Economic evaluation of investment in electricity conservation

Energy Conversion and Management 49 (2008) 3517–3530

Contents lists available at ScienceDirect

Energy Conversion and Management

journal homepage: www.elsevier .com/ locate /enconman

Economic evaluation of investment in electricity conservation q

Nir Becker a,*,1, Yaron Fishman b,1, Doron Lavee a,1

a Department of Economics and Management, Tel-Hai College, Upper Galilee, 12210, Israelb Public Utility Authority-Electricity, Jerusalem 91012, Israel

a r t i c l e i n f o

Article history:Received 26 August 2007Received in revised form 29 June 2008Accepted 5 August 2008Available online 26 September 2008

Keywords:Cost-benefit analysisConservation programsInput–output analysis

0196-8904/$ - see front matter � 2008 Elsevier Ltd. Adoi:10.1016/j.enconman.2008.08.010

q We thank Michael Ritov, David Katz, Terry Genslefor very constructive comments. The views exprenecessarily represent Public Utility Authority-Electric

* Corresponding author. Tel.: +972 4 6900976; fax:E-mail address: nbecker@telhai.ac.il (N. Becker).

1 Senior authorship is not assigned.

a b s t r a c t

The paper presents an economic study of the potential for energy conservation in Israel. We analyzeenergy conservation policies targeted at the household sector, focusing on the economic feasibility ofscrapping old household electrical appliances, and considering the effect of such policies at both thehousehold and the macro-economic level. The results of our analysis show that the appliance that pro-vides the most potential conservation is the air conditioner (used for both heating and cooling). A scrap-ping program for old air conditioners passes a cost benefit analysis (CBA) even when external benefits areexcluded from the calculation. When external benefits are included, scrapping programs for both wash-ing machines and dishwashers pass the test as well. According to our findings, the annual economic ben-efit of a program involving the scrapping of 100,000 air conditioners, 45,000 washing machines and15,000 dishwashers per annum over 10 years ranges from 246 million New Israeli Shekels (NIS) in thefirst year of implementation to 693 million in the tenth year. Most of the savings are derived from thescrapping of air conditioners.

1. Introduction

Energy efficiency and the achievement of energy savings rankamongst the most important issues in today’s developed countries[1]. For many years, with the rise in living standards and the devel-opment of industry, the demand for energy has been increasing.This increase in energy demand has negative external effects thatshould be considered in government policy for promoting eco-nomic development. A growing understanding of the importanceof this issue has given rise to different types of government policymeasures focused on investment in energy conservation.

The first time that special emphasis was placed on the need forefficiency in energy use was in the 1970s during the first Arab oilembargo. Since then, energy efficiency at the national level hasbeen measured in terms of energy consumption relative to grossdomestic product (GDP). Amongst International Energy Agency(IEA) member countries, consumption relative to GDP is currentlyabout 45% less than it was in 1973 [2]. This reduction was achievedthrough improved technology on the one hand, and changingperceptions and energy consumption patterns on the other.Energy-saving policies, when efficient, have clear economic and

ll rights reserved.

r and an anonymous refereessed in this paper do notity opinions.+972 4 6900985.

environmental advantages not only at the household or individualagent level, but also at the macro-economic level. The benefits atthe macro-economic level stem from reducing the externality costsassociated with damage to the environment caused by the burningof carbon-based fossil fuels.

The market forces that encourage efficient energy use at thefirm level in the industry sector, fail in the household sector.Households lack adequate information regarding energy efficiencyand are reluctant to replace old electrical appliances, even if thereplacement is economical in the long run (they lack the capabilityfor performing economic analyses and have high switching costs).Both types of agents (firms and households) take into account onlythe direct costs and benefits of their decisions and ignore the exter-nal costs. In order to contend with these market failures, govern-ment intervention is needed.

Another issue that needs to be taken into account is the issue ofincreased consumption during peak hours. In recent years, short-age of electricity reserves in Israel to meet demand during hoursof peak consumption has resulted in the building of new powerstations, which increase external costs. Consumption in peak de-mand hours also necessitates the utilization of the marginal unitof electricity generation – which is generally the least efficientand most expensive. Energy conservation can help delay the neces-sity of constructing and utilizing these plants, especially if conser-vation is achieved during peak hours.

According to non-official estimates of the Ministry of Infrastruc-ture, potential energy savings in Israel could reach 20–30% of totalenergy consumption. Households energy expenditure in Israel is

3518 N. Becker et al. / Energy Conversion and Management 49 (2008) 3517–3530

estimated at about $1.7 billion, so annual energy savings couldreach about $425 millions [3]. While the benefits of such programsappear to be promising, costs should be taken into account as well.Costs include payments to consumers as an incentive to scrap oldappliances, as well as administrative costs and the costs associatedwith financing the early purchase of new appliances (to replace thescrapped appliances). It is important, therefore, to consider bothcosts and benefits when dealing with such programs and this willbe the aim of the current paper.

The paper continues as follows. The next section is devoted to areview of the literature on the subject. Section 3 describes themethodology employed in the paper. Section 4 describes the eco-nomic benefits of a scrapping program for household electricalappliances at the micro level; that is, the benefits to a representa-tive consumer gained by replacing a given appliance with a moreenergy-efficient alternative, as well as the external benefitsachieved by that single replacement due to reduced pollutionand decreased consumption during peak demand hours. Section5 describes the economic benefits of a scrapping program forhousehold electrical appliances at the macro level; that is, the totaleconomic value (TEV) for programs to scrap n household electricalappliances. This value includes the added benefit due to the impactof such conservation programs on the GDP. Section 6 summarizesand concludes the paper.

2. Literature review

Energy savings programs have been in existence since the1970s [4–10] and their evaluation is an internationally acceptedfield of study. Research has been carried out on broad cross sec-tions as well as on specific sectors (e.g.: households, industry,etc.). Of specific importance are energy savings programs thatmay be directly compared to programs aimed at increasing energysupply, due to the clear environmental advantages of conservationprograms over their supply-oriented counterparts.

Experience from many regions of the world is accumulatingrapidly. For example, studies have been conducted in Germany[11], Tanzania [12], New Zealand [13] and Kuwait [14]. Convery[15] summarizes the experience of five European countries: Ire-land, England, Germany, Holland and Denmark; Gan [16] describesWorld Bank programs for investment in energy savings in China.

Frequently, the question arises whether government shouldplay a role in promoting energy conservation. The conservative po-sition is that it should not: if energy savings measures would proveto be economical then government intervention would not be effi-cient, since investments would be made independent of the gov-ernment’s involvement [17]. An empirical case study for thisargument is presented by Haugland [18]. He found that 70% of gov-ernment funds invested in energy savings measures were directedat areas which the private sector would have most likely coveredregardless of government intervention. This type of argument,however, ignores the fact that energy savings programs aim alsoto reduce pollution. Both manufacturers and consumers take intoaccount only their private interests; however, as the benefits ofreducing pollution are of a public nature, it is impossible to removethe public interest factor from the calculation.

Two additional core issues should be raised – these are the is-sues of energy independence and taxation. Brown [17] includesas one of the benefits of energy conservation the utility of in-creased energy independence. Clearly, the problem of dependencyis relevant for a country such as Israel and one may ask whetherenergy conservation can succeed in changing the composition ofimported energy. Hudson and Jorgenson [19] discuss the relation-ship between taxation and conservation of energy. Most importantin this type of work is the notion of efficient pricing of energy con-

sumption – pricing signals which provide an incentive to conserveenergy and thus avoid the need for costly investments that proveover time to be less cost efficient.

An important distinction needs to be made between energyconservation in the household sector and energy conservation inthe industrial sector. The main difference concerns the nature ofthe benefit yielded by reduced energy consumption. For the indus-trial sector, energy is an input in production, while for the house-hold sector it is a final consumption good. For households, then,energy use is of an amorphous nature, while for industrial firmsit is directly measured as lost profit. Quigley [20] and Hannon[21] provide discussions of energy conservation in the householdsector (as opposed to much of the abovementioned research, fo-cused on industry).

