MARKET TRANSFORMATION INITIATIVES: MAKING STEADY PROGRESS

Margaret Suozzo and Jennifer Thorne

May 1999

Executive Summary

Market transformation activities are strategic interventions designed to reduce market barriers and effect positive lasting changes in the market for energy-efficient goods and services, such that they are produced, recommended, and purchased in increasing quantity. National and state policy-makers are increasingly embracing the market transformation concept and a growing number of states have established special funds for new market transformation and other energy efficiency programs as part of utility restructuring policies.

In this report, we summarize the progress to date in promoting a number of energy-efficient products and services through market transformation initiatives. In total, we examine nine efforts. Six efforts target residential customers: resource-efficient clothes washers, home lighting (both lamps and fixtures), windows, consumer electronics, residential air conditioning, and geothermal heat pumps. Three target the commercial and industrial sectors: exit signs, new building commissioning, and premium-efficiency motors. (We also provide brief updates on several other initiatives covered in a prior report on the status of market transformation efforts).

These initiatives were selected based on a number of factors, including: our knowledge of the status of market transformation activities (including which efforts have been underway for long enough to see substantial progress or significant roadblocks), availability of quantitative and qualitative information on the initiative (e.g., have market and process evaluations been performed), and discussions with program managers and experts in the market transformation field. We have attempted to provide a good cross-section of activities for which progress is being demonstrated, as well as some for which considerable challenges remain.

Since an earlier ACEEE report on the status of market transformation efforts (see Suozzo and Nadel 1996), the market transformation field has experienced many changes. Perhaps the most important from the standpoint of understanding the impacts of market transformation efforts is the emergence of better-defined market transformation evaluation approaches and corresponding evaluation data. The current report benefits from considerably more data and information on market progress.

Below, we present highlights of each of the nine initiatives covered in this report. Following this, trends and lessons learned that cross-cut these initiatives are summarized.

Residential Clothes Washers

Residential clothes washers present one of the earliest examples of utilities working together to aggregate their influence and effect market changes. Beginning with the Western Utility Consortium (WUC) in 1992, utilities have attempted to work together to aggregate their market influence by defining consistent efficiency levels to promote across service territories and supporting necessary research to speed market introduction. WUC's efforts spurred one of the first CEE initiatives, which in turn, influenced the Energy Star® clothes washer program specification. Today, many utilities throughout the country and several strong regional programs (e.g., NW Alliance, NEEP, Wisconsin utilities, and emerging statewide programs in California and New York) support CEE levels and the Energy Star appliances program.

These various efforts have contributed to several encouraging market effects. Products are more readily available. As of March 1999, 31 high-efficiency washer models met the CEE and Energy Star specifications, with 14 different brands represented. In 1991, only one U.S. manufacturer met the CEE levels (DOE 1999a). Retailers are more knowledgeable about and are stocking efficient clothes washers. Consumers are increasingly aware of efficient clothes washers and are highly satisfied—85 percent of consumers surveyed in a NW Alliance study and greater than 90 percent in a PG&E study were highly satisfied with their clothes washer purchase. Market share is increasing, particularly in those regions where products are being heavily promoted. In the Northwest, clothes washer penetration averaged 13 percent in 1998, up from less than 2 percent when the program began in May 1997; further, it is holding steady in the absence of rebates. Nationally, market penetration is up to 8 percent. And prices of high-efficiency washers are beginning to come down. Although the incremental cost is still quite high, some highly efficient washers are more competitively priced, with incremental costs for some qualifying products as low as $100. As a result of these market effects, a minimum-efficiency standard based on horizontal-axis clothes washer energy performance, which would permanently transform the market, is more likely.

The sizable market progress appears largely attributable to the fact that these products offer substantial non-energy benefits. Strong manufacturer product promotions further strengthen the market. However, continued retailer education appears to be important to the continued success of this initiative. And for market share to increase substantially, more competition and greater product selection will be needed to drive prices down.

