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Unplugged: Energy Labels Underestimate Appliance Costs

Your new appliance is more expensive to operate than you think.

Since 2007, certain household appliances have carried revamped yellow Energy Guide labels that contain two key features. The first is the estimated annual costs of powering the appliance. The second is a linear scale that enables you to compare that figure with the costs of operating similar models. Both of these are useful, but neither provides up-to-date information.

Manufacturers estimate annual operating costs by measuring the appliance’s energy consumption during lab tests prescribed by the Department of Energy. They then make certain assumptions about the average consumer’s usage patterns—215 loads per year (four a week) for dishwashers, 392 for washing machines, 750 hours per year for room air conditioners, etc.—to estimate the annual energy consumption.  Finally, that figure is multiplied by the average national price of electricity (or natural gas, for appliances like water heaters).

A disclaimer on the label suggests two obvious problems with this approach that are difficult to solve—consumers vary in how they use appliances, and electricity rates vary from market to market.  But even for the average consumer paying average electricity rates, the label is likely to understate costs.

That’s because it is based on a national average utility rate from 2007. In the case of electricity, that same figure—at the time 10.65¢ per kilowatt-hour—is a full penny higher now. And in some parts of the country, electricity costs can fluctuate throughout the course of the day and year. A room air conditioner, for example, is likely to be on during the afternoon on a hot day, when electricity can be most expensive. Any estimate based on an average price is likely to be misleadingly low. And with the estimated costs for products like large room air conditioners and water heaters already reaching hundreds of dollars a year, the discrepancy can mean real money.

The comparison scale suffers from a similar shortcoming—an appliance that ranked well among its peers in 2007 may be relatively inefficient in 2011. Consumer Reports highlighted a nearly identical problem with products that have previously qualified for the Energy Star certification continuing to carry the Energy Star label even after the standard has changed and become too stringent for them.

FTC will update both the assumed utility rates and the comparison scales in 2012, which will temporarily address the problem. But these issues will plague the Energy Guide as long as the agency waits five years between each update.

Make no mistake: the Energy Guide is still useful. It allows price-sensitive consumers to start factoring in costs that would otherwise be hidden from them. And even outdated information can be useful: a model that was inefficient by 2007 standards is certainly inefficient now. But when shopping for a new appliance, it helps to remember that the Energy Guide label doesn’t tell the whole story. It tells a story that was true—on average—in 2007.