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Market Transformation

MARKET TRANSFORMATION

The term "market transformation" first appeared in the literature in the early 1990s. The term emerged more as an abstraction than a concrete program strategy or model. Market transformation provides a vision of the ultimate objective of strategic interventions—markets that yield energy-efficient outcomes automatically as the result of normal market forces. Market transformation can be viewed as a catalyst for change—a means of intervening in imperfect markets to effect long-term changes to improve market performance with respect to energy efficiency.

While there is not a single, precise definition of market transformation in professional practice, the following definition captures the essential elements:

Market transformation is a strategic intervention to achieve a lasting, significant share of energy-efficient products and services in targeted markets. Market transformation is essentially synonymous with marketing strategy as used in the private business world. A key distinction is that market transformation is motivated by the social objectives of improving the performance of markets to yield greater energy efficiency. And like marketing strategies in the private sector, it often requires ongoing measures to achieve and sustain desired market outcomes. For example, market transformation will occur in the U.S. clothes washer market when energy-efficient washers (often horizontal axis machines that use about one-third the energy and water of old vertical-axis, agitator machines) become the norm as they already are in Europe. After introduction of new machines in the market, ongoing marketing and related support may be required to sustain a significant market share.

The overall goal of market transformation is to increase the share of energy-efficient products and services through fundamental, enduring changes in targeted markets. This goal also serves to improve the economy and reduce negative social and environmental effects that result from energy use. Intervention is needed because of market imperfections that do not allow the market on its own to provide an optimum level of energy-efficiency goods and services. In most cases intervention requires an evolving mix of strategies and implementation measures over an extended period.

Market transformation as a strategy to improve market performance has become more important as most energy utility markets deregulate and restructure. Restructuring is resulting in more competition and reliance on market mechanisms in energy markets that have been highly regulated. Utility energy efficiency programs of the 1980s and 1990s, called demand-side management (DSM) programs, are being abandoned and market transformation is being introduced to fill the void. However, the roots of market transformation lie within the regulated energy industries.

The goal of most DSM programs has been relatively narrow: to reduce energy and power demand to avoid investments in new power plants or transmission and distribution systems. DSM was used within the context of integrated resource planning to yield the lowest cost of energy services by avoiding more costly construction and operation of supply-side power plants. DSM was considered a resource comparable and substitutable for supply-side resources (hence the name—integrated resource planning). Individual utilities have typically implemented DSM for their own customers, as ordered by public utility commissions or other regulatory bodies. All utility customers generally have shared the costs for DSM programs because regulators mandated such programs and consequently provided cost-recovery mechanisms for utilities.

Integrated resource planning and demand-side management have declined in the wake of the movement to restructure and deregulate energy markets. DSM has evolved to be more market-based, as program designers sought lasting change, and utilities reduced program costs and shifted some of the remaining costs to the direct beneficiaries of DSM programs.

As DSM evolved, program managers realized that their efforts could have much greater impact if they went beyond the service territories of single utilities to encompass regional and national markets. While not termed "market transformation," there were several early initiatives that took this approach, including the Manufactured Housing Acquisition Program in the Pacific Northwest and the Power Smart Program, which originated in British Columbia and was later adopted elsewhere. These and other state, regional, national and even international collaborations, with multiple parties contributing funds and expertise, have tried to change building practices, introduce new products and change market shares. Collaborations, such as the Consortium for Energy Efficiency (CEE) in the United States, have been making larger changes in the markets for target technologies. Examples include promoting super-efficient refrigerators, clothes washers, and motors. More broadly, the Energy Star Program of the United States Environmental Protection Agency (EPA) and Department of Energy (DOE) is an example of a market transformation effort that spans numerous household and commercial appliances and applications—from home computers and air-conditioners to energy ratings of commercial buildings. Energy Star is a labeling program that identifies the most energy-efficient technologies within a given appliance or application category.

Market transformation initiatives typically require collaboration among a diverse set of stakeholders, including manufacturers, retailers, utilities, research and development (R&D) organizations, government, and public-interest efficiency advocates. In recent years the need for coordination and collaboration among such a diverse set of actors to achieve consensus has led to the development of specific U.S. regional market transformation organizations, including the Northwest Energy Efficiency Alliance (NEEA), the Northeast Energy Efficiency Partnerships, Inc. (NEEP), and the Midwest Energy Efficiency Alliance (MEEA).