Residential Lighting

Current regional efforts in the Northwest and Northeast, developing initiatives in California and New York, and individual utility programs throughout the country now support the Energy Star residential fixtures specification as a platform for their fixture incentives and promotions. A similar Energy Star labeling specification has been developed for compact fluorescent lamps (CFLs) (in the interim many programs relied on an early CEE specification). High-value instant and mail-in rebates (as much as $9 per CFL and $20 per fixture) or manufacturer buy-down payments (of approximately $2 to $3 per lamp) are coupled with extensive marketing, retailer training, and catalog sales.

These and past utility efforts have had an impact. Manufacturer participation is on the rise, product availability has increased, and in many markets, prices (for both qualifying and non-qualifying products) have dropped following active promotions. Retailer stocking has improved in some regions, although continues to need attention. And many consumers are aware of efficient residential lighting products, although not as many purchase them (e.g., in a NEEP baseline study, 84 percent of consumers indicated they were aware of CFLs but only 30 percent purchase them [Wall 1999a]). Technology procurement efforts, facilitated by Pacific Northwest National Laboratory (PNNL), have also brought some new "sub-compact" fluorescent lamps to the market.

High price and limited non-energy benefits (e.g., principally longer life) together with some negative past consumer experiences and the CFL's awkward size and shape continue to hinder the market for efficient residential lighting products. The consensus agreement on an Energy Star CFL specification, with relaxed power quality standards and a shorter lifetime requirement, is anticipated to lead to greater product availability and price competition. Whether consumer demand will follow remains unclear. A number of program implementors are hoping to help raise consumer awareness and spur demand by promoting products in key market channels, such as grocery stores and big box stores, etc.

Residential Windows

Programs in California, Florida, the Northwest, and a nascent initiative in the Northeast work in collaboration with the Efficient Windows Collaborative (EWC) to promote NFRC-labeled Energy Star windows. EWC provides technical information, technical support, and training materials to manufacturers, suppliers, and others to enable them to effectively interpret the benefits of Energy Star products and the variety of products available for their climate. These efforts have contributed to increased manufacturer participation in the Energy Star program and increased product availability. In the first year of the Energy Star program, the percentage of qualifying window products manufactured nearly doubled to 30 percent. Notable gains in market share are evident particularly in regions where efficient products are being heavily promoted.

Windows, like clothes washers, offer a number of ancillary benefits that are being touted in their promotions. However, because windows are a substantially larger and less frequent investment than an appliance, market progress is likely to be slower. Since efficient windows are cost-effective in about 80 percent of applications, substantial energy saving opportunities remain. Limited awareness of the Energy Star brand and the benefits of efficient windows throughout the distribution chain highlights the importance of continued education and training for manufacturers, retailers, and builders. Furthermore, Energy Star promotions have focused on the retrofit market but incorporating energy-efficient window requirements into building codes is a possible long-term strategy for transforming the windows market.

Consumer Electronics

To encourage the development of low-standby power home electronics products, EPA worked with manufacturers to incorporate low-cost power supply redesigns initially into their TV and VCR products, and subsequently into home audio equipment. Out of this effort grew the Energy Star home electronics programs.

In a short time, these programs have had a significant market impact. Low standby products are now widely available. Several of the top TV and VCR manufacturers have upgraded most of their product lines to be Energy Star compliant. As a result, as of early 1999, 21 percent of TVs and 38 percent of VCRs on the market met or exceeded the Energy Star levels (Sanchez 1999). Additionally, six major audio equipment manufacturers had announced their participation in the home audio and DVD portion of the program. Manufacturers have also begun to incorporate new designs into their products, with the result that some products significantly exceed the program's specifications (e.g., Sony produces 0.5 watt standby TVs compared to Energy Star's 3 watt maximum). And new product innovations, such as Power Integration's TinySwitch, a small, very low-loss adaptor, are also gaining market recognition.

Working with manufacturers to identify low-cost strategies for achieving low-standby power in high-value products and recognizing (through labeling and marketing support) those that implement these strategies is key to this effort's success. However, it is not clear whether similar efforts will be as effective for lower-value products (e.g., telephone answering machines, wall transformers).