Within the household sector, numerous papers have discussedenergy conservation in the context of home electrical appliances,which stand at the focus of this paper: Arima and Sakamoto [22]present an overview of energy labeling programs for householdappliances in Japan. Ashina and Nakata [23] also look at Japanand examine policies aimed at reducing residential CO2 emissions;specifically, they consider government reimbursement of the costdifference between energy-efficient and conventional appliances,a carbon tax, and a combination of the two measures. They findthat such a combination may indeed be highly effective in reducingCO2 emissions. Wood and Newborough [24] discuss the possibili-ties of encouraging energy conservation through advanced energyconsumption displays for the home, and suggest design character-istics for these displays that will allow them to achieve maximumsavings.

A look at a different avenue for energy conservation in the elec-trical household appliance market is provided by Truttmann andRechberger [25]. Their study examines the effect of extendingproduct life of electrical appliances through reuse, taking into ac-count both the main advantage of reuse – lower consumer demandfor new products, and its main disadvantage – the fact that olderproducts are usually less energy efficient than their newer counter-parts. Their main finding is that on a national level, even extensivereuse can only result in limited savings of materials and energy.Thus they conclude that recycling of materials from electricalappliances may be a more efficient means for achieving resourceconservation. And while not directly dealing with electrical appli-ances, Al-Ragom [26] explores the opportunities to save on air con-ditioning costs by retrofitting old residential buildings with betterwall, roof and window insulation, in Kuwait. He finds that whileretrofitting is not cost efficient from the perspective of the house-hold due to the highly subsidized price of electricity in Kuwait,from the government’s perspective the investment could be recov-ered within six years.

A number of recent studies are of particular relevance to thecurrent paper. Mirasgedis et al. [27] also focus on the householdresidential sector, and carry out cost-benefit analyses to identifythose measures of energy conservation which would be most effi-cient. Taking into account both direct costs and external costs (spe-cifically focusing on CO2 emissions), they find that many possiblemeasures are in fact highly feasible, and in particular highlightthe replacement of old central heating boilers, the use of low en-ergy lighting, the use of roof ventilators and the replacement ofold air conditioners as measures which are cost-effective evenwhen the negative externalities of energy generation are ignored.

Boardman [28] estimates energy savings achieved in the UKthrough the imposition of the EU minimum standard for energyefficiency of refrigerators, which came into force in 1999. She findsthat over the lifetime of the appliances sold only from 1999 to2002, 1 Mt C of CO2 emissions will be reduced due to the standard,and net benefit to consumers will reach £855m.

N. Becker et al. / Energy Conversion and Management 49 (2008) 3517–3530 3519

Masjuki et al. [29] examine potential savings achieved throughintroduction of mandatory energy efficiency standards for room airconditioners in Malaysia. Comparing expected energy consump-tion under a business-as-usual scenario with expected energy con-sumption assuming the implementation of mandatory energyefficiency standards, the study finds that at least 831 GWh maybe saved over the 10 year period running from 2002 to 2012. Alsolooking at Malaysia, Mahlia et al. [30] carried out a cost-benefitanalysis for the introduction of minimum energy efficiency stan-dards for household refrigerators. Taking into account current elec-tricity prices and the incremental costs of purchasing moreefficient refrigerators, the study found that over a period of 8 years(after which the proposed standard becomes obsolete) implemen-tation of the standards would indeed prove economically worth-while. This, even though the study does not take into account thenegative externalities of energy consumption. Most recently, andalso in the Malaysian context, Saidur et al. [31] examine expectedreductions in air pollution (and particularly greenhouse gas emis-sions) due to the introduction of energy efficiency standards forhome electrical appliances (and, for air conditioners, raising ther-mostat set point temperature), focusing on refrigerators and air-conditioners. The study estimates that over the period 2005–2015 a total of 12,352 GWh may be saved, resulting in reductionsof 5583 kt of CO2, 282 kt of SO2, 13 kt of NOx and 3 kt of CO emis-sions. The study does not however attempt to provide an economicvaluation of the benefit of reduced emissions. Finally, a similarstudy was also carried out in China: Lu [32] examined potentialsavings from implementation of the newly introduced national en-ergy efficiency standard for refrigerators. The study finds thatimplementation of the standard over the 20 year period from2003 to 2023 may lead to cumulative electricity savings of about530 TWh, resulting in cumulative emission reductions of 737 Mtof CO2, 32 Mt of SOx, 2413 kt of NOx and 14.7 Mt of particulates.This study also does not attempt to valuate the benefit of emissionreductions.

The current paper contributes to the growing literature in thefield by providing a full cost-benefit analysis for a program in-tended to induce retirement of old household electrical appliances,encompassing all aspects of such a program. Specifically, our studyprovides (1) a direct comparison between the costs and benefits ofthe proposed policy; (2) consideration of both direct costs andexternal costs associated with energy consumption; (3) consider-ation of the effects of the proposed policy at the macro-economiclevel. The study also differs from much of the existing literaturein the field in that it considers a program intended to actively in-duce retirement of old, inefficient appliances, rather than a policythat would affect only future sales of appliances.

2 While the first six paragraphs are well addressed in this paper, the effect of theseventh paragraph could be examined in another research.

3. Methodology

We estimate the total impact of a scrapping program for oldhousehold electrical appliances by taking the following elementsinto account:

1. Direct costs of the program.2. Direct benefits of the program.3. External costs and benefits.4. Influence on other markets and overall effect on GDP.

In order to analyze the effect of replacing an old appliance witha new one we construct two alternative cash flows. The first is forthe business as usual scenario – that is, using the old electricalappliance until the end of its product life. The second relates topurchasing a new electrical appliance and scrapping the old appli-ance. The difference represents the direct net benefit.

The two externalities examined are air pollution and the impacton consumption during peak demand hours. For air pollution, weevaluate the reduction in emissions of four major pollutantsachieved through reduced energy demand (due to use of new,more energy-efficient appliances). For the externalities associatedwith consumption during peak demand hours, we first quantifythe marginal costs of consumption in peak demand hours (thatis, the extra costs associated with consumption during peak hours,above the average costs of energy consumption), and then multiplythe extra costs by the number of hours each appliance was foundto be used during peak hours.

Finally, we employ input–output analysis in order to estimatethe impact of scrapping programs on related markets (such asthe job market) and estimate the overall effect of such programson the GDP.

4. The micro level

We first present the direct CBA for the single household.

4.1. Benefits for the single household

In order to conduct a CBA for a scrapping program for householdelectrical appliances, the following data are needed:

1. Energy consumption data – average electricity consumptionduring use by each type of appliance, per unit of time and/oruse.

2. Patterns of use – the number of times each type of appliance isgenerally used (during a given period of time), and the hoursduring which it is used.

3. Rate of efficiency gain achieved by switching from an old elec-trical appliance with low energy efficiency to a new electricalappliance with higher energy efficiency.

4. Cost of electricity consumption, per kWh.5. Daily distribution of electricity consumption.6. Switching costs – costs of disposing the old electrical appliance

and acquiring the new electrical appliance.7. Lifecycle of each electrical appliance – the average lifecycle of

the appliance from production until final scrapping.2

Potential savings for electrical appliance of type i in kWh (PSi)are calculated by multiplying the average annual electricity con-sumption of electrical appliance i in kWh (ECi) by the rate of effi-ciency gain (eri) achieved by switching from an old electricalappliance with low energy efficiency to a new electrical appliancewith higher energy efficiency. That is:

PSi ¼ ECi � eri ð1Þ

Potential savings for electrical appliance i (EPSVi) in New IsraeliShekels (NIS) are calculated by multiplying PSi by the householdaverage electricity tariff, in NIS/kWh (HAET), that is:

EPSVi ¼ PSi �HAET ð2Þ

In Table 1, we present the basic database and the outcomes of Eqs.(1) and (2). The data for average annual electricity consumption isfrom the Central Bureau of Statistics (CBS) [33]; the data for the rateof improvement (increased efficiency) is from the Ministry of Infra-structure [34].

