland 1991; Van Soest and Bulte 2001) or because information problems prevent price indications from reaching decision makers (Jaffe and Stavins 1994; Sorrell, et al 2000) or force organizations to define sub-optimal routines (DeCanio 1993; Quirion 2004; Ross 1986). Energy economics research has shown that factors other than profitability—factors which are not related to market or organization failures—do interfere in energy-efficiency investment decisions In their 1998 paper, DeCanio and Watkins studied decisions by firms to join the EPA’s program Green Lights. As shown in the diagram above, investment decision making must be considered, from a dynamic perspective, not as a point in time but as the result of a decision-making process This process is influenced by (1) organizational and external contexts along any number of points that surround it, (2) actors involved, and (3) characteristics of the investment and of the investment decision to be made. Strategic character is not given; it is interpreted by actors and by organizations, due to the action of several filters These elements influencing investment decision making are described in more detail in the following pages. Instead of conceiving decision making as a series of steps (or cycling imposed on a linear sequence...), it comes to be seen in a more integrative way as the construction of an issue” (Langley et al 1995: 266)

Evaluation & Choice

Results and discussion

Conclusion