Residential Air Conditioning

Two national initiatives—CEE's High-efficiency Residential Central Air Conditioner and Heat Pump Initiative and Energy Star heating, ventilating, and air conditioning (HVAC) labeling—promote high-efficiency (seasonal energy efficiency rating [SEER] 12 and higher) residential air conditioning products. The former aggregates utility influence on the market by establishing common specifications for utility promotions. The latter labels efficient products and provides marketing support to manufacturers, distributors, and contractors.

As a result of these efforts, the market for high-efficiency residential air conditioning systems appears to be slowly progressing. Sales of high-efficiency units have increased since the early 1990s, with equipment rated SEER 12 and higher accounting for 13 percent of shipments in 1993 compared to 20 percent of shipments in 1998. This has been paralleled by an increase in product availability. Nonetheless, the market remains limited.

High-efficiency residential air conditioning systems cost a considerable amount of money and have few non-energy benefits that consumers care about, making these products harder to sell than many other energy saving measures. Utility incentives and substantial promotions appear to be critical to increasing market share (certain regions have attained market shares of 50 percent or more). And some evidence suggests that in these regions incentives can be gradually reduced without significantly eroding the market. Several strategies focusing on contractor training and expanded financing options also hold some promise, although the ultimate transformation is likely to come through a new minimum-efficiency standard. A DOE rulemaking to determine a new standard is underway. A final decision is slated for mid-2001 and the new standard is likely to take effect five years later.

Ground Source Heat Pumps

Efforts to promote ground source heat pumps (GSHPs) or "GeoExchange" systems to residential and small commercial customers have been orchestrated primarily by the Geothermal Heat Pump Consortium (GHPC). The GHPC was formed in November 1994 to address key market barriers: high initial costs for the in-ground loop system; lack of a market infrastructure for training and installation; and lack of consumer awareness and confidence (GHPC 1995).

However, efforts to promote GSHPs to residential consumers met with limited success. In the first two years of operation, the GHPC was not approaching established sales goals. Low public awareness, insufficient market infrastructure, and lack of capital from the GSHP industry persisted. This combined with long lag times in getting federal funding and declining utility funding and interest in demonstration projects further led GHPC to reconsider its efforts.

Around 1996, GHPC shifted its emphasis to the commercial sector where the investment has both a better return and a more compelling suite of non-energy benefits. Initial impacts in this market appear to be positive. Following flat sales between 1995 and 1996, unit sales increased by about 20 percent in 1997 and total GSHP tonnage increased by 23 percent, reflecting an increase in commercial applications. During the same period, sales of air source heat pumps and central air conditioners fell 6.5 and 1.5 percent respectively. Whether GSHP market share can continue to grow and be maintained in the commercial market remains to be seen.

Light-Emitting Diode (LED) Exit Signs

Utility incentive programs, the EPA Green Lights Program, and the Energy Star labeling program have helped to promote greater use of energy-efficient exit signs. These efforts have led to major and rapid market shifts.

Prior to the mid-1980s, virtually all exit signs used incandescent lamps. In the late 1980s, in an effort to save energy and increase reliability and visibility, manufacturers began to incorporate compact fluorescent lamps and light-emitting diodes into exit signs. As of 1999, only about a quarter of new exit signs continue to be illuminated with incandescent bulbs. LEDs appear to be largely filling the gap. This is supported by tests of an independent research organization, the Lighting Research Center (LRC). In 1994, approximately 30 percent of the "energy-efficient" signs voluntarily submitted for testing by manufacturers were LEDs; two years later, virtually all of the signs tested were LEDs. Participation in the Energy Star program, which began in 1996, is also sizeable. Manufacturers representing three-quarters of the exit sign market by volume have joined the Energy Star program. Also, information gathered from a subset of Energy Star partners (11 out of 28) reveals that, of the exit signs sold by these companies in 1998, 83 percent were LED exit signs and approximately 70 percent carry the Energy Star label. Three respondents also indicated that they produce only Energy Star-labeled exit signs.

