Some efficiency programs do an excellent job undermining the market and the very contractors they’d like to enlist to make efficiency improvements. And when they start talking about pricing, most of the time that’s exactly what they do. (For a discussion of other things that many programs could do better, see this program design recap.)
Here are a couple of good illustrations from the National Residential Efficiency Measures Database (and I’m copying and pasting them right from their website on December 1, 2013, so that you know I’m not just making this stuff up!!):
Really??? An average installed cost of a 60,000 Btu, 98% AFUE furnace is $2,540? ($1,100 + 50kBtu * $24/kBtu) . And the range is $1,640-$3,240?? I’m wondering if NREL will provide a quality installation of the measure at the cost. If that’s the case, we can all start subbing work out to them. A fair installed price–and NREL makes no distinction between cost and price–for the furnace could easily be 2-3 times that. And no, NREL isn’t just talking about equipment cost. They mention some of the things that can influence the cost, including:
- Prevailing local wages
- Drive time
- Local code requirements
- Condition of existing flue
- Need to bring in combustion air
- Condition of existing electrical system
- Need for additional wiring/switching
- Condition of existing gas line
- Presence of hazardous materials
- Stand alone vs treating both heating/cooling
- Need for controls and/or zoning
- Condition of existing duct system
- Type of equipment
Well, yeah. Those and many more factors.
I’m not really cherry-picking a bad example. Look at any of their other furnace numbers. Or the boilers. Or the air-conditioners. Or the HRVs:
So, according the NREL’s database, replacing a SEER 8 Central A/C, with a SEER 14 model costs on average, $2,636. Wow. Well, the good news is that 98% AFUE furnaces appear to be cheaper. The bad news is this number is also doesn’t work. Consider this an open invitation to NREL to defend these numbers. I’ll provide space here if they want.
No, not everyone reviews this database. But the database does feed things like the Home Energy Saver–the foundation of the Home Energy Score–that many consumers use, and that some home inspectors are starting to cite in referencing home improvement savings and costs. Yes, if one reads closely, NREL states, “The application of the average measure costs displayed below to any particular home is discouraged.” And yet they give a range that is just as bad, and perhaps even worse than the average. More on that in a moment.
This is just one example. Many programs make claims about what “reasonable” costs (costs to the consumer, i.e., prices) that are just as divorced from reality as NREL’s numbers.
How does this hurt the market?
Well, the big screamingly obvious reason is that it undermines the credibility of contractors who want to do quality work based on real costs and a fair profit (is 10% net profit fair? most contractors don’t even make that much.) The trusted authority says that 98% AFUE furnace costs on average $2,300. And the contractor–and honest, quality-focused contractor quotes $4,600 to install that furnace. The consumer thinks the contractor is trying to rip them off, despite the reality that the contractor may have presented a very real and very fair price. Now, a big discussion about how to price is beyond the scope of this post, but holler if you want to have that discussion.
The less obvious reason has to do with the anchoring effect. Since at least as far back as 1974 when Tversky and Kahneman published “Judgment under Uncertainty: Heuristics and Biases” we’ve know about the anchoring effect. The anchoring effect boils down to our bias to use an initial piece of information to make following decisions. Sounds reasonable. But wait. What happens is we make decisions based on the perceived comparative value, rather than on the pure value for investment (time, money, etc.), we factor in comparative value.1
In home improvement, it boils down to the reality that the NREL or program price becomes the benchmark–even the unconscious benchmark–for future framing of value. The too-low, way-too-low, price determines what seems reasonable in the mind of the consumer.
The NREL prices are wrong. Sometimes installed prices are less than material costs alone, without labor costs, marketing costs, sales costs, other overhead costs, let along even a small measure of profit. Tversky and Kahneman and many others down the line have shown that this is hurting the market. They should pull the plug on this immediately.
And the same applies to other programs who dabble in pricing, but don’t have a full understanding of what sustainable pricing in the market really looks like. Don’t do it.2
(Note, this article includes a correction from an earlier version based in a clarification from NREL. Originally I cited a furnace cost of $1,100. As NREL pointed out, I misinterpreted the data in the NREMDB. Specifically, I overlooked the guidance at the top of the page…” Where multiple costs are indicated they must be combined to obtain total measure cost (e.g., fixed ($) and normalized ($/sf) costs).” The costs need to be calculated; there’s a fixed component AND variable component. In the case of the furnace example I used, the average cost is $1,100 + $24/kBtuh. So, NREL’s estimate of the average cost of a 50 kBtuh furnace would be $2,300.)
1Dan Ariely is another of the many behavioral economists who’ve discussed this. Check out his informative and fun TED talk–a very watchable 17 minutes, including examples of anchoring. And suggestions about who to bring with you when you go bar hopping.
2Those programs who say, “but our incentives are tied to costs, so we need to make sure they’re fair” are trying to fix the wrong “problem”. The problem isn’t with the pricing, it’s with the incentives. See more on incentives and unintended consequences–and unintended costs–in this article.
Those interested in consumer protection would do better to enforce existing codes, regulations, and laws. If in CA, 85% of HVAC installations don’t comply with Title 24, no wonder those who pull permits and focus on quality installations have to charge more. There, the price anchor is based on crappy work! I’m using CA as an example only. The same applies elsewhere.