Using market transformation to achieve energy efficiency: the next steps

Using market transformation to achieve energy efficiency: the next steps

Using Market Transformation to Achieve Energy Efficiency: The Next Steps As state regulation skiffsfvom centralized planning to market-driven strategi...

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Using Market Transformation to Achieve Energy Efficiency: The Next Steps As state regulation skiffsfvom centralized planning to market-driven strategies, we should emphasize making energy-eficient choices more attractive in the marketplace. Edzuavd M. Meyers, Stephen M. Hastic and Grace M. Hu

Ed Meyers serves on the District of Columbia

Public Service Commission (DCPSC). He is a member of NARUC’s Energy Resources and the Environment Committee and chairs its Energy Efficiency Subcommittee. Ed received his Ph.D. in American governmentfrom Georgetown University. Stephen Hastie is manager of market research and evaluatio~z zoifh Resource Management International, Inc. He is the lead author o_fthe NARUC Market Tralzsformation guidebook. Grace Hu is chief economist with tlze DCPSC and staff co-chair of the NARUC Subcommittee on Energy Efficiency. Her Ph.D. is from Rensselaer Polytechnic Institute.



ecause competition in the

gress would adopt: (1) stronger

electric industry is coming

clean air standards, including

on fast, electric utilities and their

carbon, nitrogen oxide and sulfur

regulators are taking a fresh look

dioxide; (2) much stronger light-

at demand-side management pro-

ing and appliance efficiency

grams. These programs, designed

standards; (3) stronger industrial

to produce energy savings and re-

motor efficiency standards; and

duce the need for future capacity,

(4) stronger code standards for

are now generally being cut back,

residential, industrial and com-

along with other expenses, as

mercial buildings.

companies pare down and pre-

But Congress is focused today

pare for wider competition. Elec-

on using market forces to win its

tric companies and their state

objectives and is not likely to sup-

regulators are de-emphasizing de-

port central planning approaches.

mand-side management (DSM)

Meanwhile, states have a long his-

programs, as companies stream-

tory of working to improve the en-

line in preparation for the com-

vironment and are not likely to

petitive era. Indeed, the states and

abandon these efforts.

regions would not need to design,

An impasse? Not at all. Today

implement and fund any addi-

states are forming regional enti-

tional DSM programs, if only Con-

ties to develop market-driven

The EIecfricify Iollrnal

strategies to achieve efficiency

tive costs and lost revenues when

time frame so long that we have

goals. These strategies are de-

they implement traditional DSM

barely begun to tap the full poten-

signed to win the approval of en-

programs. Moreover, when DSM

tial of efficient lighting.

vironmentalists as well as market-

programs interact with the mar-

focused leaders in Congress.

ketplace, unintended conse-


here has always been a dissonance associated with

quences can occur. The District of

utility DSM. Many customers had

Columbia once had a program

trouble understanding why a

that removed inefficient appli-

company would try to convince

formation Administration, from

ances at customer request. The

them to use less of its product. In

1991 through 1995 U.S. utilities

utility’s cost of removing a second

fact, many in utility upper man-

spent approximately $12 billion

refrigerator, freezer or room air-

agement never really bought into

on DSM, resulting in a peak de-

conditioner was $225, including

utility DSM and many still want

mand reduction in 1995 of about

administrative costs and compen-

no part of it-not

29500 MW1-about

sation to the utility for lost reve-

I. The DSM Experience According to the U.S. Energy In-

four percent

now, and espe-

cially not in an environment in

of peak U.S. summer load in 1995.

which customers are free to select

Energy savings were also substan-

their electricity suppliers.

tial, at 216,000 GWh over the 1991-

II. Market Transformation-A

95 period, including more than 57,000 GWh in 1995 alone (1.9 percent of total U.S. electricity sales). Still, in this age of free market worship, DSM (or energy efficiency: if you prefer) is often lambasted as an idea whose time has passed. Thus, depending upon

Utilities and regulatars have moved up the learning cwve toward more cos t-effective pyo8ram designs.

