ADAPTING THE MARKET TRANSFORMATION APPROACH TO EXPAND THE REACH OF PRIVATE ENERGY EFFICIENCY PROVIDERS

Steven Nadel

June, 1999

ABSTRACT

Energy Service Companies (ESCo's) and other energy efficiency service providers have made substantial progress over the past two decades and now amount to a multi-billion per year industry. However, relative to the potential for energy-saving investments, the industry is small. As the electric utility industry restructures, many states are establishing public benefit charges to fund energy efficiency and other public benefit programs. In some states, a portion of public benefit funds are being used for Standard Performance Contract (SPC) programs, with the objective that these expenditures will make for a stronger energy efficiency services industry in the long term.

In these states, as well as some other states, public benefit funds are also being used to fund market transformation programs that seek to identify and address barriers impeding the market development of specific energy-saving technologies and practices, with the long-term goal of making efficient goods and services normal practice in appropriate applications and sustaining these changes over time. At least two states (California and New York) are now seeking to combine these strategies by applying the market transformation approach to the development of the energy efficiency services industry. Such an approach involves identifying: market segments to target where intervention is needed and the likelihood of success; barriers that inhibit the development of the energy efficiency services market in these segments; and strategies that address, and hopefully overcome, these barriers.

This report explores these segments, barriers, and strategies in a preliminary manner. These explorations suggest that a market transformation strategy to promote the energy efficiency services industry can build upon straight SPC programs (whose primary goal is acquisition of energy savings) but should modify these programs in two fundamental respects. First, with a market transformation orientation, rather than target SPC resources broadly to all potential customers and measures, SPC resources should be targeted more carefully to: specific measures (e.g., higher incentives for non-lighting measures than lighting measures); sectors (e.g., emphasis on promising emerging energy services markets such as industrial, mid-size commercial, and large commercial that is not owner occupied); customers (e.g., establishing tight incentive per customer caps to spread incentives among many customers, thereby exposing more customers to the benefits of working with energy efficiency service providers); and service providers (e.g., giving some preference to service providers with a local presence and who provide some evidence that the they have a long-term commitment to providing services locally).

Second, rather than put all resources into SPC's, some resources should be saved for complementary efforts such as: development of case studies and other education efforts; evaluating, improving, and publicizing existing accreditation programs; developing improved tools such as simpler contracts, simpler/improved M&V procedures, and new innovative financing approaches; adopting reforms to federal procurement practices for energy services; and offering training programs for potential service-provider staff.