Non-energy benefits, such as improved visibility and reduced maintenance, were instrumental in facilitating wide acceptance for the technology among building owners, operators, and other stakeholders. And market demand for LEDs from the auto industry helped to drive down the price of LEDs and hence improve the competitive position of LED exit signs. Building codes could complete the market transformation process, particularly given that a number of state codes and the current draft commercial building standard by the American Society of Heating, Refrigerating and Air-Conditioning Engineers, Inc. (ASHRAE 90.1R, a model for many state codes) specify energy-efficient exit signs.

Building Commissioning

Efforts to promote building commissioning intensified during the 1990s and primarily targeted the new construction market. These activities focus on raising awareness of building commissioning as a tool in improving building performance and building the capacity to effectively commission buildings and monitor building performance. The Northwest has been at the center of most building commissioning activity, with more limited efforts in a few other regions of the country. At this point, the concept is increasingly being discussed in national forums and is beginning to expand to other regions (e.g., the Northeast and Midwest).

To date, regional and utility efforts have had some impacts. One large survey of building owners in the Northwest reveals that although full-scale commissioning has not become common practice, some aspects of commissioning (e.g., design review, functional performance testing, installation checklists, HVAC/control system spot checks, and/or documentation of problems) were carried out in a majority of new construction projects (particularly in hospitals and high-tech office buildings). Also, awareness has grown significantly among architects, engineers, and contractors, leading to the formation of the Building Commissioning Association—Northwest (BCA-NW). And several industry trade publications that reach national audiences, including Contracting Business and HVAC News, now regularly feature articles on commissioning.

However, lack of awareness and understanding of the term and the process of "building commissioning," particularly among building owners, continues to thwart its broader adoption. As a result, efforts continue to focus a good deal of attention on education and training of building owners and design professionals. These programs have found that non-energy benefits, such as indoor air quality improvement, productivity enhancement, quality assurance, and tenant retention, are important in "selling" the commissioning concept. Furthermore, a number of efforts are also looking to capture the large energy savings available from "retrocommissioning" existing buildings.

Premium-Efficiency Motors

Building on the efforts of utility and statewide programs, CEE established a Premium-Efficiency Motors initiative in 1994. This initiative helped to unify disparate utility programs across the country by establishing consistent efficiency levels (that exceeded the Energy Policy Act of 1992 [EPAct]) for utilities to promote. A number of regional programs (the NW Alliance, NEEP, and the emerging New York State Energy Research and Development Authority [NYSERDA] and California programs) and individual utility motors efforts support these levels in promoting the use of premium-efficiency motors. These programs typically include incentives to dealers, distributors, or end-users, and some training, education, and marketing. The central element of the former NW Alliance program was a vendor stocking incentive. In contrast, NEEP's program, based on the experience of utilities in its region, relies on large end-user incentives promoted through suppliers, coupled with intensive supplier education. New York is providing vendor incentives and California is planning to provide stocking incentives to regional distributors.

To date, the NW Alliance premium motors venture, was abandoned because it was having "little influence on motor sales, stocking or promotion." NW Alliance staff attribute the program's failure to shifts in the motors market and a lack of understanding of these shifts. Market confusion about premium motors, high incremental costs despite contrary expectations, and manufacturer moves to "just in time" product delivery rendered the market difficult to influence through vendor incentives. NEEP, California, and New York programs have reviewed experience elsewhere and have generally designed their programs to avoid pitfalls of prior efforts.

Historically, programs have been able to achieve substantial market share for "efficient" motors by providing incentives to vendors and end-users; however, the landscape has changed. Falling electricity prices, premium pricing by manufacturers, and a higher baseline (with implementation of EPAct) render premium motors less cost-effective than pre-EPAct "energy-efficient" motors. Success in transforming the current market will depend at least in part on manufacturer decisions on pricing as well as the ability of regional groups and utilities to effectively market to first cost-oriented purchasers.