New Approach Utilities and regulators have made significant progress up the learning curve toward more costeffective program designs. Largescale, shotgun-style, customer-rebate programs are disappearing.

one’s value system, DSM has

Customers who receive high-effi-

been either a huge success or just

ciency products and services from utilities are paying a much larger

another way that regulators have distorted cost structures, encum-

nues (although Charley down the

share or all of the costs for these

bering utilities in the marketplace.

street might do it for $40). A util-

products and services. Today,

art of the change in emphasis

ity’s discounted sale of a compact

there is a greater emphasis on

P is due to regulators experiencing “sticker shock.” As we were

fluorescent (CF) bulb might only

loans, lease-purchases, shared-

cost a customer $5; but including

savings agreements, and other in-

confronted with the rising cost and

all the utility’s administrative and

novative financing methods.

lack of precision in measuring re-

marketing costs-as

Some commissions are consider-

sults from some DSM programs,


and because of concerns about in-

to $30 or $40. A customer can buy

owners of energy-efficient indus-

ter-class and inter-customer subsi-

a CF bulb at around half this cost

trial, commercial and residential

dies, many regulators backed away

at a local hardware store. In a re-

buildings.” As Amory Lovins, Di-

from DSM programs that increased

structured environment, utilities

rector of Research of the Rocky

rates. They understood that the

can’t afford to implement programs like these.

Mountain Institute, has put it,

public does not distinguish between “good” and ‘bad” components of a rate increase.2

well as lost bring the total

Marketing new lighting products has been a frustrating experi-

ing discounted energy rates for

“Traditional DSM was always a work in progress.” Today, market transformation

Utilities are often loaded with

ence for utilities. Often the prod-

programs are receiving increasing

excessive costs such as administra-

ucts needed improvement over a

attention from regulators, energy

Mm 1997

efficiency advocates and utilities.

such as low-cost financing to a

These programs appeal to tradi-

manufacturer (or a group of

tional DSM advocates because

manufacturers) specifically for re-

they result in lasting efficiency im-

tooling. Or the program could-

provements. They appeal to free

perhaps through aggregating a

marketeers because of their use of

large group of purchasers

market forces to achieve energy ef-

through procurement collabora-

ficiency objectives. Also, the in-

tives or altering government pur-

dustry has been moving toward

chasing rules-satisfy

use of state-wide system benefits

facturer that a sufficient consumer

the manu-

or wires charges for funding effi-

demand for the more efficient

ciency activities, as well as the possibility of using non-utilities as program implementers. Market transformation initiatives-which often require the significant involvement of many different market actors across multiple utility jurisdictions-could

work well in

such an environment.


arket transformation programs are specifically de-

signed to bring about [email protected] changes in energy-related decision making, by reducing or eliminating market barriers to efficient practices so that various market

Market transfovmation programs are designed to bring about lasting changes in energy-uela ted decision making, by reducing OYeliminating market barriers td eficien t practices.

I cigarettes and Venida (a leading

maker of hairnets). Women “saw green [the color of Lucky’s cigarette pack] as an unfashionable color, and many avoided Luckys because the packaging clashed with their dress.” Lucky did not want to change the packaging, so Bernays developed what became a “highly successful campaign to make green a fashionable color.” The campaign was so successful that one of Lucky’s competitors featured a woman wearing a green dress.” *



Similarly, when fashion trends resulted in “the dominance of cropped hair,” leaving Venida with greatly reduced hairnet sales, Bemays convinced a labor expert to lobby regulatory agencies “to require haimets as safety measures for women working with or around machinery.“h

The lessons learned from these two examples are that the initiatives (1) identified and targeted a

actors have a self-interest in mak-

market barrier (fashion trends)

ing efficient decisions. There is

and (2) created a campaign to

evidence that results may be more enduring than with other approaches. As a recent study defined market transformation, The reduction in market barriers is evidenced by a set of market effects that last after the interven-

manufacturer would see less risk in making the retooling invest-

scale. A market transformation program might target this market barrier by providing an incentive

large-scale, customer-rebate

Jim Gallagher, chief of the energy

ceives rebates or low-cost financing, it may continue to make the

For example, a manufacturer’s

to take advantage of economies of

is also true that some of the

when an individual customer re-

when rebates are given.

ment in quantities large enough

t I

ment on its own. In contrast,

more efficient purchases only

duction of more efficient equip-

overcome that barrier.

