The “energy efficiency gap” refers to consumers forgoing energy efficiency investments that yield a positive return. This report reviews the explanations for the energy efficiency gap and revisits one particular explanation – the role of uncertainty in future energy prices and energy efficiency capital costs. We update the option value analysis of Hassett and Metcalf (1993) by extending fuel oil price data to 2015, and using alternative proxies for energy prices. The results show an increase in the implicit discount rate for a generic energy efficiency investment. However, the magnitude of the implicit discount rate is smaller than observed in many surveys. Moreover, the small increase in the implicit discount rate originated from an increase in the investment’s conventional hurdle rate rather than an increase in the investment’s option value. This suggests that future uncertainty can only explain a portion of the energy efficiency gap. The report concludes by highlighting avenues for future research that will clarify the role of uncertainty in explaining the energy efficiency paradox.