We assume that purchasing a new appliance earlier than other-wise planned is financed by a bank loan, with the annual interestpayments on the loan constituting the financing cost. We assume

Table 1Potential annual savings

Electrical appliance Size/volume Average annual electricityconsumption – ECi(kWh)

Rate of improvement –increased efficiency – eri (%)

Potential savings –PSi (kWh)

Potential savings –EPSVi (NIS)

Refrigerator Up to 200 L 292 30 88 42Refrigerator Above 500 L 1825 30 548 260Air conditioner Up to 9000 Btu 1787 25 447 212Air conditioner Above 33,000 Btu 7597 25 1899 902Washing machine Up to 5 kg capacity 730 40 292 139Washing machine Above 10 kg capacity 1564 40 626 297Dishwasher Up to 8 place settings 584 40 234 111Dishwasher Above 12 place settings 803 40 321 153Dryer Up to 6 kg capacity 320 40 128 61Oven Single cell 345 30 104 49

Source: CBS [33], MNI [34].

that the household will have to purchase a new appliance in the fu-ture at any event. Therefore, the additional annual cost of purchas-ing a new appliance of type i earlier than otherwise planned (CEPi)is calculated by multiplying the price of appliance i, includinginstallation costs (CAi), by the interest rate on loans (r). That is:

CEPi ¼ CAi � r ð3Þ

Table 2 shows the results for each type of electrical appliance. Foreach appliance, we compared annual savings (due to switching toa new energy-efficient appliance) with the additional annual costsstemming from purchasing the new appliance earlier than other-wise planned (at a 6% interest rate).

The results show that positive annual savings may potentiallybe achieved only for air conditioners (the other appliances do notpass a direct CBA). For air conditioners, the net return on invest-ment (the rate of return of annual cost savings to investmentminus additional annual costs stemming from purchasing thenew appliance earlier than otherwise planned) is positive. By thiscalculation it can be seen that even if we ignore external costs,switching is economical from the point of view of the household,so that households may be expected to implement this measureeven without government financial support. Government involve-ment should still be considered, however, in the context of increas-ing public awareness to the potential private benefit of purchasingthe new air conditioners earlier than otherwise planned.

4.2. External benefits

Total program benefits for the economy also include the lowerexternal costs associated with the use of the new appliance of typei in place of the old appliance (EPEi). We examine benefits stem-ming from reduced negative externalities of two types: the valueof avoided negative environmental effects of appliance i (VANEEi),and the potential reduction in electricity costs due to a reduction inenergy consumption during hours of peak electricity demand, de-fined as peak-hours cost savings of appliance i (PHSCi). That is:

EPEi ¼ VANEEi þ PHSCi ð4Þ

4.2.1. Value of avoided negative environmental effectsWe estimate the value of reduced air pollution for each electri-

cal appliance through the following four steps:

Step a: Electricity production in Israel is based on three major fueltypes: coal, natural gas and diesel fuel. For each fuel type/generation technology (f), we calculated unit cost savingsassociated with reducing air pollution emissions of fourmajor pollutants (e): SO2, NOx, CO2, and PM, expressed in$/kWh (UCSRAPf). This is carried out by multiplying theemission coefficient, expressed in units of g/kWh (ECfe)

(as published by the IEC [35]), by the pollution costs ofthe four pollutants, expressed in units of $cent/g (UPCe)(as published by the Public Utility Authority-Electricity[36]), dividing by 100, and summing over e. That is:

UCSRAPf ¼X4

ECfe � UPCe=100 ð5Þ

The results of Step a are presented in Table 3.

low, medium and peak – we calculate weighted averageunit cost savings (in NIS/kWh) associated with reducingair pollution emissions of each pollutant type, based onthe assumed marginal fuel type utilized in each band(WAUCSRAPj). This is carried out by multiplying UCSRAPf,calculated in Step a (presented now in NIS, according toan exchange rate of 3.486 NIS/US$) by the assumedweighted marginal fuel type used in each band (WMFTUj),and summing over e. That is:

WAUCSRAPj ¼X4

ECfe � UPCe=100 �WMFTUj ð6Þ

The actual marginal fuel type used in each band is deter-mined by the optimal dispatch of generation units, which,in turn, depends upon many economical, engineering andregulatory variables and constraints governing the electric-ity generation sector. Full analysis of this issue is beyondthe scope of this paper. For simplicity, we assume thereforethat in peak demand hours the marginal fuel type utilizedis diesel fuel; in low demand hours, the marginal fuel typesutilized are coal and gas, but we assume that any reductionin electricity demand will be met by reduced generation bycoal (due to the high emissions associated with its utiliza-tion); in medium demand hours, reduced demand will bemet by reduced generation by both diesel fuel (20%) and coal(80%). The results of Step b are also presented in Table 3.

Step c: For each electrical appliance (i) we calculate the unit costsavings (in NIS/kWh) associated with reduced air pollution(EAUCSRAPi) by multiplying WAUCSRAPj, calculated inStep b, by the percentage rate of its consumption in eachtime of use tariff band (j) – low, medium and peak (EACPRj)– and summing over j. That is:

EAUCSRAPi ¼X3

WAUCSRAPj � EACPRj ð7Þ

The results of Step c are presented in Table 4.

avoided negative environmental effects of appliance i inNIS (VANEEi) by multiplying EAUCSRAPi, calculated in Step

c, by the potential savings of electrical appliance i in kWh(PSi), presented and calculated in Eq. (1) and Table 1,respectively. That is:

VANEEi ¼ EAUCSRAPi � PSi ð8Þ

The results of Step d are also presented in Table 4.

4.2.2. Peak hour cost savingsThis section explains our calculations of potential electricity

cost reductions due to reduced peak hour energy demand. Thiscalculation is carried out by comparing the household averageelectricity tariff (HAET), which is a fixed tariff, with the timeof use tariff, which is a differential tariff that takes into accounttime of consumption. The Public Utility Authority-Electricity inIsrael offers consumers the possibility to pay a differential tariffthat varies according to time of consumption. This differentialtariff is a function of both season and time of day. The differ-ence between the marginal cost of electricity production (re-flected in the time of use tariff) and the fixed tariff forelectricity represents the additional costs borne by the economydue to demand at peak hours. As the vast majority of house-holds pay the household average electricity tariff, this differ-ence is usually not taken into account by the individualhousehold. The time of use tariff, consisting of different pricesfor three time bands and three seasons (summer, winter andtransition), and the household average electricity tariff, are pre-sented in Table 5.

We estimate peak hour cost savings for each electrical appli-ance i (PHSCi) through the following two steps:

Step a: For each electrical appliance i, we calculate the averagetime of use tariff (ATOUT), by multiplying the time ofuse tariff of cluster k (k = 9), presented in Table 5 (TOUT),by the percentage rate of its consumption in each of thenine time load tariff clusters (EACPRk,i), and summingover k. That is:

ATOUT ¼X9

TOUT � EACPRk ð9Þ

Step b: We calculate peak hour cost savings for each electricalappliance i (PHSCi). This is achieved by first calculatingunit cost savings due to a reduction in energy consump-tion during peak hours (EAUCSRECPHi), that is, the dif-ference between the household average electricitytariff (HAET) and the average time of use tariff for eachelectrical appliance i (ATOUT), presented in Step a, andthen multiplying the result by the potential savings ofelectrical appliance i, in kWh (PSi) (which was presentedand calculated in Eq. (1) and Table 1, respectively). Thatis:

PHSCi ¼ ðATOUT�HAETÞ � PSi ¼ EAUCSRECPHi � PSi

ð10Þ

The results of Steps a and b are presented in Table 6. In Table 7we present a summary analysis of the individual and nationaleconomic benefits for each of the different types of appliances.We also introduce the cost of scrapping the old appliance (GRT-COSTi) – the cost of having the old appliance permanently dis-mantled by a certified technician. Clearly the return oninvestment for new air conditioners is significantly higher thanfor all other electrical appliances. This is the case both at theindividual level and at the national economy level. Scrappingair conditioners is associated with the highest benefits as a resultof the following:

Table 5Time of use tariff and household average electricity tariff 3/2008 (NIS/100/kWh)

Season Time of use tariff (TOUT) Household average electricity tariff (HEAT)

Low Medium Peak

Winter 19.98 48.97 83.07 47.48Transition (spring/autumn) 20.35 42.44 66.28Summer 21.22 55.97 86.59

Source: PUA [36].

