This article was originally published in the July/August 1999 issue of Home Energy Magazine. Some formatting inconsistencies may be evident in older archive content.


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Home Energy Magazine Online July/August 1999

Market Transformation: 
Expectations vs. Reality

by Nick Hall and John Reed

Nick Hall and John Reed are principals and co-owners of the energy technology research and evaluation firm TecMRKT Works.

As two program evaluators tell it, market transformation is a beast with many heads. Designing, ramping up, and implementing a program to tame all those heads requires years of sustained effort.


Increasingly, market transformation programs are seen as a means of bridging the gap between regulated and unregulated energy markets (see Wisconsin Utilities Prime the Whole-House Pump, HE Jan/Feb '99, p. 13). In planning new market transformation efforts, one question inevitably arises: How long does it take to transform the market for an energy product or service to the point where the change will be maintained in the absence of the program? The better one understands market transformation, the better one understands why answering this question is difficult--and why it may not be the most appropriate question anyway.

There is a big difference between a demand-side management program--in which program planners need only to get energy-efficient measures used in the market in order to achieve demand or consumption reductions--and a market transformation program (see Table 1). In our view, market transformation means applying market interventions in such a way that the effects of the intervention last, in one or more segments of the market, until other intended or unintended market forces act to erode them. We like this definition for several reasons. It recognizes that (1) interventions can have both long- and short-term effects; (2) markets are always in a state of transformation by different market initiatives; (3) energy-efficient interventions make up a small part of the intervention mix at any given time; and (4) markets are made up of linked segments, each of which reacts to transformation initiatives in different ways.

Reaching Market Segments An initiative designed to move one segment of the market can have little or no effect, or even an opposite effect, on another segment. In studying green power sales in Colorado, for example, we identified five market segments for wind energy: the no-frills greens; the traditionalists; the full-service greens; the egalitarian greens; and the cost-conscious individualists.

The cost-conscious individualists want power at the lowest cost and believe that people who want green energy should pay the full cost of the service. The egalitarian greens believe that the environment should take precedence over cost, and that all customers should pay for green energy. The other three segments fall somewhere in between these two extremes.

The cost-conscious individualists will be transformed only by programs that allow them to receive wind power at a cost equal to or lower than the cost of other energy sources. The egalitarian greens will want others to share the cost of wind power, so that they do not have to pay the full ticket for environmentally friendly energy. Transformation programs that offer proportional service or blocks of wind power will find this group more receptive to their efforts.

Each market segment is distributed differently across different geographic areas. Program planners must know how these segments are distributed in their target areas in order to plan appropriate market transformation time lines. They must also understand that market segments change and that market transformation initiatives must plan for these changes.

A recent study by our company, TecMRKT Works, identified three operational approaches to new commercial construction in Northern California. These are the collaborative method, the plan/design/ build method, and the design/build method. With the collaborative method, the architects, designers, engineers, and builders form a team. Typically, the members of this team have a history of working well together and communicating well with other members of the team. With the plan/design/build method, an architect is retained to design the building prior to construction. With the design/build method, the building is designed at the same time as it is under construction. The big advantage of this last method is that it saves time.

While the collaborative method may give team members time to entertain energy efficient building ideas introduced by other team members exposed to market transformation programs, the design/build method concentrates on getting the building up as fast as possible. We must have our retail buildings up and ready in eight weeks, one design/build architect advised us. We do not have time for energy efficient performance planning or analysis. Market transformation programs that assist architects and engineers with energy analysis and provide construction recommendations may find a receptive audience with the members of a collaborative team or with the plan/design/build architects and engineers, but they will have a difficult time gaining an audience in the design/ build market. In order to reach this market segment, they must find a way to make energy-efficient building design and construction as easy, as fast, and possibly as cheap as the design/ build community requires.

Adopting Energy-Efficient Technologies and Behaviors Programmers who want to forecast the rate at which an innovation will be adopted need to consider several factors. These factors are (1) the way in which technologies or behaviors are adopted, (2) the market actors they are trying to reach, (3) the attributes of the product or innovation, and (4) the channels they use to communicate about the innovation (see Adoption of Technologies). The adoption of energy efficient recommendations typically follows a decision pathway known as the diffusion-of-innovation path. Some market actors move through this path and take action very rapidly; others may take a very long time. Homeowners, for example, may have been convinced that they should install an energy efficient improvement, but for various reasons they may not actually install it for several years.

