Why 'cryptic barriers' inhibit energy efficient buildings

Much time and effort has been invested in addressing the market barriers that inhibit greater investment in energy-efficiency technologies and practices in the buildings sector. In addition to these common and well-known barriers (split incentives, asymmetrical information, higher first costs), a class of “cryptic barriers” has received less attention.

These barriers are cryptic in the sense that they are hidden or unrecognized; they do not stem from the same market failures that have been the subject of extensive study and the target of many policy and program interventions. Often these cryptic barriers are aspects of building codes or standards. In this context, “standards” include safety standards, energy efficiency standards and other standards established to assure common quality or performance metrics.

By definition, cryptic barriers are hidden from most stakeholders, unless they do in-depth due diligence. Here’s an example: Industry compares the efficiency of water heaters with a measure called the “Energy Factor" (EF). Few people keep track of how EF is calculated, but it turns out to be important. The federal rating method for residential water heaters uses a hot water supply temperature of 135°F, with a stipulated 77°F temperature rise from the inlet water temperature. However, it turns out that manufacturers ship their products with a lower default temperature setting in the range of 120°F to 125°F and consumers largely have adopted this setting as the norm. At the time the rating method was developed, this discrepancy was irrelevant for the product classes on the market because these products all relied on similar heating technologies.

Since that time, new water heating technologies have been introduced that make this discrepancy very relevant. Almost all heat pump water heaters (except those units using carbon dioxide working fluid) require some electric resistance heating boost to provide 135°F water, which reduces the efficiency measured by the EF test. Similarly, the apparent efficiency of condensing gas water heaters, especially in comparison to conventional water heaters, may be reduced by rating at a supply temperature of 135°F if test conditions leave the heat exchanger trying to transfer heat to hot water.

A rational business is unlikely to attempt to change a true cryptic barrier. Both government and voluntary consensus standards are intended to establish performance floors without favoring one firm or another. Thus, they can’t require use of a proprietary technology that is only available from one source. In addition, standards adoptions and changes generally take several years. In practice, this means that a firm that invests in changing a standard to allow for innovation is unlikely to directly benefit because it is investing its funds to open the market for competitors, too. Thus, standards, at times, can have the unintended consequence of stifling innovation.

Our recent report, Cryptic Barriers to Energy Efficiency, written by Alice Stover, Amanda Lowenberger and myself, is an effort to characterize and explore cryptic barriers in some detail. We selected cryptic barrier case studies from results of a broad survey to identify as many cryptic barriers as possible and start a compendium (included in the report's appendix). Drawing on these cases, the report's objective is to suggest opportunities for policy actions that could improve residential building efficiency and to propose potential tools to eliminate cryptic barriers.

Cryptic barriers reflect several underlying problems, including regulatory uncertainty, archaic or legacy regulations and inaccurate ratings and standards. One example of regulatory uncertainty is contractor reluctance to install a technology not yet familiar to code inspectors in his jurisdiction. If challenged, the contractor still has to invest in an uncertain waiver request process, which adds additional costs if the project schedule is disrupted. In turn, this makes familiar designs and equipment more attractive.

Archaic or legacy regulations are ones that have not responded to changes in the technology of the products or building techniques that they regulate. These regulations become cryptic barriers when they no longer serve the original purpose for which they were written and instead inhibit innovation and further development. Sometimes these regulations even begin to affect products or techniques they were never intended to regulate.

The water heater ratings example above illustrates how legacy regulations can present a barrier and their impacts. The rating method was introduced when residential “water heater” meant a tank heated by electric resistance or gas using natural draft combustion. It provides reasonable comparisons among products in each of these product classes. As noted above, it is expected that heat pump water heaters would get higher ratings if a realistic test were carried out with 120-125°F supply temperature instead of 135°F, because the former probably would not require invoking auxiliary resistance heat as often. Expectation of lower ratings (and thus, of calculated lower energy savings for incentive program purposes) may have contributed to the reluctance of major manufacturers to invest in the technology.

Indeed, this example also illustrates inaccurate ratings as a cryptic barrier. A rating method should be the simplest feasible test that gives reasonable predictions of performance in the field, for all present and anticipated products. However, to a greater or lesser degree (depending on use volumes and patterns, for example), comparisons of conventional storage water heaters to newer tankless water heaters can be uncertain, at best. The issues with the federal water heater efficiency rating method were so pervasive and important to industry that legislation was enacted to require development of a new “uniform descriptor” method; the U.S. Department of Energy (DOE), American Society of Heating, Refrigerating and Air Conditioning Engineers (ASHRAE) and Air Conditioning, Heating, and Refrigeration Institute (AHRI) all are developing proposals.

Cryptic barriers inhibit investments that would provide a public good. When this situation occurs, governments should intervene with policies -- or revise existing policies that could be problematic -- to ensure that actions that contribute to public interest are not impeded. There also may be a role for energy efficiency stakeholders to pursue interventions to address these barriers. An understanding of the nature of cryptic barriers is needed to guide policy and program interventions.

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