Lessons from the Toyota Prius for Alt Energy Stocks

Dan Ariely asks: Why do we buy a Toyota Prius but won't invest in making our homes more energy efficient, when the financial payback and CO2 saving from house improvements would be greater?

He suggests three factors:

The first is that we remember the price of gas at the pump, and seeing the gas price every time we fuel-up makes it more psychologically painful to drive a less efficient car. The second is that when we drive a Prius it acts as a constant reminder of how little we spend on gas compared to all the cars driving around us–providing us with positive comparison. The third is that we project a positive social image when other people see us driving a socially conscious car. Homes don’t have any of these features.

In a thoughtful response, Felix Salmon suggests another reason, derived from recent experience from the mortgage market:

When people took out 3/1 mortgages, they didn't worry about the resets often because they had no intention of staying in their house for the full three years. And in that kind of context, home improvements which only pay back over the long term are much less attractive: it's the people you sell to who will get most of the benefit with none of the cost.

My suspicion is that Dan's third explanation is the correct one: it's all about the psychology. If you look at the market share data, you'll find that the Prius has an astonishing 50% share of the hybrid market.

The reason for that is that the Prius is only available as a hybrid, whereas most other hybrids come also in non-hybrid options. The Prius is therefore instantly recognizable as a hybrid. That results in strong sales among people who want to be seen owning a hybrid, and want to be consciously reminded themselves that they are driving a hybrid. In other words, the psychology of owning a hybrid (and being seen to own a hybrid) is having a huge impact on which hybrids are selling, irrespective of price.

If you apply that to the question of home improvements, it would explain why people won't invest in insulation when that would save more CO2. Nobody can see how much roof insulation you have, and you can even forget it yourself (except when the bill arrives).

What are the implications for alternative energy stocks? The message from the Prius is actually great news. As far as I know, every form of alternative energy is more expensive than conventional energy (particularly if you remove the government subsidies). If the decision to use alternative energy was purely economic, nobody would do it until the relative price falls.

But concerns about the environment and future energy prices are enough to incentivize people to adopt green technology even if it's not economical now. The key, however, is that these technologies must be packaged for the end user so it's obvious to everyone that this is a green product, not just a "hybrid under the hood". People will pay more to be green, as long as it's obvious to them and their neighbors that they're green.

So next time you hear someone complaining about solar panels being too obtrusive, think again.

Comments

[CrossProfit]

David,

Is it true that 80% of all private homes and apartment buildings in Israel have solar panels and that 80% of all hot water is heated by the sun?

If this is true or even close to the true figures, how do you explain that in a country where the raw materials used to manufacture the solar panels are all imported (there are no ore mines etc.) have overcome the so called economic factor?

There seems to be something of a conundrum over here!

CrossProfit

[DavidJackson]

Great point, CrossProfit. My guess is that solar water heaters in Israel are one of the exceptional cases where "green" technology is economically compelling because:

- the climate is conducive to solar heaters
- most people live in apartment buildings, so the costs can be shared
- solar water heaters in Israel are cheap and simple, so upfront costs are low.

What do you think?

[DavidJackson]

One point I didn't address in my post: if the economic payback to home improvements is positive, why don't more people do it, particularly when they are building a home from scratch? My guess is that most consumers and builders realize that green technology is very immature, and are waiting for prices to fall.

[OBR]

It's not about being socially conscious. It's about being able to do something on your own. Most people can go out and buy a car. It's something that someone can do no matter what their background, education, or capability. Not so with home improvement. You either have to know what you are doing or you have to get someone else to do it. Its much more satisfying to accomplish something on your own.

Personally, I think anyone not driving a large vehicle is nuts. Having survived a side impact in my giant gas guzzling SUV that would have killed someone in a small vehicle, I would never put my life (or my family's) in that position, ever. I'll pay an extra couple of grand for gas again this year. Happily. It's cheap insurance. There are MANY other ways my family can reduce our carbon footprint, none of which we can do if we are not alive.

[Ralph F]

The marketshare numbers for the Prius are amazing. I wonder how long Toyota can keep that up for.

[raphael]

why is it that this supposedly knowledgeable author is misleading readers by calling attention to the alt energy subsidies and ignoring the MASSIVE $20B oil subsidies that were just renewed as the alt energy subsidies were defeated?