style DSM programs have resulted in market transformation.

tion has been withdrawn or reduced.”

retooling costs may impede pro-


equipment existed, so that the

Advertising or educational campaigns may work even better, as shown by these two non-energy examples of market transformation initiatives, carried out by the early public relations practitioner Edward Bernays for Lucky Strike

staff section of the New York State Department of Public Service, contends that “what seemed to be lost in the rush to jettison traditional DSM and embrace market transformation was any public recognition that many of the traditional DSM programs being implemented since the mid-1980s have indeed resulted in, to varying degrees, substantial long-term

market effects.” This is certainly

encourage building owners to ret-

target the supply side of the distri-

the case with T-8 lamps in com-

rofit and install highly efficient

bution chain.’ For example,

mercial facilities as well as the

lighting products. It is operated

through a joint effort by the New

comprehensive change in new

on a partnership basis with man-

York Power Authority Consor-

construction efficiency codes in

agers of many Fortune 500 firms

tium for Energy Efficiency (CEE)

the Pacific Northwest. The chal-

and public facilities. Green Lights

and manufacturers, the purchase

lenge is to economically change

reports on average a 49 percent

of a super-efficient apartment-

the market and keep it changed.

lighting energy saving for com-

sized refrigerator has reached at

pleted upgrades.7

least 40,000 units each year.‘” Two

III. Why Is Market

Transformation Promising?

The ENERGY STAR program is a voluntary product labeling pro-

other successful examples cited by Suozzo and Nadel are geothermal heat pumps (GHP) and Wis-

Already we have seen examples that demonstrate that market trans-

consin high-efficiency gas fur-

formation programs are working

naces. GHP sales almost doubled

and that external stimulus is no longer needed. For example, prices for electronic ballasts and high-efficiency lamps have fallen and the incentives are unnecessary in some regions. Kathryn Conway manager of the lighting transformation program in the Lighting Research Center at Rensselaer Polytechnic Institute notes that market transformation articulates the needs and expectations of the user and purchaser first, and then responds with products designed specifically to meet those needs. The customer comes first. Instead of trying to persuade people that they ought to buy a light bulb to avoid pollution (when all they want is enough light to read their horoscopes or match their socks), a market transformation program should promote products that will first meet the users’ visual needs, then offer good values such as being economical and long-lasting, and finally add the less tangible benefits of being environmentally sound.


onway cites other successful examples, such as the

U.S. EPA’s Green Lights and ENERGY STAR programs. Green Lights is a voluntary program to

Maw 1997

Rebate programs are market transformation programs wien they produce lasting changes. ... ‘We have created an industry that is sustainable without the utility’sjinancial assis tan&’

from 1994 to 1995. For the Wisconsin gas furnaces, by the early 1990s more than 90 percent of the replaced furnaces were already high-efficiency even though rebates had been terminated. This market had been transformed. Lovins cites B.C. Hydro’s high-efficiency motor program as another successful example.” ebate programs are only Rm

arket transformation pro-

grams when they produce lasting market changes. David Morse, Chief of Energy Resources at the

gram designed to stimulate manufacturing of highly efficient appliances, lighting products and even homes. The ENERGY STAR computer program developed by EPA and manufacturers has become the standard for federal procurement. For example, for office equipment the ENERGY STAR program has achieved a 50 percent energy savings.8 Many foreign countries have joined ENERGY STAR as well. Suozzo and Nadel’s recent study lists several successful market transformation activities that

California PUC, notes two successful market transformation programs in California: (a) rebate financing for insulation and other weatherization measures, and (b) solar water heating for swimming pools. Both have moved well beyond the rebate stage and are no longer in need of subsidy ‘We have created an industry that is sustainable on its own without the utility’s financial assistance,” Morse says.12 Another success story is NUTEK, a non-profit organization funded through taxes and charged with implementing en-


ergy efficiency initiatives for

ers recently published a report on

to see if any had taken concrete ac-

Swedish citizens. NUTEK aggre-

market transformation”

tions to initiate market transfor-

gated groups of buyers who pur-

dresses several key issues:

chased equipment for rental build-


which ad-

the types of program delivery

mation activities.‘” Regulatory staff from four of the states contacted-

ings and developed the desired

mechanisms that can be used in

California, Massachusetts, Rhode

specs for refrigerator-freezer

market transformation programs;

