Rebate programs for water efficient appliances: Are municipalities just flushing money down the drain? Jonathan Lee Center for Environmental & Resource Economic Policy NC State University

Managing Municipal Water Demand Federal policy affecting household water demand is generally technology-based standards Local utilities/municipalities often are required to go further in demand management.

Managing Municipal Water Demand Toolkit for household demand management: –Pricing (rarely) –Voluntary and mandatory water use restrictions Applies to outdoor only –Incentive/rebate programs Over 100 WaterSense rebate programs

Are Rebate Programs Cost-effective Policy Tools? To answer this question: –What are the actual reductions in resource use? Engineering estimates vs. actual reductions. –Automobile fuel economy (e.g., Greene et al. 1999) –Energy efficiency (e.g., Haas et al. 1998; Schwarz and Taylor 1995) –Water Heater (Hartman, 1984) –Toilets?? –Is the technology replacement due to the program?

High Efficiency Toilet (HET) Retrofit Rebate Program Town of Cary began program in June 2008 Rebate of $150 per toilet was offered –Old toilets must use at least 3.5 gallons per flush (gpf) –Must be replaced with WaterSense labeled HET using 1.28 gpf

High Efficiency Toilet (HET) Retrofit Rebate Program Rebates limited to three per residence Verification of replacement included: –Submission of original receipts –On-site inspections to verify toilets were installed In first year of the program, rebates were issued to 305 households that replaced 592 toilets.

HET Program Data 1.Survey of program participants 2.Monthly water-use data 1.5 years prior up to 2 years after program participation 3.Monthly water-use of matched neighbors over same time frame.

Survey Overview June 2010, 305 surveys mailed Response rate of 80% Information collected: –Demographic data –House construction data –Reason old toilets were replaced

Survey Overview 3 types of replacements –Full savings – rebate program was the reason they replaced their old toilet –Small savings – rebate program was the reason they chose an HET over a new 1.6 gpf toilet –No savings – household planned to replace toilet with an HET anyway

Distribution of Consumption Savings

Water Meter Data Monthly water use January 2007 to July 2010 Covers 680 rebate recipients over two years Includes 25,177 matched households –Parcel is within a 0.5 mile radius of the HET house –Parcel is same land class (e.g., single-family resid.) –Parcel is within 0.1 acre of the HET home’s acreage –Parcel is within 350 square feet of HET house –“Matched neighbor” is not another HET house

Monthly Water Usage: HET vs Non-HET Program Start

How much water is saved by an HET replacement? Engineering estimates are simply: (GPF of old toilet – GPF of HET) * # flushes/year Mean savings per HET:4,577 Mean savings per hh:9,057 Total (for 469 HET Toilets):2,146,446

Estimation Techniques Matching – generally do not find statistically significant differences in monthly water usage between HET households and control households prior to installation of an HET –1 HET hh’s-2/24 months sig. pre-treatment difference –2 HET hh’s-13/24 months –3 HET hh’s-0/24 months

Estimation Techniques contd… Some evidence that conservation minded people may be selecting into the program –All 15 groups with significant pretreatment differences have lower water usage for HET hh’s Difference-in-Differences (DID) chosen as preferred estimation technique

How much water is saved by an HET replacement? DID estimator: W i,t = a + β 1 D 1,i + β 2 D 2,i + β 3 D 3,i + γ t M t + δ 1 DT 1,i,t + δ 2 DT 2,i,t + δ 3 DT 3,i,t + ε i,t Where: –D 1(2, 3) = 1 if household replaced 1 (2, 3) toilets = 0 otherwise –M t = monthly dummy variables –DT 1(2, 3) = 1 after household installs their 1 st (2 nd, 3 rd ) toilet = 0 before 1 st (2 nd, 3 rd ) toilet install and after subsequent toilet installs

DID Results Variable (1) No Heterogeneity (2) With Heterogeneity (3) Heterogeneity & Covariates constant4515.4**4515.3** ** D8.59 DT ** D1D ** D2D ** D3D ** DT ** ** DT ** ** DT ** **

DID Estimate of Water Savings (gallons/year) Estimated mean savings per HET: 3,950 Estimate mean savings per hh: 7,817 Total (for 469 HET Toilets): 1,852,632

Comparison of DID and Engineering Estimates of Water Savings DID Estimated mean savings per HET: –3,950 gallons per month –95% confidence interval of [3,123 – 4,782] Engineering estimated mean savings per HET: –4,577

How much water savings is due to the rebate program? Water Savings per flush calculated for the three groups as follows: –Full Savings: WS 1 = (gpf 0 – gpf HET ) * #flushes/year –Small Savings: WS 2 = (1.6 – gpf HET ) * #flushes/year –No Savings: WS 3 = 0

Rebate-Induced Estimates of Water Savings (gallons per year) Total for 469 HET Toilets analyzed: 751,506 gallons Estimated mean savings per HET: 1,756 gallons Estimate mean savings per hh: 3,400 gallons Estimated median savings per hh: 571 gallons

Cost-Effectiveness NPV = -$89, year sum of benefits of the rebate program to the utility

Cost-Effectiveness Total (592 toilets) Engineering Estimates Rebate-Induced Estimates Water Savings (gallons/year)2,709,5841,039,552 Annual Treatment Cost Avoided, Excluding Debt Service and Capital Cost ($2.91/1,000 gallons) $7,885$3,025 Net Present Value (Payback years)$89,217 (13)-$21,505 (44)

Policy Implications How to improve cost-effectiveness? –Increase benefit Targeting full savings hh’s Feasibility?? –Lower upfront costs $115 HET rebate would be cost effective assuming no behavioral responses…