Direct and Indirect Benefits of Energy-Efficient Residential Buildings

Direkte und indirekte Zusatznutzen bei energie-effizienten Wohngebäuden

Investigators
Eberhard Jochem, Martin Jakob, Walter Ott (lead, econcept), Martin Baur (econcept)

Partners
econcept AG (lead)
Zürcher Kantonalbank (ZKB)

Time Frame
7/2002- 5/2004

Funding
Swiss Federal Office of Energy (BFE), Programm Energiewirtschaftliche Grundlagen (EWG), see project tender
Bundesamt für Wohnungswesen (BWO)
Canton of Basle City (BS)
Schweizerischer Hauseigentümerverband

Abstract
Energy efficiency investments in buildings often generate benefits on several levels. Besides reduced energy cost for space heating, these co-benefits include improved living comfort, enhanced protection against external noise, higher rental incomes or resale prices and lower energy price risk exposure. The goal of the project is to identify and to quantify these co-benefits in financial terms. Two different methods, both based on the utility theory, are pursued: Conjoint Analysis as a stated preference method, and Hedonic Pricing as a revealed preference method. The results will be useful for the design of efficient policy measures, for building facility management and for the marketing strategies used to promote energy efficient buildings. A project extension determines the economic value of the co-benefits empirically, using the hedonic pricing method.

Zusammenfassung
Die Vermarktungserfahrungen mit Energieeffizienzinvestitionen zeigen, dass diese nicht mit Energiekosteneinsparungen allein begründbar sind. Vielmehr bestehen in erheblichem Umfang nicht-energetische Zusatznutzen, die aber bis jetzt nicht quantifiziert werden konnten. Die Forschungsgemeinschaft econcept / CEPE identifiziert die Zusatznutzen und -kosten von Energieeffizienzmassnahmen. Mit zwei verschiedenen methodischen Ansätzen (Conjoint Analyse und Hedonic Pricing) wird zur Monetarisierung der wichtigsten Zusatznutzen (Reduktion von Aussenlärm, höhere Raumluftqualität, Wohnkomfort, Behaglichkeit) die Zahlungsbereitschaft für diese Nutzen ermittelt. Aufgrund der Erkenntnisse werden Kommunikations- und Marketingempfehlungen für private und öffentliche Akteure im Wohnungsmarkt formuliert.

1 English Summary

Energy efficiency investments in buildings, such as thermal insulation of the building envelope, new energy-efficient windows or ventilation systems, often generate benefits on several levels. Besides reduced energy costs for space heating, these benefits include improved living comfort, enhanced protection against external noise, higher rental incomes or resale prices and lower energy price risk exposure. The goals of the project are (i) to classify the different types of co-benefits, (ii) to develop a methodological framework to quantify the co-benefits and express them in financial terms, and (iii) to apply the methodology thus developed to obtain an economic valuation of these benefits for such different stakeholders as building owners, investors of single or multi-family houses or the real-estate economy. Two different methods based on the utility theory are pursued: (i) Conjoint Analysis, as a stated preference method and (ii) Hedonic Pricing, as a revealed preference method. The results will be useful for the design of efficient policy measures, for building facility management and for the marketing strategies used to promote energy-efficient buildings.

2 Project Description

Introduction

Energy efficiency investments in buildings, such as thermal insulation of the building envelope, new energy-efficient windows or ventilation systems, often generate benefits on several levels. Besides reduced energy costs for space heating, these co-benefits include improved living comfort, enhanced insulation against external noise, higher rental incomes or resale prices and lower energy price risk exposure. However, these co-benefits barely enter into traditional economic assessments. This is partly due to a lack of methods which can quantify these co-benefits in financial terms. It can be assumed that this negligence of the economic value of such co-benefits is one of the reasons why the great potential of energy efficiency in the Swiss residential building sector is still largely untapped. The economic and ecological importance of these potentials provides a strong motivation to determine the economic value of these co-benefits.

Project goals

The goals of the project are fourfold:

to identify and classify the different types of co-benefits and to show their relevance to the Swiss residential building sector
to develop a methodological framework to quantify these co-benefits and express them in financial terms
to apply the methodology thus developed to obtain an economic valuation of the co-benefits for such different stakeholders as private building owners, investors in single- or multi-family houses or the real-estate economy
to develop marketing strategies for these stakeholder groups to stimulate a renewal of interest in the residential building regarding energy efficiency renewal of the buildings and to promote the energy-efficient construction of new buildings.