Island and Wisconsin-reported

which included an efficiency at

0 program features regulators

least 30 percent higher than avail-

should require to maximize

able products in the Swedish mar-

chances for success;

ket. The winning manufacturer, Electrolux, introduced high-efficiency models into both the Swed-


selection between utility and

non-utility implementers; l

changes regulators should

make to facilitate development

ish and German markets, and

that market transformation programs are a priority of the commission or its staff, and some reported having taken concrete steps to facilitate such activities. For example: l

The California PUC has

authorized $5 million per year

market shares of these products

1996-98 for Pacific Gas & Electric

have increased consistently, stimu-

Co. to implement market transfor-

lating other manufacturers to in-

mation programs.

troduce high-efficiency products.


en Keating, coordinator of market transformation pro-

grams at Bonneville Power Administration says, The Northwest has been something of a laboratory for market transformation. For example, the Northwest spent hundreds of millions of dollars on residential weatherization and new construction programs. One result of this was the encouragement and development of a market for more efficient windows. A corollary effect was driving single pane and inefficient aluminum storm windows out of the market.” In short, we have many market

transformation success stories, even at this early stage. What has made these programs successful and what should we avoid doing? A review of the theoretical foundation for market transformation provides some clues. IV NARUC’s



Starting Point The National Association of Regulatory Utility Commission-

We have many market

tmnsfovmation success stories, even at this early stage. What has made these programs successfill?


The Massachusetts DPU has

“proposed that [industry] transition programs include participation in market transformation efforts sponsored by private industry, regulatory agencies, or other entities that aim to develop new energy efficiency technologies or upgrade building codes and standards.” l

The Rhode Island restructur-

ing law provides a systems beneand implementation of market

fit charge as a funding source for

transformation programs in their

DSM and renewable energy pro-

jurisdictions; and

grams during a five-year transi-


guidelines for evaluating mar-

ket transformation programs. Definitional problems, conflict-

tion to competition. It also gives the commission authority to increase the amount spent and to ex-

ing signals from regulators, and

tend the time during which pro-

uncertainties over evaluation

grams would be funded.

methods have hampered market


The New York Public Service

transformation efforts to date. The

Commission organized a market

guidebook is intended to help

transformation workshop to en-

commissions and other stakehold-

courage utilities to jointly imple-

ers clear these hurdles.‘”

ment market transformation pro-

A. Steps Taken Toward Market



B. Lingering Questions

For this article, we contacted

Regulators and others who

regulators in a dozen jurisdictions

would like to see market transfor_____


mation programs in operation

dicators. Eto et al. listed potential

In addition to impact evalu-

must first answer a few basic

market effects grouped by market

ation, process evaluation can help



interpret results and determine

1. who should implement market transformation programs?


changes in building codes and ap-

the best strategy to overcome mar-

pliance standards; retail and

ket barriers. Such qualitative re-

wholesale providers’ changes in

search, conducted among the

tioned whether utilities have

stocking and distribution prac-

stakeholders and potential cus-

made a good-faith effort to imple-

tices, and in wholesale and retail

tomers, helps explain the pro-

ment DSM programs. As Morse

prices and quantities; market ac-

gram’s effects on market indica-

points out:

tors’ (including retail and whole-

tors. Process evaluation also plays

sale providers, non-financial inter-

a significant role in improving

mediaries and financial

program design, ensuring effec-

Regulators have often ques-

Many traditional DSM programs had market transformation effects. However, they are loaded with utilities’ excess costs or quasi-governmental type of costs such as brochures, publicity, program design, planning, administrative costs and lost revenues. If a third party or ESCO conducts DSM, these excessive costs may be reduced and programs will be more market driven.17

mplementation by a third


party, whose financial viability

is not so closely tied to increased energy sales, should eliminate a number of regulatory concerns. For ex-

intermediaries) changes in promo-

bling mid-course adjustments. 3. Should payment be based in

Programs that take longer to transform markets might include a savings bonus -with a paymen t-for-services arrangement.

tied to evaluation results (based on
h1q 1997

part on savings achieved? When payments for market transformation services are linked to results, short-term energy savings may be emphasized at the expense of lasting reform. Still, some linkage of payment to energy savings would be possible for programs designed to alter markets in the short term.

