This is a glimpse of the future under the energy efficiency regime being pushed in Texas and across the U.S. The picture shows a new home in the SOL neighborhood, three miles east of downtown Austin. It is being built on the premise that energy efficiency is the cheapest option for “new” energy.

A new study along these lines claims that energy efficiency would eliminate the need for seven new power plants and save Texas consumers $5 billion. But the reports always underestimate the costs of the energy efficiency measures and overestimate their savings. For instance, the study states that energy efficiency houses cost about 15% more to construct, though numbers in the study show the costs to be more like 20%. But whatever the figure, the mantra is that these higher costs will eventually be recouped through annual energy savings.

However, the numbers don’t actually work out so well. The report estimates that the savings of a net-zero home will run about $500 per year. However, if a normal house costs about $150,000 to construct, then the additional costs of making a home energy efficient will be about $22,500. That’s a payout of about 61 years, considering interest costs and inflation.

So one of the problems of the current energy efficiency push is that most people won’t live long enough to see the benefits of their investment in it! That is why those promoting energy efficiency want to mandate it, i.e., make us pay for it. They say while individuals may not be able to benefit from energy efficiency, society does, which represents a market failure. So we’ll all be better off if we pay for something that we’ll never benefit from personally.

One problem with this is that it ignores opportunity costs, i.e., the benefits that could have been achieved had energy efficiency money been invested elsewhere – say college, or a business, or savings for the future. This would make the likely payout much longer than 61 years. In fact, it would probably make the return go negative, which just highlights the fact that most energy efficiency arguments ignore basic math. Something is only efficient if it costs less. The energy efficiency solutions being mandated today are not. It also ignores basic human nature. If something is cheaper and better we’ll buy it or use it. If it is not, we won’t.

When energy efficiency is cheaper than building new power plants, then the market will be the place those measures are adopted. But until then, we’ll keep using coal, nuclear and natural gas to keep our lights on and our homes cool.

– Bill Peacock