[nerfer]

I don't think the visibility of your greenness applies at all, or at least in very limited numbers. If you wanted something recognizable as a hybrid, you would've bought the Honda Insight - the first hybrid sold in the U.S. and more distinctive than the Prius which looks like a mini-Aztek. But very few did, and it's no longer sold.
Fewer people take extra measures on their homes because that takes more education and preparation. Most people simply haven't investigated those options. If they do, often they have to fight with the installer/salesperson to get the green options instead of mainstream products. And they're more expensive - you can't insulate a house, replace windows or a furnace for the hybrid "premium" present in a Civic Hybrid or Prius, about $3K or less.

I bought the Prius because I wanted a new car under $25K that got good gas mileage, was reliable, had interior space (it's classed as a mid-size car because of the interior volume, great back seat legroom), and had 4 doors. Since I intend to keep the car for years and years, I wasn't worried about resale value, but that is well above average. MSN lists this as the best overall value for a vehicle under $24K for the 3rd year straight (editorial.autos.msn.co...). Getting double the mileage in my old car was a nice bonus. I didn't care for the styling, would've preferred something nicer, but I've gotten used to it. It's aerodynamic and the hatchback is useful, something I appreciate as an engineer.
(And for the record, I have also reduced the energy costs in my home, which has a much longer payback period, but there's much more to do).

[nerfer]

My guess as to why Israel uses solar water heaters is because of plentiful solar power, and anything that reduces their reliance on their Islamic co-inhabitors of the mid-east has a good sound to them.
However, we have no problem sending boatloads of money to countries that harbor terrorists. Petroleum is the single largest item on our trade deficit. So we feel free to waste energy, and some even think it's patriotic to run around in huge vehicles that endanger others and can roll-over in a heartbeat.

[jt]

Wow!!!...looks like the irony of this topic is lost on this board. Only in America would someone write this:

"People will pay more to be green, as long as it's obvious to them and their neighbors [see] that they're green."

Only in America do people have so much extra cash lying around I guess that they'll spend significantly more for appearance's sake. The truth that is so conveniently and lightly passed over is actually in this article:

"As far as I know, every form of alternative energy is more expensive than conventional energy (particularly if you remove the government subsidies)."

...this whole train of thot presupposes that readers, probably mainly Americans I would suppose, though the net is intl, just blithely assume they're going to have all this extra money to spend. They're brainwashed...they think they have some birthright as Americans to remain wealthy. Well that light you see at the end of the tunnel isn't the land of prosperity you've grown up in or dreamed about...it's a fast-moving train call "Depression" and it's heading right at the US, and perhaps the world. Haven't you seen how the dollar is being destroyed (and has been for a long time) by the Fed's policies. The working class has been robbed blind thru monetary inflation, the manufacturing jobs have left, unemployment is rampant, and the govt continues to bail out the financial institutions with OUR and our Children's money and to lie to us about all of it.

Let's see what kinds of decisions people are making 5 years from now...and what their decisions are based on. I'll bet you 100:1 it'll be on costs and ability to pay...NOT on what their neighbors think about their "social consiousness."

In the meantime, as has been stated and as is well known, we aren't even CLOSE to having an alternative for petroleum for the next 10 years at least, though nuclear is close (though that aint gonna be powering your car, that's for sure). And those or you who actually believe that "Global Warming" is some scientific fact and are going to plan your lives around preventing it...as well-intentioned and as "socially concerned" as you may be...you have been mercilessly hoodwinked by a TOTALLY political-economic movement. It is an outright scam. But that is another topic.

In the meantime...hope you all are trading in some of your worthless paper money for REAL money: silver and gold. That way, when the time comes to buy whatever transportation you're going to need and whatever fuel it's going to take, you'll have something to buy it with. The dollar has lost 80% of its value since 1980 and that value is falling faster and faster, and that's just against other fiat currencies with no backing either!!!!! Got silver?...got gold?

jt

[R D Olivaw]

A few comments:
First, the media can lead the formation of attitude toward domestic energy efficiency. Whether
your local TV Station provides programmes on installing fibreglass or choosing new curtains does affect what gets done.
Second, Hybrids are only attractive if most people drive inefficient vehicles.
And how do you know that your neighbour isn't improving his energy use? Depending on where you live, solar water or solar pv may not be the best use of your money. Anything else, for example K Glass, is not easy to spot unless you local authority carries out an aerial
IR survey or a camera with themal imaging capability is to hand.
A final point - buying a hybrid is a one-off choice - improving the energy efficiency of an
exisiting dwelling is a long slow series of small decisions - it used to be called thrift.