Table 3Unit pollution costs, emission coefficient, unit cost savings associated with reducing air pollution and weighted average unit cost savings of reducing air pollution for SO2, NOx,CO2 and PM

Pollutanttype (e)

Unit pollution costsin $cent/g (UPCe)a

Emission coefficient in g/kWh(ECfe)b

Unit cost savings associated withreducing air pollution in $/kWh(UCSRAPf)

Weighted average unit cost savingsassociated with reducing airpollution in NIS/kWh (WAUCSRAPf)

Fuel type Time of use tariff bands

Diesel fuelc Coal Gas Diesel fuelc Coal Gas Low Medium Peak

SO2 0.319 1.2 2.5 0.03 0.0038 0.0080 0.0001 0.0278 0.0249 0.0133NOx 0.24 2.6 2.5 0.5 0.0062 0.0060 0.0012 0.0209 0.0211 0.0218PM 0.95 0.13 0.08 0.01 0.0012 0.0008 0.0001 0.0026 0.0030 0.0043CO2 0.0007 925 872 461 0.0065 0.0061 0.0032 0.0213 0.0215 0.0226

Total 0.0178 0.0208 0.0046 0.0726 0.0705 0.0620

a Source: PUA [36].b Source: IEC [35].c Diesel fuel in industrial gas turbine.

Table 6Electrical appliance unit cost savings due to the reduction of energy consumption in peak demand hours and annual peak-hour cost savings

Electrical appliance Type Electrical appliance unit cost savings due to reductionof energy consumption in peak hours in NIS/kWh (EAUCSRECPHi)

Annual peak-hour costsavings in NIS (PHSCi)

Refrigeratora Up to 200 L �0.0315 �3Refrigeratora Above 500 L �0.0315 �17Air conditioner Up to 9000 Btu 0.1053 47Air conditioner Above 33,000 Btu 0.1053 200Washing machine Up to 5 kg capacity 0.1511 44washing machine Above 10 kg capacity 0.1511 95Dishwasher Up to 8 place settings 0.1573 37Dishwasher Above 12 place settings 0.1573 51Dryer Up to 6 kg capacity 0.2496 32Oven Single cell 0.1827 19

a The negative results for refrigerator are due to its uniform consumption distribution and the differences between the consumption distribution used to calculate the timeof use tariff and the consumption distribution used to calculate the household average electricity tariff.

Table 4Electrical appliance unit cost savings associated with reducing air pollution and the value of avoided negative environmental effects

Electrical appliance Type Electrical appliance unit cost savings associatedwith reducing air pollution in NIS/kWh (EAUCSRAPi)

Value of avoided negative environmentaleffects in NIS (VANEEi)

Refrigerator Up to 200 L 0.0691 6Refrigerator Above 500 L 0.0691 38Air conditioner Up to 9000 Btu 0.0681 30Air conditioner Above 33,000 Btu 0.0681 129Washing machine Up to 5 kg capacity 0.0660 19Washing machine Above 10 kg capacity 0.0660 41Dishwasher Up to 8 place settings 0.0659 15Dishwasher Above 12 place settings 0.0659 21Dryer Up to 6 kg capacity 0.0644 8Oven Single cell 0.0652 7

1. Air conditioners consume more electricity than otherappliances.

2. Air conditioners are used primarily during medium and peakdemand hours.

3. Purchase costs of air conditioners are low relative to annualsavings.

4.3. Value added to the national economy of a scrapping programfor air conditioners

In order to analyze the national benefits of a scrapping programfor air conditioners we first need to address two market failures.First, in many instances, old air conditioners are returned to the

Table 7Summary analysis of the private and national economic benefits (NIS per unit)

Electricalappliance

Type Private benefits (NIS) National benefits (NIS)

Price of applianceincludinginstallation – CAi

Additional annualcost due to earlierpurchase – CEPi

Averageannual costsavings –EPSVi

Annualprivatenetbenefit

Rate of return oninvestment net ofearlier purchasecost (%)

Scrapping cost(one-time cost)– GRTCOSTi

Cost of applianceincluding installationand scrapping cost

Annual energyproductionexternalities –EPEi

Annualsocial netbenefit

Rate of return oninvestment net ofearlier purchasecost (%)

Refrigerator Up to200 L

1000 60 42 �18 �1.8 100 1100 3 �15 �1.4

Refrigerator Above500 L

6000 360 260 �100 �1.7 100 6100 21 �80 �1.3

Airconditioner

Up to9000 Btu

2400 144 212 68 2.8 200 2600 77 146 5.6

Airconditioner

Above33,000 Btu

7300 438 902 464 6.4 200 7500 329 793 10.6

Washingmachine

Up to 5 kgcapacity

2500 150 139 �11 �0.5 100 2600 63 52 2.0

Washingmachine

Above10 kgcapacity

5500 330 297 �33 �0.6 100 5600 136 103 1.8

Dishwasher Up to 8placesettings

2000 120 111 �9 �0.5 100 2100 52 43 2.1

Dishwasher Above 12placesettings

3500 210 153 �57 �1.6 100 3600 72 14 0.4

Dryer Up to 6kgcapacity

2500 150 61 �89 �3.6 100 2600 40 �49 �1.9

Oven Single cell 3500 210 49 �161 �4.6 100 3600 26 �135 �3.8

N.Becker

etal./Energy

Conversionand

Managem

(2008)3517–

35303523

market after refurbishment. This market failure must be correctedthrough a mechanism that ensures that old machines are scrappedand not returned to use. Second, in the process of decommissioningold air conditioners greenhouse gases may be released into theatmosphere, thereby causing significant environmental damage.This market failure must also be addressed.

In order to overcome these failures, the government must fi-nance and supervise the decommissioning and scrapping of airconditioners. In an unofficial survey we conducted, the cost ofdecommissioning and scrapping an old air conditioner (GRT-COSTac) was found to be about 200 NIS. Government financing ofthe scrapping costs should thus constitute an incentive to consum-ers to scrap their old air conditioners.

Table 8 describes the cash flow and the net present value for theaggregate economy of the air conditioner scrapping program. Thecost of capital in this analysis is 6%; the cash flow is calculatedfor small air conditioners (less than 9000 Btu).

The results of the benefit analysis show that there are signi-ficant economic benefits to scrapping old air conditioners. InTable 9 we present a sensitivity analysis for some of the vari-ables in the model – cost of capital and the expected rate ofefficiency. It can be seen that even with a relatively high costof capital and a low savings rate, the program still has apositive net benefit.

5. The economic benefits of a scrapping program for householdelectrical appliances at the macro level

In the previous section we presented the economic benefits ofscrapping programs for old electrical appliances at the micro le-vel. In this section we present the economic benefits of scrap-ping programs at the macro level. Specifically, two models thatcalculate the total economic value (TEV) for programs to scrapn household electrical appliances are presented. The first modelis a single period model that presents the central variables thatmust be taken into account in the calculation of the TEV. Thesecond model is a multi-period model for the calculation ofTEV, dependent on the time horizon for the implementation ofthe program.

Table 8Cash flows associated with scrapping air conditioners, at the national level (NIS per unit)

Year 0 1 2

Scrapping cost (GRTCOSTi) �200Average annual cost savings (EPSVi) 212 212Additional annual cost due to earlier purchase (CEPi) �144 �144Annual energy production externalities (EPEi) 77 77Cash flow (CF) �200 146 146Capitalized cash flow �200 137 130

Net present value (NPV) 871Internal rate of return (IRR) 72.5%

Table 9Sensitivity analysis for air conditioner scrapping, at the national level (NIS)

Capital costsRate of efficiency (eri) 10.0% 9.5% 9.0% 8.5% 8.0%10% �373 �377 �381 �385 �3815% �17 �13 �9 �5 �020% 339 350 363 375 38825% 695 714 734 755 77730% 1050 1078 1106 1135 11635% 1406 1441 1478 1515 15540% 1762 1805 1849 1895 19445% 2118 2169 2221 2275 233

5.1. Single period model for the calculation of the TEV

The TEV of a scrapping program for n household electrical appli-ances can be defined as the sum of the direct economic value (DEV)and the indirect economic value (IEV) of the program:

TEV ¼ DEVþ IEV ð11Þ

In this work, the DEV of the program is calculated as the sum of thecost savings in energy production (energy production savings value(EPSV)) that result from switching to new, more energy-efficientappliances, net of the additional annual costs of purchasing thenew appliances earlier than otherwise planned (CEP) and net ofthe costs of scrapping the old appliances (GRTCOST). The IEV ofthe program is calculated as the sum of the reduced external costs(energy production externalities (EPE)) resulting from the decreasein electricity generation, and the increase in GDP (DGDP) as a resultof increased demand for locally manufactured appliances (energy-efficient alternatives to the old appliances). That is:

DEV ¼ EPSV� CEP� GRTCOST ð12ÞIEV ¼ EPEþ DGDP ð13Þ

The energy production savings value (EPSV) is calculated by multi-plying the energy production savings value of electrical appliance oftype i (EPSVi), as calculated in Section 4.1, by the number of electri-cal appliances of type i scrapped within the framework of the pro-gram (mi), and summing over l different types of electricalappliances involved in the program. That is:

EPSV ¼Xl

EPSVi �mi ð14Þ

Similarly, to calculate the costs of purchasing new appliances earlierthan otherwise planned (CEP), we multiply the additional annualcosts of early purchase of appliance of type i (CEPi) by the numberof electrical appliances of type i scrapped (mi), and sum over l differ-ent types of appliances. To calculate the costs of scrapping old appli-ances, we multiply the scrapping cost of electrical appliance of typei (GRTCOSTi) by the number of appliances of type i scrapped (mi)and sum over l different types of appliances; that is:

3 4 5 6 7 8 9 10

212 212 212 212 212 212 212 212�144 �144 �144 �144 �144 �144 �144 �14477 77 77 77 77 77 77 77146 146 146 146 146 146 146 146122 115 109 103 97 91 86 81

7.5% 7.0% 6.5% 6.0% 5.5% 5.0%9 �393 �398 �402 �407 �412 �418

4 9 14 19 24 30402 416 430 445 461 477799 822 847 871 897 924

5 1197 1229 1263 1298 1334 13714 1594 1636 1679 1724 1770 18193 1992 2043 2096 2150 2207 22661 2389 2450 2512 2577 2644 2713

CEP ¼Xl

CEPi �mi ð15Þ

GRTCOST ¼Xl

GRTCOSTi �mi ð16Þ

The savings from reduced energy production externalities (EPE) arecalculated in a manner similar to the calculation of EPSV describedabove. For each electrical appliance of type i, we multiply the en-ergy production externalities (EPEi), as calculated above, by thenumber of appliances of type i scrapped (mi) and sum over l differ-ent types of appliances:

EPE ¼Xl

EPEi �mi ð17Þ

The growth in GDP (DGDP) stems from the growth in demand fornew energy-efficient products as substitutes for the less efficientproducts (scrapped within the framework of the program). DGDPis calculated in this work using the input–output tables (describedin detail below) of the Israeli Central Bureau of Statistics (CBS).

5.2. Multi-period model for the calculation of the TEV

The scrapping of old household electrical appliances is a gradualprocess that will take place over a number of years. In practice, aprogram for scrapping household electrical appliances involvesthe scrapping of a fixed and constant number of appliances of eachtype each year. As such, the flows of EPSV, CEP and EPE grow overthe years. In contrast, the flows of GRTCOST and DGDP areconstant. In light of these differences, we follow with the presenta-tion of a multi-period model for the scrapping of household electri-cal appliances. Specifically, we suggest in this work a fixed numberof air conditioners, washing machines and dishwashers for scrap-ping over a 10 year period. We chose these appliances because theyare the only appliances that pass the CBA at the micro level; that is,the annual return on investment is positive for these appliances(see Table 7).3

The total economic value of scrapping an electrical appliance oftype i in year t is calculated as the outcome of the following eco-nomic components: the electricity production savings value tothe economy of scrapping an appliance of type i in year t (EPSVi(t));the additional annual costs of early purchase of appliance of type iin year t (CEPi(t)); the scrapping cost of appliance of type i in year t(GRTCOSTi(t)); the reduction in external costs stemming from thescrapping of an appliance of type i in year t (EPEi(t)); and the in-crease in GDP stemming from increased demand for new electricalappliances of type i in year t, (DGDPi(t)).

We now describe the cash flow of each of these componentsover a ten year time span. The savings in electricity generationcosts grow over the years because in each year, over the 10 years,a fixed number of energy-efficient appliances replace the samenumber of older, less efficient appliances. In other words, savingsin electricity generation costs in year t (in each of the 10 years ofthe program) equal savings in electricity generation costs in thefirst year of the program multiplied by t. Annual cost savings afterthe tenth year equal savings in the first year of the program mul-

3 Theoretically, one can calculate the TEV at the macro level for electricalappliances that do not pass the CBA at the micro level, that is, appliances whosereturn to investment is negative (refrigerators, dryers and ovens). This is because theincrease in GDP due to domestic production of new appliances may make thescrapping of these appliances worthwhile at the macro-economic level even if it is notworthwhile at the micro level (i.e. scrapping of a single machine). We have not shownthis calculation because most dryers and ovens are not domestically produced inIsrael while for refrigerators it was not possible to isolate the number of domesticallyproduced refrigerators out of the total number of refrigerators sold.

tiplied by 10 (this is because the program lasts for only 10 years).That is:

EPSViðtÞ ¼EPSVið1Þ � t 8t ¼ 1;2; . . . ;10EPSVið1Þ � 10 8t > 10

�ð18Þ

The cash flows of additional annual costs of early purchase (of thenew electrical appliances) and of reduced external costs followthe same pattern as that of the cash flow of electricity productionsavings value. Thus we obtain

CEPiðtÞ ¼CEPið1Þ � t 8t ¼ 1;2; . . . ;10CEPið1Þ � 10 8t > 10

�ð19Þ

EPEiðtÞ ¼EPEið1Þ � t 8t ¼ 1;2; . . . ;10EPEið1Þ � 10 8t > 10

�ð20Þ

The cash flows of scrapping costs and the increase in GDP do notgrow over the years. That is, in each year, a fixed number of electri-cal appliances are scrapped and the scrapping cost for each is re-corded once. Concomitantly, an identical number of electricalappliances are produced corresponding to a one-time increase inGDP, lasting for the 10 year time span of the program (that is, eachyear the program contributes a fixed, constant, and non-accumulat-ing sum to the GDP, as a result of increased demand for locally man-ufactured appliances). Algebraically, we obtain:

GRTCOSTiðtÞ

¼GRTCOSTið1Þ ¼ GRTCOSTið2Þ ¼ . . .

¼ GRTCOSTið10Þ 8t ¼ 1;2; . . . ;100 8t > 10

8><>: ð21Þ

DGDPiðtÞ ¼DGDPið1Þ ¼ DGDPið2Þ ¼ . . .

¼ DGDPið10Þ 8t ¼ 1;2; . . . ;100 8t > 10

8><>: ð22Þ

5.3. Scrapping programs for household electrical appliances

In this section, we present scrapping programs for air condition-ers, washing machines, and dishwashers; that is, we present thebasic data and assumptions used in the calculation of the TEV ofscrapping these electrical appliances in Israel.

5.3.1. Air conditioner scrapping programAccording to the Ministry of National Infrastructures [34], each

air conditioner produced until 1999 is 30% less energy efficientthan one produced thereafter. Therefore, we recommend, in thiswork, a 10 year program for the gradual scrapping of every air con-ditioner produced prior to 1999. According to the CBS [33],1,243,989 air conditioners were produced in Israel between theyears 1990 through 1998. Assuming that approximately 20% ofthe total number of air conditioners produced before 1999 werescrapped over the years, approximately 1,000,000 air conditionersshould be scrapped over the 10 years of the program (that is, about100,000 air conditioners per year). In addition, we assume that halfof the air conditioners scrapped are small (up to 9000 Btu) and theother half large (above 33,000 Btu).