The scope of the project is limited to the co-benefits gained within the private economy. Co-benefits accruing to the public economy, such as reduced external costs, are not part of the project, even though they may be at least as significant.

Methodology

There are two approaches to the quantification and financial assessment of the co-benefits of energy efficiency investments. Co-benefits can involve reduced economic loss (e.g. reduced medical care costs) or constitute a positive valuation of the increased usefulness of apartments or houses. A broad survey of the relevant literature revealed some empirical evidence available which followed the former approach (e.g. epidemiological studies or studies of rent loss due to external noise), but also showed that a direct link to the attributes of energy efficiency investments, such as improved insulation, more energy-efficient windows or ventilation systems, was not possible. Therefore, new empirical work was deemed necessary. Following the latter approach, two types of methods can be used to empirically determine the co-benefits of energy efficiency investments, both based on consumer theory: (i) the method of stated preferences and (ii) the method of revealed preferences. It was decided to apply both types, since both have their specific advantages and disadvantages.

For the stated preference approach the indirect method of Conjoint Analysis (CA) was chosen. Within this approach, potential consumers are asked to state their preferences by choosing between or ranking two or more alternatives that are described by their utility functions. CA is often used to uncover the preferences of consumers regarding the designs of consumer goods (e.g. cars) and their pricing strategies. In the current project the survey respondents were asked to choose between their current residential situation (apartment or house) and an alternative situation where one or several of the following attributes were varied: rental or purchase price, façade insulation, and the enrgy efficiency of windows. Applying the discrete choice method, the utility function and the marginal willingness to pay (WTP) or willingness to accept (WTA) of these attributes can be estimated. Choices and WTP/WTA may depend on socio-economic factors such education, income, residential situation, etc.

The hedonic pricing (HP) method was chosen as a revealed preference approach. This method reveals the implicit prices of consumer goods or services. It is also used by the real-estate sector to appraise the values of houses or apartments. The method is based on the principle that supply and demand bid functions match at market equilibrium. Both of the functions are determined by the attributes of the goods or services, the cost to supply and the willingness to pay for each attribute. In the current project the good or service under consideration is housing, and the attributes that determine the prices are the micro and macro location, number of rooms and living area (and area of property in the case of individual houses), equipment, and the condition of apartment and of equipment. Prices include purchase prices in the case of individual (pre-existing or new) houses that have been traded and rental prices in the case of apartments.

It should here be emphasised that the similar data requirements of both approaches permit synergies in the research effort.

Work program

Between October 2002 and May 2003 the questionnaires for both of the methods were developed to cover the individual and common data requirements and thus to make use of the synergies mentioned above. In this period a pre-test for the CA approach was also carried out.

The main survey for the CA was conducted by Polyquest AG, Bern, between May and August 2003, using a three-stage approach:

contacting the respondents by phone to collect first data, check target group matching and willingness to participate
mailing of the written questionnaire that contained 10 to 15 choice alternatives
querying the general data and the alternative choices by phone

The goal was to obtain the following number of completed interviews: about 250 persons having moved into single family houses and about 250 interviews concerning the residents of rental apartments. Both samples were divided into 50% new houses (mostly built and sold by investors) and 50% houses of the existing building stock (constructed prior to 1990). The new buildings were further stratified equally into those meeting the requirements of the Minergie label and those merely fulfilling legal stipulations. Information about the building envelope of the pre-1990 apartment buildings had been surveyed separately at an earlier stage.

Regarding the HP method, two approaches are currently being pursued. Firstly, a collaboration with Zurcher Kantonalbank (ZKB) was initiated to make use of the existing real-estate transaction database and ZKB's HP model. This database was merged and intersected with the list of Minergie single-family houses in the Canton of Zurich. Secondly, a survey was conceived to cover both rental apartments and single-family houses outside of the Canton of Zurich. A further goal was to distinguish in more detail some attributes relevant to energy efficiency, in particular the endowment and condition of façades, windows and ventilation systems. A stratification approach similar to that of the CA method was pursued to obtain comparable precision (i.e.,standard error) on estimation results for the cases of multi- and single-family houses (MFH/SFH), new and existing buildings, Minergie and non-Minergie label houses (for new buildings) and renovated /non-renovated buildings. The survey, based on a 4-page written questionnaire, was started at the end of September 2003. About 3200 questionnaires were sent out, of which about 300 were sent to wrong or outdated addresses, including those of people who had moved or died. By the beginning of November 2003, barely 30% had been returned. Some 15% to 20% of these had not been fully completed with the most important characteristics (price or size of apartment or house) and cannot presently be used. Due to the insufficient number of responses, a reminder was sent out in November 2003.

