Quantifying the Effect of the Principal-Agent Problem on US Residential Energy Use

The International Energy Agency (IEA) initiated and coordinated this project to investigate the effects of market failures in the end-use of energy that may isolate some markets or portions thereof from energy price signals in five member countries. Quantifying the amount of energy associated with market failures helps to demonstrate the significance of energy efficiency policies beyond price signals. In this report we investigate the magnitude of the principal-agent (PA) problem affecting four of the major energy end uses in the U.S. residential sector: refrigeration, water heating, space heating, and lighting. Using data from the American Housing Survey, we develop a novel approach to classifying households into a PA matrix for each end use. End use energy values differentiated by housing unit type from the Residential Energy Consumption Survey were used to estimate the final and primary energy use associated with the PA problem. We find that the 2003 associated site energy use from these four end uses totaled over 3,400 trillion Btu, equal to 35% of the site energy consumed by the residential sector.