5.3.2. Washing machine scrapping programAccording to a household expenditure survey published by the

CBS [33], approximately 1.8 million households owned a washingmachine in 2003.4 Assuming, conservatively, that only 25% of thewashing machines are energy inefficient, approximately 450,000washing machines should be scrapped over 10 years; that is,

4 In 2003, 94.3% of approximately 1.9 million households (1.8 million households)owned washing machines.

Table 10Total economic value of air conditioner scrapping in the first year of the program (in NIS)

Small air conditioners (up to 9000 Btu) Large air conditioners (above 33,000 Btu) All air conditioners

Sum per unit Sum per 50,000 units Sum per unit Sum per 50,000 units Sum per 100,000 units

Energy production saving value (EPSV) 212 10,605,845 902 45,088,195 55,694,040Additional costs of early purchase of the

new appliance (CEP)144 7,200,000 438 21,900,000 29,100,000

Costs of scrapping the old appliance (GRTCOST) 200 10,000,000 200 10,000,000 20,000,000

Total direct economic valuea (DEV) �132 �6,594,155 264 13,188,195 6,594,040

Reduced external costs (EPE) 77 3,873,109 329 16,465,591 20,338,700Increase in gross domestic product (DGDP) 221,900,000

Total indirect economic value (IEV) 242,238,700Total economic value (TEV) 248,832,740

a Total direct economic value due to the scrapping of a small air conditioner is negative because of the one-time scrapping costs that are accounted for in the first year.From the second year onward, the total direct economic value due to the scrapping of one small air conditioner is positive (see Table 11).

Table 11Cash flows of the components of total economic value for the scrapping of air conditioners, over the 10 years of the program (in millions of NIS)

Year 1 2 3 4 5 6 7 8 9 10

Energy production saving value (EPSV) 56 111 167 223 278 334 390 446 501 557Additional costs of early purchase of the new appliance (CEP) 29 58 87 116 146 175 204 233 262 291Costs of scrapping the old appliance (GRTCOST) 20 20 20 20 20 20 20 20 20 20

Total direct economic value (DEV) 7 33 60 86 113 140 166 193 219 246

Reduced external costs (EPE) 20 41 61 81 102 122 142 163 183 203Increase in gross domestic product (DGDP) 222 222 222 222 222 222 222 222 222 222

Total indirect economic value (IEV) 242 263 283 303 324 344 364 385 405 425Total economic value (TEV) 249 296 343 390 437 483 530 577 624 671Capitalized total economic value 235 263 288 309 326 341 353 362 370 375Net total economic value (NPV) over 10 years 3221

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20Years

Decrease in External Costs Increase in GDP Total Direct Economic Values

Fig. 1. The contributions of direct economic value (DEV), increase in GDP, (DGDP) and the decrease in external costs (EPE) to the total economic value (TEV) of the airconditioner scrapping program.

45,000 washing machines per annum. We assume, in addition, thateach scrapped washing machine is of 5 kg capacity.5

5 In the absence of data on the distribution of different types of washing machines,we assume that most washing machines owned by households are of the 5kg capacityvariety.

5.3.3. Dishwasher scrapping programAccording to a household expenditure survey published by the

CBS [33], approximately 600,000 households owned dishwashersin 2003.6 Assuming, conservatively, that only 25% of the dishwashers

6 In 2003, 31.1% of 1.9 million households (that is, 600,000 households) owneddishwashers.

Table 12Changes in gross domestic product (DGDP) and other national account variables (inmillions of NIS)

Change in uses 405Change in imported merchandise and services 175

Change in gross domestic product (DGDP), at purchase prices 230

Change in taxes on products (net) 8Change in taxes on products 9Change in subsidies of domestic product 1

Change in gross domestic product (DGDP), at base prices 222

Increase in gross domestic product (%) 0.04%Change in employment (millions of NIS) 145Average 2004 annual salary (in NIS) 84,600

Change in the number of jobs 1714

9 The capitalized rate of discount used is 6%.10 Calculated by multiplying the price of one washing machine (approx. 2500 NIS)

by the number of washing machines scrapped in each year of the program (45,000machines).

11 Calculated as the sum of the products obtained by multiplying the cost of an 8-

are energy inefficient, approximately 150,000 dishwashers should bescrapped over 10 years; that is, 15,000 dishwashers per annum. We as-sume, in addition, that half of all dishwashers scrapped are small (up to8 place settings) and the other half large (above 12 place settings).

The following shows the TEV of a program to scrape air condi-tioners, washing machines and dishwashers.

5.4. TEV of the air conditioner scrapping program

The annual TEV obtained by scrapping 100,000 air conditionersper year, within the framework of a 10 year program for the scrap-ping of one million air conditioners, is between 249 million NIS inthe first year of the program (235 million NIS on a capitalizedbasis7) and 671 million NIS in the tenth year (375 million NIS on acapitalized basis). The results of the calculation are given in Tables10 and 11. In Table 10, details of the calculation of TEV in the firstyear of the program are given based on the single period modelpresented above. That is, Table 10 shows the economic value ofscrapping one air conditioner according to the calculation describedabove, as well as the total economic value of scrapping 100,000 airconditioners (split, as indicated above, into categories of large andsmall air conditioners). Table 11 shows the cash flows of each ofthe different components of the TEV over the ten years of the program’simplementation, based on the multi-period model presented above.

Fig. 1 shows that in the first years of the program, the most signif-icant contribution to TEV comes from theDGDP. Nevertheless, as thescrapping program for air conditioners progresses, more new, en-ergy-efficient air conditioners replace old, inefficient air condition-ers, thus increasing the contributions of EPSV and EPE to the TEV.

The calculation of DGDP uses input–output tables published bythe CBS and is described in detail in the following section.

5.4.1. Calculation of DGDP from input–output tablesIn this work, we used the 1995 input–output tables, published

by the CBS for 162 Israeli economic sub-sectors [37].Specifically, we calculated DGDP assuming an increase of 405

million NIS in demand for final goods in the household applianceindustrial sectors. These sectors include four sub-sectors, includingin particular the household electrical appliance industry (coveringthe production of household electric refrigerators, air conditioners,dryers, etc.).8

The total sum of 405 million NIS was obtained by multiplyingthe average price of an air conditioner (that is, 4050 NIS) by100,000 new air conditioners within the framework proposed. Be-cause of a lack of up-to-date data in the detailed sub-sectors input–output tables, we calculate DGDP based on detailed input–outputtables for the year 1995. Details of the calculation of DGDP andother national account variables are provided in Table 12.

From Table 12 it can be seen that the annual expected D GDPfrom a program involving the scrapping of 100,000 air conditionersannually is 222 million NIS. This program is expected to increaseemployment, on a one-time basis (lasting for the entire 10 yearsof the program), by 1714 positions because of the increase in activ-ity in different sectors of the economy. It is important to emphasizethat the program will increase the current account deficit by 175million NIS annually because of the increased imports of inputsfor air conditioner production.

5.5. TEV of the washing machine scrapping program

The TEV generated by the scrapping of 45,000 washing ma-chines per annum within the framework of a 10 year program dur-

7 The capitalized rate of discount used is 6%.8 The other sub-braches are the non-electric household appliance industry, solar

energy industry, and non-electric household heating equipment industry.

ing which 450,000 washing machines are scrapped is between �2million NIS in the first year of the program and 19 million NIS inthe tenth year (11 million NIS on a capitalized basis).9 The TEV fromthe scrapping of washing machines is positive only after EPE is intro-duced. Governmental financial support is therefore needed to inducehouseholds to purchase the new washing machines earlier thanotherwise planned.

The TEV excludes the effect of DGDP because most washing ma-chines are not produced domestically. It is important to note thatthere will be an annual increase in the current account deficit equalto the value of the washing machines imported annually, i.e.,approximately 113 million NIS.10

The results of the calculations are provided in Tables 13 and 14.In Table 13, we provide details of the calculation of the TEV in thefirst year of the program according to the single period model de-scribed above. That is, in Table 13 we present the economic valueof scrapping a single washing machine as well as the economic va-lue of scrapping 45,000 washing machines. In Table 14, we showthe cash flows of each of the different components of the TEV overthe 10 years of the program’s implementation, based on the multi-period model.

5.6. TEV of the dishwasher scrapping program

The TEV obtained by the scrapping of 15,000 dishwashers perannum within the framework of a 10 year program for the scrap-ping of 150,000 dishwashers ranges between �1 million NIS inthe first year of the program and 3 million NIS in the tenth yearof the program. This value is quite low (it is positive only afterEPE is introduced) and may even be negative if small changes aremade in the parameters of the model.

