Could Easier Credit Speed the Adoption of Energy Efficiency?

Participants had to bid on the stove before learning the subsidized cost, and they had an incentive to submit an honest bid: If their bid was higher than the subsidized cost, they paid the lower cost for the new stove. If their bid was lower, however, they continued using their charcoal stove.

The new stove slashed a household’s energy costs by an average $120 a year, the researchers estimate. That’s a 300 percent average annual return rate, or around one month of income. Yet families were only willing to pay $12, on average, for the more-efficient stove.

Few would lay out the funds for the better stoves even when it was clear that the marginal benefit exceeded the marginal cost. The researchers had some families complete an accounting exercise making clear the potential savings, but that didn’t change participants’ behavior, which suggests households were already aware of the savings potential.

However, an offer of credit did move the needle. Berkouwer and Dean randomly offered some participants a three-month loan, while the rest had to pay for a new stove up front. When they had access to a loan, participants were willing to pay $25 for the stove, more than double their original average.

Could these results explain why some households in higher income countries don’t want to shell out extra money for cleaner energy options such as solar or geothermal? Don’t jump to that conclusion quite yet, says Dean. In the United States, an investment in solar can take years to recoup, whereas in Kenya the better stove quickly paid for itself. But even with this being the case, the participants couldn’t pay the full amount, which was more than the median weekly household income. They demonstrated a willingness to pay four times the amount they were already paying for a stove, but they simply couldn’t afford the full amount without credit.

The findings demonstrate the crucial role that credit can play, but also the danger in exporting energy policies from high-income countries to the rest of the world, says Dean. A policy such as a carbon tax may tip the scales for a US resident considering the switch to cleaner energy. But for a poor resident of Kenya, who already wants to make that switch, the scales are already tipped and the issue may be access. In this case, subsidies or loans for high-return, energy-efficient technologies could improve environmental outcomes, save poor households money, and benefit public health.

Many participants reported using the savings for critical household expenses such as food and school fees. “This means governments looking to reduce poverty by increasing household adoption of profitable technologies may find that addressing market failures in the credit sector can provide tangible opportunities for welfare gains for poor households,” the researchers write.