Obtaining the optimal fuel conserving investment mix: a linear programming-hedonic technique approach

Abstract

<p>The objectives of this study were to: (1) determine how energy efficiency affects the resale value of homes; (2) use this information concerning the "implicit price" of energy efficiency to estimate the resale value of fuel saving investments; and (3) incorporate these resale values into the investment decision process and determine the efficient investment mix for a household which plans to own a given home for three alternative time periods;Two models were used to accomplish these objectives. A hedonic price model was used to determine the impact of energy efficiency on housing prices. The hedonic technique is a method used to attach implicit prices to characteristics which are not themselves bought and sold in markets, but are components of market goods. The hedonic model constructed in this study provided an estimate of the implicit price which is paid for an increase in energy efficiency in homes on the Des Moines housing market. Given this implicit price, and the efficiency of fuel saving investments (such as insulation, passive solar applications, and high energy efficiency furnaces), the resale values of fuel saving investments were estimated;In order to determine how the length of time the home is to be owned affects the "optimal" investment mix, a linear programming model was used to determine the cost minimizing investment mix for a baseline house under the assumption that it would be owned for 6, 20, and 50 years, alternatively. The resale values which were estimated based on the implicit price of energy efficiency were used in obtaining the 6 and 20 year solutions;The results of the hedonic technique revealed that a premium is paid for energy efficient homes in Des Moines. The implicit price of energy efficiency indicates that, on average, a 1 decrease in annual fuel expenditures (due to an increase in efficiency) increases the expected selling price of the house by 11.63;The results of the linear programming model reveal that the optimal fuel saving investment mix for a home is sensitive to the time which the home is to be owned. Solutions which are based on the resale value of fuel saving investments exhibit an underinvestment in conservation relative to the long-run cost minimization solution. Further information is required, however, before it can be determined whether or not the housing market is pricing fuel saving investments efficiently.</p>