Industrial Firms’ Choices of Energy Efficiency Investments: A Mixed Multinomial-Poisson Approach

The industrial sector accounts for about a third of the energy usage in the United States. Given the potential of energy savings from the industrial sector, it is important to look at the factors influencing industrial firms’ decision to adopt energy efficiency measures. The Industrial Assessment Centers (IAC) program offered by U.S. Department of Energy provides free energy efficiency assessments to small and medium sized industrial firms. In most situations, multiple energy efficiency recommendations are made for a single firm. The firm then chooses which recommendation(s) to implement. This paper uses the IAC database, with 15,412 assessments and 115,710 recommendations, to empirically analyze industrial firms’ choices of energy efficiency investments. We build an instrumental variable (IV) Poisson model and an IV probit model to analyze a firm’s decision of both how many and what recommendations to implement. The model results show that when making the decision of whether or not to invest in an energy efficiency measure, industrial firms put more weight on the upfront investment cost than the energy savings. Thus industrial firms are more likely to invest in smaller energy efficiency projects that cost less but save less energy. With the presence of rebates to reduce the upfront investment cost, industrial firms are more likely to invest in an energy efficiency measure, which justifies the continuing support from government to subsidize the upfront investment in energy efficiency. Another interesting implication is that more recommendations can be made by an IAC center to a firm, which can increase the probability of a single recommendation to be implemented.