States Should Expand Incentive Programs for Smart Thermostats (Revised)

Thesis: States could boost economic activity in just a few short years by making subsidy programs for smart thermostats more popular amongst households. 

Smart thermostats are devices that allow a household to optimize the use of their heating and cooling utilities by auto-scheduling the process: they turn the temperature up or down at key times, like in the morning and around dinnertime, and let the HVAC system relax when users are asleep or out of the house.  While programmable thermostats have been around for a while, new brands like Nest utilize smartphone GPS data or sensors to make the process far easier for users by detecting when people are home, learning a customized schedule that can react to sudden changes.  It’s a household product that makes too much sense to not be utilized – Nest estimates that they save the average household $173 a year on utility bills, but homes in more extreme climates or those with less efficient heating systems, such as those that use heating oil, stand to save even more.  One user’s analysis of his change in utility bills from blog Get Grok, controlled for temperature changes, demonstrated that by using all of the Nest’s features, he was able to reduce his bill by a whopping $305 in a mere four months.

With a price tag of just $250, the average household’s savings would pay for a Nest or a similar product in just a year and a half, and many homes like the one in the example above would earn back the upfront cost in essentially no time.  Considering this short payback period, states should expand their rebate programs that can be applied to smart thermostats – the aggregate savings from consumers making the switch would ripple through the economy within a few years, translating to more spending on other goods and services.  There are currently a couple dozen rebate programs available for smart thermostats, in the range of $10 to $100, as compiled by a post on the Nest community page, but most of them are offered by local utility companies, making them scattered and inaccessible to many homes.  By making these incentives available statewide and more attractive (i.e. increasing the subsidy), states would see consumer savings get a slight bump as households hold on to a portion of their utility bill savings, and overall consumer spending on other goods increase as households spend the rest.  And there is evidence to suggest that spending on other goods and services is more valuable to the economy than spending on utilities: according to the American Council for an Energy-Efficient Economy, “one dollar of avoided utility bill costs has 2.24 times the effect on domestic employment and wages compared to one dollar spent on utility bills”, mostly since such a large portion of expenditures on energy services ends up overseas.  Since states generally have a higher sales tax than a utility tax rate, they would recoup the costs of the subsidy programs off the spread between tax rates.

Reducing the cost of utility bills for consumers would have another desirable effect, addressing one of the nation’s most hotly contested topics: income inequality.  Since utility costs are fairly uniform across socioeconomic status, low-income households spend a far bigger proportion of their income on utilities than most – a hefty 17%, as compared to the 4% that the average American household spends.  Subsidy programs that reduce utility costs would help improve economic parity by leaving low-income families with more disposable income.  I won’t recommend a specific value for the subsidy, as that will vary state to state (those with more extreme climates than average can afford to offer more, as their consumers will save more and they will earn back the cost quicker).  But every single state in the nation stands to benefit from these types of policies – and the reduction in carbon emissions is just icing on the cake.

10 thoughts on “States Should Expand Incentive Programs for Smart Thermostats (Revised)

  1. Linda Sun

    I would like to have such a smart thermostat. In the winter my utility bills is increasing a lot much ; (
    I guess one thing that have to be considered is the cost of developing and advertising for such a smart thermostat. If the cost is too high, maybe the government could simply cut the tax a little bit.

  2. Jonathan Zimmermann

    The University of Michigan could follow that example for its own buildings. People living in Bursley have to buy a fan… for winter, and a heater… for summer :O

  3. Michael Giedzinski

    I think it should still be a household’s decision as to whether or not they want their lives run via computer. The problem is not with the nest, it’s with the idea of accepting technology unquestioningly.

    1. luctommo@umich.edu'Lucas Morrison Post author

      Michael,

      I would hardly call an automatic temperature control system something that runs your life. I’m also not suggesting that the government ever enforce any sort of household product (though there may be some logic to that when it comes to making homes more efficient, as there are several externalities that society must bear if a household refuses to improve efficiency). I’m merely suggesting that they incentivize these types of products so more people find them attractive, as it would increase the country’s welfare.

      You do make a good point about blindly adopting new technologies – as data collection is booming, companies (particularly software developers) are creating new ways to harvest user data to sell in bulk, and many find that to be infringement on their personal freedoms. Personally, I have no issue with this business model, so long as companies are transparent about what data they’re tracking.

  4. njbeck@umich.edu'Nathaniel Beck

    I agree that systems like Nest can work wonders for the atmosphere. However, if energy companies revenues start to falter, what’s to stop them from just increasing the costs of utilities?

    1. luctommo@umich.edu'Lucas Morrison Post author

      Electricity prices are subject to lots of regulation in the United States. Most states have some sort of cap on electricity prices and many calculate a fixed return on capital for electricity producers (i.e. they decide how much revenue the producers should make over their costs of producing). Energy companies cannot simply raise prices in most parts of the country.

  5. Max Haskin

    I agree with all the benefits of smart thermostats that you point out. However, my question is that why should the government bear the cost? While the savings might be better for the overall economy, how does the government make their money back? If the product was really so good businesses should be able to sell it without the help of the government.

    1. luctommo@umich.edu'Lucas Morrison Post author

      Max,

      As I mentioned in the post, the government would make their money back on the spread between the utility tax rate and the normal sales tax rate. Most states have a general sales tax that is higher than the utility tax, so as households spend their savings on goods and services instead of on electricity, states will see tax revenue increase. This is how they would pay for the subsidy programs.

      Obviously since every state faces different circumstances, each would have to decide what the ideal subsidy amount would be. For example, a state like Texas, where consumers spend far more on electricity than the national average, the utility tax rate for large cities is around 2% while the sales tax rate is 6.25%. Say the average household saves $200 a year on electricity and spends it on other goods – the state now receives $8.5 more in yearly tax revenue from each home. If the state implemented a $85 subsidy for smart thermostats, it would see a payback period of 10 years. After that period, there is an indefinite rise in tax revenue.

  6. Dan Miller

    This is a great post that offers practical advice on policy making to enhance welfare. More people from all economic classes should use smart thermostats.

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