‘ample, if shareholder incentives are specific market indicators), utilities

tive communication and coordination among stakeholders and ena-


strategy for programs that will take longer to

tional practices, and manufactur-

transform markets might in-

ers’ changes in retooling rates.”

clude a mechanism that com-

impacts measured by these mar-

bines a savings bonus with a

ket transformation indicators will


depend upon the baseline values

ment. The initial implementation

chosen, which should be agreed

contract would define the basic

on by all program sponsors at the

services to be provided for a

outset of the program. Indicators

specified fee, with metrics to en-

that signal when the subsidized

sure that the program funds are


portion of program should end

being spent prudently

In addi-

should also be agreed on. Overall,

tion, the implementing


market transformation programs

tion can receive a bonus pay-

must rely more on macro-eco-

ment based on achieving a

nomic measures, such as changes

minimum level of savings, as es-

in supply and demand, than the

timated (and paid) at the end of

micro-economic measures of indi-

the program’s implementation,

vidual DSM implementation that

or after a specified amount of time.

have been used over the years.


C. Jump-Starting Market

mation by themselves, except in

embarked on a new project that

Transformation Initiatives

the rarest of cases. Whenever fea-

focuses on evaluating market

Regulators could use the follow-

sible, all major stakeholders

transformation activities in two re-

ing activities to help jump-start

should be involved in achieving

gions: the Northeast and North-

market transformation activities

market transformation: end users,

west.” The project’s goal is to

in their jurisdictions, though

utilities, other industries, apart-

compare and contrast regional

many of these activities imply or

ment and office building coali-

market transformation programs

suggest actions that can be taken

tions, construction firms, builders,

(1) to assist regulators in setting

by utilities, energy efficiency ad-

architects, vendors, building code

priorities for energy efficiency

vocates and others:

officials, manufacturers, distribu-

funding and (2) to evaluate the

tors, realtors, banking and lend-

cost-effectiveness of market trans-

1. Work with other interested

ing institutions, trade allies, retail-

formation strategies. Initially,

cate a clear understanding of

ers, contractors, real estate

NARUC’s evaluation will target

what is a “market transformation

developers, DOE, EPA, Congress,

residential compact fluorescent

parties to develop and communi-


lighting fixtures programs in both

especially impor-

tant step when a regulatory body

regions. This project will also ad-

mandates energy efficiency expen-

dress policy implications beyond

ditures on market transformation.

lighting, such as building codes,

2. Assure utilities of cost recov-

standards for appliances, industrial motors, and HVAC systems.

ery for cost-effective, prudently implemented market transforma-


tion programs.

he Northeast and Northwest regional efforts are led

by the Northeast Energy Effi-

3. Encourage utilities and other stakeholders to identify specific

ciency Partnership and the North-

markets that might be amenable

west Energy Efficiency Alliance,

to market transformation efforts.

respectively. EPA has funded the

Where feasible, collaborations

Northeast efforts through a two-

should be encouraged between

year grant covering (1) market

utilities and non-utility organizations, such as energy efficiency advocacy organizations and energy

PUCs, state legislatures, state en-

transformation outreach, educa-

ergy offices, and others.

tion and development; (2) energy-

In addition, the geographic

efficient residential lighting fix-

scope of market transformation

tures and (3) energy-efficient

will most often extend beyond

lighting in commercial remodel-

state boundaries. For that reason,

ing projects. The Northwest mar-

state regulators should encourage

ket transformation efforts have al-

regional collaboration to imple-

ready achieved success in

ment market transformation pro-

upgrading building codes and im-

grams. Even at that, market transformation may not materialize if

proving efficiency in manufac-

only a few scattered states pursue

gained through the Northeast and

D. Market Transformation

elimination of a market barrier.

