Getting it Right Matters: Why Efficiency Incentives Should be Based on Performance and Not Cost

Secondary Author(s)

Fairey, Philip

Report Number





Energy Efficiency; Buildings


At least 28 countries and regions offer government-sponsored incentives for energy efficiency, as well as a number of U.S. states and Canadian provinces. But, there has been little cross-fertilization of ideas and even less scientific evaluation of the results. This lack of dialogue and evaluation has led to disproportionate reliance on the simplest solutions, which generally base efficiency incentives on costs. (Sometimes, other performance parameters are also used in addition to costs.) This paper examines the practice and some of the theory that predicts the likely outcomes of different structures of economic incentives for efficiency. It shows how purely cost-based incentives, whenever they have been evaluated, have shown excessive levels of free ridership and failed to transform markets. It finds anecdotal evidence for mixed performance and cost-based incentives working in some cases, but a paucity of evidence to corroborate these anecdotes. These results are contrasted to the experience with performance-based DSM programs, which have proven to be effective both at acquiring efficiency resources and transforming markets. This finding is consistent with analysis of the market barriers and market failures that efficiency confronts, and with the incentives to consumers and suppliers that are provided by the different types of incentives.

Date Published



Buildings - Energy Efficiency

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