Market Transformation Strategies to Promote End-Use Efficiency

1994

Market transformation is a process whereby energy efficiency innovations are introduced into the marketplace and over time penetrate a large portion of the eligible market. Market transformation can be visualized in terms of the classic S-shaped logistic diffusion curve. Once a new product or other type of innovation is introduced, its penetration begins to rise through early adopters. Penetration then "takes off" as awareness of the technology and its advantages grows. The adoption process continues until market penetration levels off at "full market potential." Market transformation involves ongoing and lasting change such that the market does not regress to lower levels of efficiency at some later time.

Adoption and diffusion of energy efficiency measures is a complex and dynamic phenomenon involving interactions between technology, behavior, market conditions, and public policy. Decisions affecting energy efficiency are made by manufacturers, vendors, architects and builders, contractors, and consumers. New appliance models, vehicles, or other products are introduced every year. Manufacturer and consumer behavior is affected by events such as energy price swings or environmental concerns. Markets vary in terms of prices, growth rates, competition, and other factors. And a wide range of policies or programs including energy efficiency educational efforts, financial incentives, or regulations are possible.

In spite of these complexities, energy efficiency greatly increased in many market segments in the United States during the past 20 years. For example, the average efficiency of new refrigerators (measured in terms of refrigerated volume per kWh per year) increased by 175% during 1972-93; the average rated fuel economy of new cars doubled during 1973-88; and the fraction of windows sold with two or more glazings increased from 37% of the market in 1974 to 87% of the market in 1991. These and other examples of market transformation are discussed in detail in this paper.

The rationale for market transformation is the same as the rationale for energy efficiency improvements: cost-effective energy efficiency improvements are possible in all end uses given technological advances and energy price increases of the past twenty years. Put simply, it often costs less to save energy than to supply energy. Thus economic productivity and economic efficiency improve as energy efficiency increases. In addition, air pollution emissions including emissions of carbon dioxide and other greenhouse gases decline as end-use energy efficiency rises.

If energy efficiency measures are cost effective, it is reasonable to ask why they are not widely implemented in the marketplace without policy and program intervention. In other words, why are market transformation strategies needed at all? The answer to these questions is that barriers such as lack of awareness or information, limited product availability, perceived risks, different parties purchasing equipment and paying operating costs, energy price distortions, and limited access to capital inhibit widespread and full implementation of cost- effective energy efficiency measures. These barriers are discussed in detail in other studies.

As evidence of these barriers, end-use markets implicitly act as if consumers require returns of 30% or more (i.e., paybacks of under three years) when considering energy efficiency investments. These implicit discount rates are much greater than returns provided by other investments including energy supply facilities. This problem, known as the "payback gap," and the barriers that cause it are addressed through policies such as minimum energy efficiency standards, utility DSM programs, R&D, demonstration, and commercialization programs. Market transformation combines individual policy and program initiatives into a coherent strategy for rapidly moving up the diffusion curve and increasing the ultimate market penetration of energy efficiency measures.

We consider market transformation from the perspective of new products and trends in the fraction of which are "energy-efficient." This perspective differs from examining the entire stock of products in use at any particular time. Obviously, it takes much longer for energy- efficient products to penetrate a large fraction of the overall equipment stock than the new product market, because of delays in stock turnover. By products, we mean appliances, building components such as windows, vehicles, motor systems, or other major energy-consuming devices. We address both discrete energy-efficiency measures such as electronic ballasts for fluorescent lighting and variable speed drives for motors, and multiple energy-efficiency measures that are combined in refrigerators, cars, computers, or other "integrated systems."

Market transformation goes beyond simply considering the energy efficiency of new products. It also involves the people who install and use these technologies. In some cases, proper installation and use is critical to ensure that "efficient" technologies perform up to their full potential. Governments or utilities can play an important role in training, inspection and quality assurance, as demonstrated in the case studies discussed below.

The subject of market transformation with respect to end-use energy efficiency has been addressed in other studies. Many of these studies examine particular products, policies, or jurisdictions. Some of these studies focus on how electric utilities can promote market transformation through their demand-side management (DSM) programs. Other studies consider market-based efforts to promote technological innovation and commercialization of energy- efficient technologies.

In this article, we consider market transformation broadly. We examine the entire technology diffusion process, the full array of policies and programs that can contribute to market transformation, and key energy end uses in all sectors of the economy. We focus on the elements of market transformation strategies and empirical examples of successful or partially successful energy efficiency transformations. We concentrate on experience in North America, although transformation of energy efficiency markets can be applied in any country or region. For example, the energy efficiency of new housing in Sweden was greatly increased through a combination of extensive R&D, subsidized loans to home buyers and the national building code.