Energy efficiency can be a powerful way to lower energy bills, as well as the external (social) costs associated with energy consumption. Previous experience and research, however, has demonstrated that consumers are often unwilling to make investments in energy efficiency, even when such investments have relatively short payback periods. Because energy efficiency can contribute to correcting negative externalities associated with energy use, subsidies and other programs have been proposed as a way to increase efficiency investments. Thus, under the right circumstances, such subsidies can improve economic efficiency. In this paper, we analyze the economics of energy-efficient space conditioning using data from an actual household in rural Pennsylvania to evaluate ground-source heat pumps (GHP). GHP technology has been advocated as a potentially appealing energy efficiency measure for rural communities. We find that with current subsidies GHP is economically viable for a wide range of electricity prices. We also find, however, that current subsidies are actually greater than those that can be economically justified. Using the efficient level of subsidies reduces, but does not eliminate, the economic case for GHP technology. We also evaluate the economics of efficiency subsidies using an ambitious program in Pennsylvania as a case study. The program, known as the Alternative Energy Investment Act (AEIA), provides subsidies for GHP among other technologies. We find that the substantial federal subsidies for GHP undercut the economic efficiency arguments for the AEIA with respect to GHP.
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