Household heterogeneity in valuation of heating energy costs

Abstract

This study analyses household heterogeneity in the valuation of lifetime heating energy costs. The valuation is estimated from the willingness to pay higher upfront costs at the moment of installing a residential heating system to obtain savings in heating costs over its lifetime. We combine extensive administrative register data on new houses built in Finland during 2010-2011 with local electricity prices and engineering estimates of heat consumption and estimate a mixed logit model of heating system choice. The data allow defining the valuation as a function of several observable household characteristics. On average, households are willing to pay €7 more in upfront costs to obtain annual savings of €1 in heating costs over the lifetime of the heating system. However, we find considerable heterogeneity across households and a valuation ranging from €2 to €15 in higher upfront costs. The relatively low valuation indicates policy measures could be needed to accelerate energy efficiency investments in the detached housing stock. Furthermore, the notable heterogeneity suggests the cost-effectiveness of policy measures can be improved by targeting the households with lowest valuations.