The TEV excludes the effect of DGDP because most dishwashersare not locally produced. It is important to note that dishwasherimports will thus increase in value by 41 million NIS per yearand this will increase the current account deficit by the sameamount in each year.11 The results of the calculations are providedin Tables 15 and 16.

place-setting dishwasher (approx. 2000 NIS) by the number of dishwashers of the 8-place-setting type scrapped in each year under the program (7500 dishwashers); andby multiplying the cost of an 12-place-setting dishwasher (approx. 3500 NIS) by thenumber of dishwashers of the 8-place-setting type scrapped in each year under theprogram (7500 dishwashers).

Table 13Total economic value of a washing machine scrapping program, in the first year of the program (in NIS)

Washing machines (up to 5 kg capacity)

Sum per unit Sum per 45,000 units

Energy production savings value (EPSV) 139 6,238,872Additional costs of early purchase of the new appliance (CEP) 150 6,750,000Costs of scrapping the old appliance (GRTCOST) 100 4,500,000

Total direct economic value (DEV) �111 �5,011,128

Reduced external costs (EPE) 63 2,851,847

Total indirect economic valuea (IEV) 2,851,847Total economic valueb (TEV) �2,159,281

a Indirect economic value excludes the changes in GDP because most washing machines are not domestically produced.b Total economic value turns positive in the third year (see Table 14).

Table 15Total economic value of a dishwasher scrapping program, in the first year of the program (NIS)

Dishwashers up to 8 place settings Dishwashers Larger than 12 place settings All dishwashers

Sum per unit Sum per 7500 units Sum per unit Sum per 7500 units Sum per 15,000 units

Energy production savings value (EPSV) 111 831,850 153 1,143,793 1,975,643Additional costs of early purchase of the new appliance

(CEP)120 900,000 210 1,575,000 2,475,000

Costs of scrapping the old appliance (GRTCOST) 100 750,000 100 750,000 1,500,000

Total direct economic value (DEV) �109 �818,150 �157 �1,181,207 �1,999,357

Reduced external costs (EPE) 52 391,077 72 537,731 928,808

Total indirect economic valuea (IEV) 391,077 537,731 928,808Total economic value (TEV)b �427,073 �643,476 �1,070,549

a Indirect economic value excludes the changes in GDP because most dishwasher are not domestically produced.b The total economic value becomes positive in the fifth year.

Table 14Cash flows of the components of total economic value for the scrapping of washing machines, over the 10 years of the program (in millions of NIS)

Year 1 2 3 4 5 6 7 8 9 10

Total direct economic value (DEV) �5 �6 �6 �7 �7 �8 �8 �9 �9 �10

Reduced external costs (EPE) 3 6 9 11 14 17 20 23 26 29

Total indirect economic value (IEV) 3 6 9 11 14 17 20 23 26 29Total economic value (TEV) �2 0 3 5 7 10 12 14 17 19Capitalized total economic value �2 0 2 4 5 7 8 9 10 11Net total economic value (NPV) over 10 years 53

Table 16Cash flows of the components of total economic value for the scrapping of dishwashers, over the 10 years of the program (in millions of NIS)

Year 1 2 3 4 5 6 7 8 9 10

Total direct economic value (DEV) �2 �2 �3 �3 �4 �4 �5 �5 �6 �6

Reduced external costs (EPE) 1 2 3 4 5 6 7 7 8 9

Total indirect economic value (IEV) 1 2 3 4 5 6 7 7 8 9Total economic value (TEV) �1 �1 0 0 1 1 2 2 2 3Capitalized total economic value �1 �1 0 0 0 1 1 1 1 2Net total economic value (NPV) over 10 years 5

Table 17Summary of total economic value of the scrapping program for air conditioners, washing machines, and dishwashers

Year Total economic value (millions of NIS)

1 2 3 4 5 6 7 8 9 10

Air conditioners 249 296 343 390 437 483 530 577 624 671Washing Machines �2 0 3 5 7 10 12 14 17 19Dishwashers �1 �1 0 0 1 1 2 2 2 3

Total electrical appliances 246 295 345 395 444 494 544 594 643 693Total electrical appliances –

capitalized234 268 298 325 348 369 386 402 415 425

Total unitsscrapped per year

Total economic value –10 year capitalization

Annual change in grossdomestic product

Annual change in currentaccount deficit

One time change inemployment (no. of jobs)

(millions of NIS)

Air conditioners 100,000 3221 222 175 1714Washing machines 45,000 53 – 113 –Dishwashers 15,000 5 – 41 –

Total 160,000 3279 222 329 1714

5.7. TEV of the scrapping program for air conditioners, washingmachines and dishwashers

The TEV obtained annually by the scrapping of 100,000air conditioners, 45,000 washing machines and 15,000 dishwash-ers each year is between 246 million NIS (234 million NIS on acapitalized basis) in the first year of the program and 693million NIS (425 million NIS on a capitalized basis) in thetenth year. The TEV for 10 years on a capitalized basis is 3279million NIS (Table 17). The TEV of scrapping air conditioners issignificantly higher than the TEV of scrapping washingmachines and dishwashers. This difference is due to two mainfactors:

First, the rate of return on the per unit investment in scrappingair conditioners (approximately 5.6% for air conditioners up to9000 Btu’s and 10.6% for air conditioners above 33,000 Btu’s) is sig-nificantly higher than the rate of return on the per unit investmentin scrapping washing machines (2.0%) and dishwashers (2.1% fordishwashers up to 8 place settings and 0.4% for dishwashersabove12 place settings).

Second, the scrapping program for air conditioners is based ondomestic production and supports an increase in GDP. In contrast,the program to scrap washing machines and dishwashers is basedon imports of these products and does not contribute to the GDP.Domestic production of air conditioners influences employmentas it contributes to a one-time increase of 1714 jobs.

The program to scrap air conditioners, washing machines anddishwashers is expected to increase the current account deficitby 329 million NIS per annum according to the following break-down: an increase of 175 million in imports of production inputsfor air conditioners, an increase of 113 million NIS in imports ofwashing machines, and an increase of 41 million NIS in importsof dishwashers.

6. Conclusions

Today, member countries of the International Energy Agencyconsume on average approximately 45% less energy relative totheir GDP than in 1973. This reduction was achieved through tech-nological improvements as well as through changes in energy con-sumption behavior. In Israel, it has been found that a potentialexists for energy savings in the range of 20–30% of total energyconsumption. The potential for energy savings exists essentiallyin all sectors – households, industry, commerce, tourism andthe public sector (government offices, hospitals and municipalservices).

Energy-saving policies have clear economic and environmentaladvantages and are characterized by efficiency both at the nationallevel and at the level of the individual agent (a household or firm).The benefits of these programs stem from reduced energy expendi-ture and from the reduction in negative externalities linked to en-ergy generation. In addition, there are a number of otheradvantages to such policies, such as a lower level of dependenceon imported coal, natural gas and diesel fuel. Energy-saving mea-sures may also help delay the necessity to construct new powerplants, thereby saving valuable land (which is of particular signif-icance in Israel due to the fact that most power plants are built onvaluable waterfront land).

In addition to these advantages, it should be noted that the stateof Israel is obliged under international agreements to reduce airpollution emissions. For example, the National Plan to Reduce Pol-lution of the Mediterranean Sea region (according to the UN’s NAP-SAP) requires a 50% reduction in pollution from land-based sources(i.e., pollution that reaches the Mediterranean Sea) by the year2014. Israel’s Sustainable Development Plan mandates, amongother things, the use of measures to conserve energy. Within theframework of the CEO Committee for Sustainable Development,the government of Israel formed a sub-committee for energy con-servation. The objective of this committee is to assess differenttools and measures for the achievement of energy conservation.

One of the particularly important results of our analysis is thatenergy conservation measures may be worthwhile even when thepositive externalities of such measures are ignored. That is, for thehousehold or firm, individually, it is often worthwhile to take upenergy conservation measures even without government support.The fact that such measures are not often enough taken up in prac-tice may be explained by lack of awareness, switching costs, con-servatism and, in Israel, hesitation stemming from lack ofexperience in applying such measures.