3 Results

The first preliminary estimation results of the CA approach are available for the cases of apartments in new buildings and in the existing building stock.

For residents of apartments in new buildings a WTP for a ventilation system of 8% (for rents of CHF 1300.-) to 10% (for rents of CHF 2000.-) can be derived. Contrary to expectations, the WTA is slightly lower, between 5% and 7%. There is a slight scale effect, meaning that the relative WTP and WTA (expressed in % of the current rent) is lower for high rental prices, but it still increases in absolute terms. The estimation coefficient of the WTP of improved insulation and more energy-efficient windows is not significantly different from 0. However, the willingness to accept (WTA) is 7% to 9% for triple-glazed energy-efficient windows and 5% to 6% for improved insulation. The willingness to pay for Minergie as a whole is about 5% and the willingness to accept is about 10% for initial rents of CHF 1300.-), i.e., CHF 65.- to CHF 130.- per month. Note that willingness to accept expresses the compensation a person is expecting if she or he should abandon a certain advantage (here, an attribute of energy efficiency).

For apartments in the existing building stock the willingness to pay for improved wall insulation, new energy-efficient windows or ventilation systems is up to CHF 100.- to CHF 150.- per month. Note that these are preliminary estimation results. The results cited here might differ between specific locations (noisy streets or railways) or due to socio-economic factors such as income or education, or because of personal susceptibilities regarding noise, indoor air quality or allergies.

Regarding the HP method, estimation results are available from the analysis of the Zurcher Kantonalbank (ZKB). New Minergie single family houses yield a higher selling price of about 9%, with a standard error of about 5%, compared to standard energy efficiency with similar housing equipment at similar locations. Existing buildings that are equipped with new energy-efficient windows achieve an increased selling price of 2 to 3.5%. These results are based on about 5000 transactions over the last twenty years. Note that these estimation results are valid for the Canton of ZH and for single-family houses.

More estimation results will be available in spring 2004.

4 Publications

Ott W., Jakob M., Baur M. (2006). Direkte und indirekte Zusatznutzen bei energieeffizienten Wohnbauten (Direct and Indirect Benefits of Energy Efficient Residential Buildings), on behalf of the research program "Energiewirtschaftliche Grundlagen (EWG)" of the Swiss Federal Office of Energy (SFOE), Bern, Report in German, 220 p. [pdf, 2.65 MB], Annex [pdf, 2.72 MB]
Jakob M., Jochem E. (2003). Wärmeschutz bei Wohnbauten - Kosten und Nutzen. Publikation [pdf] (24 S.) im Auftrag des Forschungsprogramms EWG des Bundesamts für Energie (BFE, Hrsg.), November. Zu beziehen bei BBL oder Infostelle Minergie (info@minergie.ch).
Jakob M., Jochem E. (2003). Protection thermique des bâtiments - Coûts et bénéfices. Publication en francais (24 S.) im Auftrag des Forschungsprogramms EWG des Bundesamts für Energie (BFE, Hrsg.), November. Zu beziehen bei BBL oder Infostelle Minergie (info@minergie.ch).
Ott, W., Baur., M., Jakob M. (2003). Direkte und indirekte Zusatznutzen bei energie-effizieten Wohnbauten - 2. Zwischenbericht, on behalf of the research program "Energiewirtschaftliche Grundlagen (EWG)" of the Swiss Federal Office of Energy (BFE), Berne, September.

5 Presentations

Jakob, M. (2003). Gebäudeerneuerung lohnt sich - Direkte und indirekte Nutzen bei energie-effizienten Renovationen. 9. Herbstseminar "Mehrwert schaffen dank Sanieren und Erweitern in Minergie" vom 27. November in Bern (invited talk)· Jochem, E., Jakob, M. (2003). Gebäudeerneuerung lohnt sich - Direkte und indirekte Nutzen bei energie-effizienten Renovationen, Medienveranstaltung vom 21. November 2003, Bern.