These organizations vary significantly in their structure, funding and operation. However, their overall approach to market transformation is similar. Market transformation typically includes the following steps (not necessarily in sequence):

  • Identify needs through market analysis and research—the markets where opportunities exist to increase market share of products and services that respond to customer needs and deliver superior energy-efficient performance.
  • Identify market participants (manufacturers, retailers, consumers) and stakeholders (such as consumer advocacy groups, trade organizations, and government).
  • Form collaboratives and define roles among key market participants and stakeholders to lead and manage the market transformation initiative.
  • Establish funding to cover costs of the initiative (program costs).
  • Define program goals for target products or services within the chosen market.
  • Establish market baselines against which intervention(s) will be evaluated.
  • Design strategies and measures for the initiative, including a transition strategy that may be an exit or continued intervention such as advertising and education.
  • Implement measures.
  • Track market performance and evaluate results of the initiative.
  • Continue, modify or end initiative as indicated by monitoring and evaluation results.

Implementation of market transformation programs requires adoption of coordinated measures targeted to various market participants over a fairly long period. The duration of market transformation programs depends on numerous factors, including the complexity of the market; customer response; support of manufacturers, distributors and retailers; and time required for manufacturers to change manufacturing operations. Experience with past DSM programs and early market transformation programs suggests that periods of five to ten years or more are needed to transform energy efficiency markets.

Typical measures used with market transformation programs may include the following:

  • marketing, such as media advertisements, point-of-purchase displays, utility bill stuffers and other promotions
  • labeling (a key example is the Energy Star program established and operated by the U.S. EPA and DOE)
  • consumer education
  • professional training (e.g., sales associates, skilled tradespeople, contractors, manufacturers)
  • research and development in support of program needs
  • codes and standards (to codify energy-efficient technologies by establishing minimum performance standards)
  • consumer rebates or other incentives to increase consumer acceptance
  • manufacturer and retailer incentives
  • technology procurement (specifying required performance of technologies and aggregating customers to create sufficient demand for suppliers to respond to performance requirements)
  • other types of bulk purchasing or buyer aggregation to create market pull
  • design competitions based on desired performance.

Market transformation collaborations involve multiple parties—each with different motivations and objectives. The target markets are typically broad in geographic scope (regional and national markets). These two factors alone pose major challenges for market transformation programs. The complexity and dynamic nature of markets pose a different set of challenges. While the challenges of market transformation are many and complex, the advantages of market transformation versus traditional DSM intervention are substantial. Market transformation focuses on systemic, complementary measures for market improvement, whereas DSM programs typically were isolated efforts that addressed much narrower symptoms of market imperfections. For this reason, market transformation is growing rapidly as a dominant model for publicly and privately supported energy-efficiency programs.

Dan W. YorkMark E. Hanson

See also: Demand-Side Management; Efficiency of Energy Use, Labeling of.

BIBLIOGRAPHY

American Council for an Energy-Efficient Economy. (1998). Proceedings from the 1998 American Council for an Energy-Efficient Economy Summer Study on Energy Efficiency in Buildings, Volume 7, Market Transformation. Washington, DC: Author.

Eto, J.; Prahl, R.; and Schlegel, J. (1996). "A Scoping Study on Energy-Efficiency Market Transformation by California Utility DSM Programs," LBNL-39058. Berkeley, CA: Lawrence Berkeley National Laboratory.

Geller, H., and Nadel, S. (1994). "Market Transformation Strategies to Promote End-Use Efficiency." Annual Review of Energy and the Environment 19:301–346.

Nadel, S., and Latham, L. (1998). The Role of Market Transformation Strategies in Achieving a More Sustainable Energy Future.Washington, DC: American Council for an Energy-Efficient Economy.

Synergic Resources Corporation. (1996). Market Trans-formation in a Changing Utility Environment. Washington, DC: National Association of Regulatory Utility Commissioners.

York, D., ed. (1999). "A Discussion and Critique of Market Transformation: Challenges and Perspectives," Report 186. Madison, WI: Energy Center of Wisconsin.

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