Renewable Energy: willingness-to-pay by households for micro-generation technologies

1. Centre for Research in Environmental Appraisal and Management , University of Newcastle Renewable Energy: willingness-to-pay by households for micro-generation technologies K.G. Willis1 and Riccardo Scarpa2 1Centre for Research in Environmental Appraisal & Management School of Architecture, Planning and LandscapeNewcastle University 2Department of Economics, Waikato Management School, Waikato University Paper presented at the International Energy Workshop, Venice, 17th-19th June 2009

2. Outline • UK and EU policy on renewable energy • Stated preference theory and choice experiments • Experimental and survey design • Questionnaire and data • Primary heating choice • Discretionary micro-generation adoption CE • Conclusions Centre for Research in Environmental Appraisal and Management , University of Newcastle

3. UK and EU Policy • EU Directive 2001/77/EC • Set indicative target of 21% of electricity from renewable energy by 2010 • UK target 10% • 2008 EU proposed 20% of all energy sources from renewables by 2020 • UK target 15%. In 2005 UK renewable energy only 1.3% of all energy • Sustainability policy instruments • Awareness measures : • C&C instruments : building regulations • Market based instruments : feed-in tariffs, CCL, RO, EST subsidies • Micro-generation strategy • 47% of CO2 emissions in UK from built environment • BERR and Energy Saving Trust grants to households £2,500 towards installation of • Biomass heaters and stoves • Ground source heat pumps • Heat pumps (air) • Small scale hydro • Solar thermal • Solar electric • Wind turbines Centre for Research in Environmental Appraisal and Management , University of Newcastle

4. Installations of micro-generation Centre for Research in Environmental Appraisal and Management , University of Newcastle

5. Existing studies • Elk (2005): Swedish hholds +ve attitude to wind power • Bergman, Hanley & Wright (2006): wind turbine attributes • Martinsson and Scarpa (2006): wind power in Chile • Longo, Markandya & Petrucci (2006): WTP for green energy • Borchers, Duke and Parsons (2006): WTP for green energy from specific sources – wind, biomas, solar, farm methane • Rivers and Jaccard (2005): capital cost and fuel costs significant determinants of boiler choice • Banfi, Farso, Filippini & Jakob (2008): WTP for windows and insulation • OXERA (2006): loft, cavity wall insulation, light bulbs Centre for Research in Environmental Appraisal and Management , University of Newcastle

6. Stated preference theory and choice experiments • Revealed preference v stated preference • Stated preference (SP): • consumer demand theory (Lancaster, 1966) • and random utility theory • Utility function:Uij = Vij+ eij • Prob choosing alternative j among those in choice set C facing individual i is conditional logit Pi(j) = exp (xij'β)/Σk exp (xik'β), j,kC • Panel mixed logit Uij = βi ‘xij + εij where taste parameters β depend on some underlying distribution Centre for Research in Environmental Appraisal and Management , University of Newcastle

7. Choice experiment 1 • replacement of primary heating • 6 attributes • Capital cost or new system • Energy bill • Maintenance cost • Recommended by: none, friend, heating engineer, both • Contract length: 0, 1, 2, 4 years • Inconvenience: garden dug up, refuelling & space for fuel storage, space for hot water tank. Centre for Research in Environmental Appraisal and Management , University of Newcastle

8. Choice experiment 2 • Discretionary choice: additional micro-system • 5 attributes • Type of technology: solar power, solar water, wind turbine • Capital cost: • Maintenance cost: • Recommended by: none, friend, heating engineer, both • Monetary energy savings • Respondents given choice of ‘no purchase’ option Centre for Research in Environmental Appraisal and Management , University of Newcastle

9. Questionnaire and sample • Sample comprised 1279 households across Britain • Sample chose to represent • Population: age, gender, social class, employment status, income, location • Dwelling types, housing age, and existing heating • Each respondent completed 8 choice cards: 4 primary and 4 discretionary CE cards Centre for Research in Environmental Appraisal and Management , University of Newcastle

10. Results: primary CE Centre for Research in Environmental Appraisal and Management , University of Newcastle

11. Results: discretionary CE Centre for Research in Environmental Appraisal and Management , University of Newcastle

12. Primary heating system choice • RPL panel model best fit, but results similar to MNL • information increases prob. of micro-gen installation • Inconvenience decreases prob. of installation • contract length negative • WTP +£244 (GBP) for heating engineer recommendation, and £144 for that of friend • WTP -£545 (GBP) if garden is dug-up; -£446 for fuel storage, and -£221 for hot water tank space Centre for Research in Environmental Appraisal and Management , University of Newcastle

13. Discretionary heating system choice • RPL model best fit, but results largely similar to MNL • Information has mixed effect of prob. of installing micro-gen • Energy savings increase prob. choice • Maintenance costs decrease prob. • People WTP • Solar electricity +£2,831 • Solar thermal +£2,903 • Wind turbine +£1,288 • Heterogeneity in tastes with respect to • capital cost • Energy savings Centre for Research in Environmental Appraisal and Management , University of Newcastle

14. Conclusions • Renewable energy significantly valued by households • But not enough • to offset higher capital costs of micro-gen technologies • & in relation to annual energy savings • Costs of micro-gen > WTP • £10,638 2kWh solar PV unit > £2,831 • £4,998 for 1 kWh micro-wind unit > £1,288 • £3,904 for 2kWh solar thermal unit > £2,903 • WTP £2.91 in capital costs to save £1 on annual fuel bill • Implies time horizon 3 to 5 years • 34% discount rate • Explains slow uptake of micro-gen technologies • Sustainable development policy is running ahead of evidence Centre for Research in Environmental Appraisal and Management , University of Newcastle

15. Thank you • Thank you for attending this session • Do you have any questions, comments, or suggestions on the research? Centre for Research in Environmental Appraisal and Management , University of Newcastle