Summary

The cases in this report suggest that there is no single "best approach" to market transformation. Instead, program planners and implementors can draw on a range of program elements (e.g., labeling, incentives, marketing, and codes and standards) and tailor a market transformation initiative to the specific characteristics of the market and products or services under consideration. In some cases (e.g., high-value consumer electronics products), a national labeling effort alone can facilitate market transformation while in other cases vigorous promotion, incentives, and regional/local efforts are required, and mandatory standards may be needed to complete the transformation.

Thus far, the market transformation approach is meeting with mixed success. While the markets for energy-efficient products are improving in some areas, as evidenced by increased availability of energy-efficient products or services, improved stocking, broader awareness, and greater market share, other markets have been slow to adopt particular technologies or approaches. Of the nine initiatives:

• clothes washers, home electronics, and exit signs are moving toward market transformation;

• residential lighting, windows, and building commissioning are making steady progress; and

• residential air conditioning, ground source heat pumps (for residential customers), and premium motors are making limited or little progress.

From these efforts, a number of general lessons emerge:

1. Market transformation activities for products and services with high non-energy benefits, low incremental costs, and relatively simple market structures enjoy more success.

The relative ease or difficulty in effecting market progress toward transformation is influenced by a number of factors, including whether the product or service offers non-energy benefits, how costly the product is relative to standard alternatives, and the complexity of the market that the effort is attempting to transform. For a product to gain market acceptance, consumers have to be satisfied with its performance—which means it has to perform at least as well, and probably better than, existing products. The most pointed example of this is with energy-efficient clothes washers, which boast cleaner clothes, less wear and tear on clothing, less detergent use, lower noise, and reduced water use, among other attributes. In virtually all regions where consumer satisfaction has been gauged, consumers are extremely satisfied with a wide array of performance attributes of the new washers. Products with high incremental costs and few non-energy benefits (e.g., residential HVAC), without substantial financial incentives, tend to attract only a limited market. However, owner-occupied (and public) commercial customers are more receptive to products and services with these attributes provided they provide a good return on investment. This has been the experience with ground source heat pumps. Finally, complex markets with multiple market actors (e.g., the motors market) are generally more difficult to transform than simpler markets (e.g., clothes washers). A number of efforts have attempted to "simplify" the market by working directly with manufacturers and other "upstream" market actors. Some, such as the Energy Star consumer electronics, office equipment, and LED exit signs programs, have been quite successful. Others, such as manufacturer buy-downs for Super Good Cents manufactured homes, CFLs, and the Triathlon gas-fired heat pumps, have had mixed results, with progress limited by anemic consumer demand, little manufacturer participation, or technical problems. Efforts to influence distributors, such as in California's premium-efficiency motors program and high-efficiency commercial packaged air conditioning programs, are just getting underway.

2. National and regional coordination can facilitate market transformation

Coordinated national, utility, and regional efforts can capitalize on the relative strengths of each group to deploy pieces of an overall market transformation strategy, assure more efficient use of limited resources, and ultimately increase the likelihood of market transformation. National initiatives offer a platform and public education/awareness building that regional programs can rely upon as regional incentives "sunset." Utilities throughout the country or regionally can aggregate their market influence through coordinated efficiency targets, incentive levels, and promotions. Regional groups can provide better access to local manufacturer, distributor, and retailer partners and facilitate local data collection, which can be used to track progress of regional and national activities. National and state policies can also affect program success. Codes and standards, for example, can be used to motivate action and to complete a market transformation effort.

3. Improved data are needed to better understand market changes

For a number of efforts, better national and regional sales tracking information is needed to assess the extent to which markets are being transformed. For exit signs, for example, no national data on the number of exit signs in place exists. To assess the market share of energy-efficient exit signs, researchers rely on manufacturer estimates. In the case of air conditioning equipment, manufacturers and their associations collect the data but are sometimes unwilling to share it. Recent coordinated regional/national data collection and evaluation efforts address this need to some extent, although broad-based national data collection efforts are appropriate and necessary for some end-uses.

In conclusion, a number of initiatives are on the path to success, others will take many years to succeed, and still others are unlikely to achieve their goals. By viewing these relative successes and failures, important lessons can be learned that can help guide the selection of initiative targets and strategies and increase the chances of success in the future.