Introduction

The United States is plagued with a variety of environmental problems that are directly attributable to our energy consumption. We still rely heavily on fossil fuels to meet our energy needs, and the air emissions from power plants contribute significantly to climate change, acid rain, smog, and a variety of health afflictions such as respiratory disease. Global treaties on climate change, new U.S. Environmental Protection Agency (EPA) air quality standards, and growing scientific understanding of the health impacts of air pollution are now forcing us to look more closely at possible changes to our energy mix and consumption habits.

Energy is important for powering our economy but current evidence suggests that we do not consume it as efficiently as we could. A recent study prepared for the U.S. Department of Energy (DOE) by five national laboratories estimated that the United States could reduce its carbon dioxide emissions by more than 20 percent without increasing cost if we just made use of available technologies (Interlaboratory Working Group 1997). Research and development (R&D) efforts could improve technology options further and produce additional improvements in national energy efficiency and the environment.

Furthermore, energy-saving technologies contribute to a stronger economy. They lower the annual energy costs borne by businesses and consumers, thereby freeing up funds for other profitable purposes. A 1997 analysis estimated that implementation of a sustainable development energy strategy, instead of a business-as-usual strategy, would result in net gains of nearly 800,000 jobs, nationwide, by 2010 (ASE et al. 1997).

In addition, energy-saving technologies can help reduce dependence on energy imports. As experience with the 1973 oil embargo, the 1979 Iran-Iraq War, and the 1992 Kuwait-Iraq war showed, dependence on energy imports can be highly disruptive to the United States. Overall, Greene and Leiby (1993) estimate that our dependence on imports, and the partial monopolization of the world oil market that this abets, has already cost the U.S. economy $4 trillion over the 1972-1991 period. Unfortunately, in 1997, oil imports reached an all-time high, with net imports (imports minus exports) reaching 48 percent of total U.S. oil demand (EIA 1998).

The fact that there exists such a large potential for cost-effective energy efficiency investments implies that our markets are not operating effectively. A variety of factors have contributed to this unfortunate situation. After the energy crisis of the 1970's became a distant memory to most Americans, interest in our energy-consuming habits waned. Today most Americans do not think much about their energy use, nor are they aware of the significant environmental and social costs. A variety of institutional, transactional, and other barriers further hinder the market's ability to produce a logical outcome (for a discussion of these barriers, see Golove and Eto 1996; Hirst and Brown 1990).

Recognizing the inadequacies of the market with regard to energy-saving measures, governments have commonly used a broad array of regulatory and voluntary mechanisms to promote energy-saving investments and actions that are in the public interest. This has included education and technical assistance programs, utility rebates and other demand-side interventions, building codes, and minimum efficiency standards. However, in many cases, these past efforts have focused on short-term objectives and not on addressing underlying market barriers that hinder the long-term adoption of cost-effective energy-saving measures. And many of these activities have been conducted in isolation from similar activities conducted by others.

In order to address these limitations with traditional program approaches, a growing number of practitioners and policy-makers are adopting a "market transformation" framework that attempts to incorporate the best features of, and improve the coordination between, market-based and regulatory approaches. In fact, as discussed below, state policy-makers are increasingly embracing the market transformation concept and a growing number of states have established special funding for new market transformation programs as part of utility restructuring policies.

This report is intended to help policy-makers and program implementers better understand the market transformation approach. It offers some principles for the design of market transformation strategies, and also includes some suggestions for improve the effectiveness of efforts already underway. We begin, in Section II, by defining the term market transformation and illustrating how the market transformation approach can work. In Section III we review market transformation policies in a variety of states and discuss some of the key players. In Section IV we discuss the different stages of planning and implementing a market transformation strategy, from selecting targets to exit strategies. In Section V, we present a variety of case studies to answer the question of whether market transformation strategies really work. Finally, in Sections VI and VII we discuss challenges/issues for the future and our overall conclusions and recommendations.

Click to order hard copy. 

43 pps., 1998, $14.00, U983

Return to Top