Northwest market transformation

-Requires Integrated Efforts

Without strong regional coopera-

efforts, we can look forward to

Neither state public utility com-

tion, market transformation ef-

the expansion of activities to new

forts may fail in many cases.

regions and technologies.

service companies. 4. Consider-but cases-pilot

only in some

programs to test pro-

gram feasibility. But note that a pilot may not provide enough indication of a program’s cost-effectiveness due to its limited scale or scope.‘”

missions nor utilities acting alone can accomplish market transfor-

Recently, following publication of its Guidebook, NARUC has

tured homes. As experience is

The nation today should be exceeding by significant margins its

r goals for clean air, conservation of natural resources, and reduced deof strong

lighting standards-and


cient Econ., Aug. 1996).

of DSM pro-


and middle income ratepayers simply subsidize the affluent ratepayers.

B.C. Hydro’s big mine and mill customers used inefficient but huge motors, each of which used its own capital cost’s worth of electricity every few weeks. B.C. Hydra simply subsidized

3. Edward M. Meyers, Making fke Right Energy Choices in America, PUB.

by it-

self, save many gigawatt hours of


energy use. Congressional action

the carrying and warehousing costs of stocking only efficient motors. In a few

July 15, 1993, at 15.

4. Joseph Eto, Ralph Prahl and Jeff

on stronger equipment and build-

years. practically nothing else was available. The inefficient motors became a rare, special-order item.

Schlegel, A Scoping Study on Energy

ing envelope standards, stronger

Efficiency Market Transformation

appliance standards, and on


California Utility DSM Programs, July 1996, at 11 (prepared for Calif. DSM

tighter emission ceilings for vari-

Amory Lovins, fax to authors, Nov. 6, 1996.

Advisory Committee).

ous pollutants, might persuade

(Am. Coun. for an Energy-Effi-

10. Id. at 8.

extent as the more affluent. Therefore, if DSM is funded through rates, lower

mately replacement of the incandescent light bulb-could,


ers do not take advantage

gram offerings to nearly the same

pendence on foreign energy supplies. Implementation

and low and middle income custom-

12. Conversation

regulators to look to the market-

with David Morse,

Nov. 26, 1996.

place to meet energy needs in an

13. Conversation

efficient manner.

Feb. 15, 1997. Another well-known


with Ken Keating,

ample is changing

n the absence of such national


the building codes

in the Northwest.

efforts, state regulators are

continuing their work to achieve


efficiency improvements through




cost-effective strategies such as


market transformation. It’s time






(NARUC, May 1996).

for regulators to take concrete

15. In September

steps toward transforming mar-

setts utility issued a request for pro-

kets in a comprehensive, lasting

posals calling for identification of pre-program market conditions in preparation for the final design and

manner. As we shift at the state regulatory level from centralized

1996, a Massachu-

planning to market-driven strate-

5. She1 Feldman, How Do We Measure

implementation of a set of market transformation programs. The RFP

gies, we must place more empha-

the Invisible Hand?, Aug. 22-25, 1995, at 3-8 (Conference on Energy Program

specified the use of the NARUC guidebook as the basis for the research.

sis on making energy-efficient

Evaluation: Uses, Methods, and Results) (1995 International Energy Pro-

choices more attractive in the marketplace. By helping to create re-

gram Evaluation

gional models for the mutually


stimuli in the future. n Endnotes: FNERGY INFO. ADMIN., U.S. ELECTRIC 1995,

3-4 (Jan. 1997). 2. Customers

Rhode Island, Vermont and Wisconsin.

and Maria Tikoff, Director of Green

19. For example, regional efforts require many stakeholders to pool resources and cooperate to create a critical mass.

8. Conversation with Linda Latham, Chief of Energy Star Labeling Branch,

20. EPA provided grant funding for

Envtl. Protection

this new project and DOE has contin-


Agency, Feb. 12,1997.

ued to provide support to NARUC on ways to achieve energy efficiency in a restructured environment.




18. Eto, supra note 4, at 20.

with Kathryn Conway

Lights, Envtl. Protection Agency, Feb. 12, 1997.


tend to groan at a

greater strain on the family budget,

May 1997


17. Morse, supra note 12.

7. Conversation

for publicly mandated market




gan, Montana, New York, Oregon,

6. Id.

tion efforts may reduce the need


bia, Maryland, Massachusetts,


and Schuster, 1965).

market actors, market transforma-



See also


beneficial collaboration of key

16. Regulators interviewed represented California, Colorado, District of Colum-


_ 41