eThesis - School of Business electronic theses

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Consumers do not in all circumstances tend to behave as the neoclassical economic theory would predict. In fact, consumers have often the tendency to overweight the initial investment cost of a technology versus the operating costs that accrue in the future. In this thesis, the hypothesis is tested by investigating Finnish households’ heating mode choices in their newly built detached houses. If the hypothesis holds true, the lower level income households choose the heating mode that entails lowest initial investment costs despite the predicted future energy price development. Similarly, households with high income levels would have greater probability to choose more expensive heating modes. Direct electric heating is the most economical solution by its purchase price for a detached household in Finland and ground heat pump one of the most expensive. However, when discounting the predicted future energy costs back to the investment period, the NPV of ground heat pump for a type consumer is lower the NPV of the direct electric heating. The net savings of ground heat pump over its lifetime owes to the energy efficiency of the technology. If the diffusion of an energy efficient technology is very low despite being competitive, researchers talk about energy paradox. The empirical approach of this thesis belongs to the discrete choice model family. Multinomial logistic and logistic regression models are applied to predict the probabilities of households to choose certain heating mode. The model is estimated by utilizing data from Finnish research company Rakennustutkimus Ltd. The data contains heating mode choices as well as socio-economic information of 1,260 Finnish households that were building a detached house in 2008. The results of the empirical examination do not give unreserved support for the hypothesis between income level and heating mode choice. Strong correlation between the income level and certain heating modes can be however found indicating that lower income level households would prefer direct electric heating and higher income level households ground heat pump. It is not possible to draw clear political implications based on the findings of the study. The importance of the empirical part of the study is to provide indication for further, wider and more profound study that should be conducted by applying more accurate data.