The importance of our findings is thus that they suggest thatmassive funding by the government for energy conservation pro-grams may not be required in the long run. It would be sufficientif the government would set the process in motion, support it atits early stages, and then allow the private sector to take the lead.A good example of how government involvement should work maybe seen in the increasing uptake of technologies that improve theefficiency of commercial and industrial cooling systems. At thebeginning of the process, the Ministry of Infrastructure supportedthe introduction of such systems in businesses. After the potentialof such energy-efficient systems was proven, the private sectorwent ahead and applied similar technologies in other firms, with-out receiving government assistance. Government intervention is

therefore found to be most effective in the early stages of processesintroducing new energy conservation technologies or methods.

References

[1] Hahn RW. Energy conservation: an economic perspective. AEI – Brookings JointCenter Policy Matters 05–25, Washington, DC; 2005.

[2] USGS. Energy Resources Program. <http://energy.cr.usgs.gov> [retrieved01.06.08].

[3] Central Bureau of Statistics (CBS). Annual statistical report, Jerusalem, Israel;2003.

[4] Van-Vactor SA. Energy conservation in the OECD: progress and results. JEnergy Dev 1978;3(2):239–59.

[5] Schipper L. Another look at energy conservation. Am Econ Rev1979;69(2):362–8.

[6] Henry EW. An input–output approach to cost-benefit analysis of energyconservation methods. Econ Soc Rev 1977;9(1):1–26.

[7] Hanke SH. On the benefits and costs of energy conservation. J Energy Dev1979;5(1):123–4.

[8] Gale JR. State energy conservation plans: a method of analysis. J Energy Dev1977;3(1):123–30.

[9] Carter J. Energy conservation in the United Kingdom: a major industrialopportunity. Energy J 1984;5(1):149–58.

[10] Bourgeois B, Criqui P, Percebois J. Energy conservation versus supplystrategies: implications for industrial policy. Energy J 1988;9(3):99–111.

[11] Wirl F. On the economic efficiency of energy conservation programs. In:Zimmermann U, Derigs U, Gaul W, Mohring RH, Schuster KP, editors.Operations research proceedings 1996: selected papers of the symposium onoperations research (SOR 96) Braunschweig, September 3–6, 1996. New Yorkand Heidelberg: Springer; 1997. p. 427–32.

[12] Van der Vleuten F, Lemmens L, Bos O, Samplonius C, Toussaint D, Yhdego M.Energy conservation in the industrial sector in Tanzania. In: Szirmai A,Lapperre P, editors. The industrial experience of Tanzania. Houndmills, UK andNew York: Palgrave; 2001. p. 262–80.

[13] Tester JW, Wood DO, Ferrari NA, editors. Energy and the environment in the21st century. Cambridge and London: MIT Press; 1991. p. 803–12.

[14] Burney NA, Al-Matrouk FT. Energy conservation in electricity generation: acase study of the electricity and water industry in Kuwait. Energy Econ1996;18(1–2):69–79.

[15] Convery FJ, editor. A guide to policies for energy conservation: theEuropean experience. Cheltenham, UK and Northampton: Mass; 1998. p.143–64.

[16] Gan L. World Bank policies, energy conservation and emissions reduction. In:Cannon T, editor. China’s economic growth: the impact on regions, migrationand the environment. New York/London: St. Martin’s Press/Macmillan Press;2000. p. 184–209.

[17] Brown SPA. Directions for U.S. energy conservation and independence.Business Econ 1996;31(4):25–30.

[18] Haugland T. Social benefits of financial investment support in energyconservation policy. Energy J 1996;17(2):79–102.

[19] Hudson EA, Jorgenson DW. U.S. tax policy and energy conservation. In:Jorgenson DW, editor. Growth. Econometric general equilibrium modeling, vol.1. Cambridge and London: MIT Press; 1998. p. 105–89.

[20] Quigley JM. Residential energy conservation: standards, subsidies, and publicprograms. In: Gilbert RJ, editor. Regulatory choices: a perspective ondevelopments in energy policy. Berkeley and Oxford: University of CaliforniaPress; 1991. p. 290–346.

[21] Hannon B. Energy conservation and the consumer. In: Ayres RU, Button K,Nijkamp P, editors. Global aspects of the environment. Elgar referencecollection. environmental analysis and economic policy, vol. 1. Cheltenham,U.K. and Northampton: Mass; 1999. p. 243–50.

[22] Arima S, Sakamoto Y. Start of uniform energy-saving label: points of energy-saving measures for home electric appliances, etc. Trans Electrical Electron Eng2008;3:32–6.

[23] Ashina S, Nakata T. Energy-efficiency strategy for CO2 emissions in aresidential sector in Japan. Appl Energy 2008;85(2–3):101–14.

[24] Wood G, Newborough M. Energy-use information transfer for intelligenthomes: enabling energy conservation with central and local displays. EnergyBuild 2007;39(4):495–503.

[25] Truttmann N, Rechberger H. Contribution to resource conservation by reuse ofelectrical and electronic household appliances. Resour Conserv Recy2006;48(3):249–62.

[26] Al-Ragom F. Retrofitting residential buildings in hot and arid climates. EnergyConvers Manage 2003;44:2309–19.

[27] Mirasgedis S, Georgopoulou E, Sarafidis Y, Balaras C, Gaglia A, Lalas DP. CO2

emission reduction policies in the Greek residential sector: a methodologicalframework for their economic evaluation. Energy Convers Manage2004;45:537–57.

[28] Boardman B. Achieving energy efficiency through product policy: the UKexperience. Environ Sci Policy 2004;7(3):165–76.

[29] Masjuki HH, Mahlia TMI, Choudhury IA. Potential electricity savings byimplementing minimum energy efficiency standards for room air conditionersin Malaysia. Energy Convers Manage 2001;42(4):439–50.

[30] Mahlia TMI, Masjuki HH, Saidur R, Amalina MA. Cost-benefit analysis ofimplementing minimum energy efficiency standards for householdrefrigerator-freezers in Malaysia. Energy Policy 2004;32(16):1819–24.

[31] Saidur R, Masjuki HH, Jamaluddin MY, Ahmed S. Energy and associatedgreenhouse gas emissions from household appliances in Malaysia. EnergyPolicy 2007;35(3):1648–57.

[32] Lu W. Potential energy savings and environmental impact by implementingenergy efficiency standard for household refrigerators in China. Energy Policy2006;34(13):1585–9.

[33] Central Bureau of Statistics (CBS). Annual report 2005 [in Hebrew].[34] Ministry of National Infrastructure (MOI). Management of infrastructure

resources sector. Realizing the potential for energy conservation in Israel,1977–2010; 1997 [in Hebrew].

[35] Israeli Electricity Company (IEC). Annual report 2006 [in Hebrew].[36] Public Utility Authority-Electricity (PUA). Chapter of tariff tables – March 2008

[in Hebrew] <www.pua.gov.il/Sip_storage/FILES/9/789.pdf> [retrieved 01.06.08].

[37] Central Bureau of Statistics (CBS). Input–output tables 1995 – technicalpublication 1175; 2002 [in Hebrew].

Economic evaluation of investment in electricity conservation

Documents

Transcript of Economic evaluation of investment in electricity conservation

Vidyut.pdf - NEPAL ELECTRICITY AUTHORITY

SOCIALIZATION PROCESS AND INVESTMENT IN CULTURAL VALUES AS A CHILD OF TRADITIONAL DOLANAN HERITAGE CONSERVATION EFFORTS NUSANTARA

MAHARASHTRA ELECTRICITY REGULATORY COMMISSION

ACCELERATING APPLIED SUSTAINABILITY BY UTILIZING RETURN ON INVESTMENT FOR ENERGY CONSERVATION MEASURES

THE ELECTRICITY YEAR Operations

BEFORE THE ELECTRICITY OMBUDSMAN

UTTARAKHAND ELECTRICITY REGULATORY COMMISSION

Construction_of_Substations.pdf - Central Electricity Authority

Electricity and Energy 2.1 Practical Electricity - Glow Blogs

Egyptian Electricity Holding Company

Central Electricity Regulatory Commission

CENTRAL ELECTRICITY AUTHORITY

CONSERVATION - ERIC

Electricity - Frederiksen

{tft. ~. - - Central Electricity Authority

NEPAL ELECTRICITY AUTHORITY

STATE ELECTRICITY REGULATORY COMMISSION

Maximising return on conservation investment in the conterminous USA

Electricity and Climate Change

VIETNAM INVESTMENT