The attributes of energy efficiency products--their complexity, their unfamiliarity, and often their higher first cost--can work against a rapid adoption process. But program managers who can spread news of their products or services through word of mouth are well on their way to accomplishing their market transformation goals.

Step-by-Step Estimates Designing and implementing a market transformation program for an unspecified technology is done in a series of steps, each of which may take more or less time to complete (see Table 2). Assuming that the technology is already available in the market, the entire process can take anywhere from about 7 years to about 14 years. However, some of these steps can take place simultaneously, shortening the whole process.

The time estimates given in Table 2 assume a program management and operational structure that is uniformly committed to the market transformation process and that can make prompt decisions. We have been involved with market transformation collaboratives that have made operational decisions, with supporting budgets, during brief, team meetings that lasted anywhere from one to three hours. However, we have also been involved with collaboratives that were managed by consensus, some of whose members disagreed strongly with others. In one such effort, it was not unusual for program planners to take from 12 to 24 months or more to reach a decision. For situations like this, the time estimates given in the table may be conservative.

What Are the Goals? Beyond such organizational influences, the key factor that determines how long a transformation program will last is what, exactly, the goals of the program are. To transform the market toward reduced greenhouse gas emissions, for example, planners may need to devise interventions that last as long as they are committed to these goals, rather than targeting near-term market changes.

In Wisconsin, high-efficiency residential furnaces have become the standard throughout most of the state, as a result of past furnace rebate programs. But the high-efficiency furnace's market share has started to slip as the market reacts to other transformation efforts. To maintain market share, periodic market transformation interventions that reinforce the high-efficiency choice will need to be strategically applied in the areas of the state that show market deterioration.

If we want to focus on single technologies or behaviors and plan to achieve only short-term market effects, we need intervene in the market only until the early majority begins to implement actions based on their interaction with other market actors. Then we can exit out of that market and let the technology sink or swim on its own.

However, if we truly want to guide markets toward improved efficiency, we must be willing to supply them with transformation programs that react to changes in the market as they occur. The real answer to the question How long does it take to implement market transformation programs? may be How long do you want to influence the market?

Table 1. Examples of Market Transformation Initiatives
Initiative Initiative Components Results
Condensing furnaces in Wisconsin Inclusion of condensing furnaces in low-income weatherization program; utility incentives Market share ~85%; prices have come down and local contractors routinely recommend and install condensing furnaces; market share dropping since the program ended
Residential construction practices in the Northwest Development of voluntary Model Conservation Standards; demonstration projects; incentives for builders and local governments; development of new building codes Model Conservation Standards now incorporated into building codes in Washington and Oregon, affecting ~85% of regional construction; entire effort cost regional utilities ~3 mils/kWh saved
Electric motors in British Columbia Education of customers and dealers; customer and dealer incentives; promotion of provincial and national minimum efficiency standards As a result of first 3 components, by 1993 high-efficiency motors had a 70% market share; provincial minimum efficiency standards adopted in 1993 effective 1995
Energy Star office equipment Labeling program for office equipment with power management features; legislative requirement for office equipment information program; Executive Order requiring federal agencies to purchase Energy Star equipment Market share of Energy Star office equipment 70%-90%, varying by type of equipment; efforts on-going to work with manufacturers and customers to encourage use of power management features
Efficient magnetic ballasts Utility incentives; state minimum efficiency standards Federal minimum efficiency standards, which require performance levels achievable with only efficient magnetic or more efficient products adopted effective 1990
High-efficiency refrigerators Super Efficient Refrigerator Program; other utility rebates; bulk-purchase by housing authorities of high-efficiency apartment-size refrigerator; negotiations with manufacturers on new federal minimum standard New federal standard adopted, to take effect 2001, which will result in 30% energy savings for the most commonly sold models, relative to the current federal standard
Source: Nadel, S. and L. Latham. The Role of Market Transformation Strategies in Achieving a More Sustainable Energy Future. Washington, D.C. 1998. American Council for an Energy Efficient Economy.
Table 2. Estimate of Time Needed For Hypothetical Market Transformation Programs
Steps in the Market Transformation Process Number of Months
  • Research the operations of the target market
  • Assess the potential intervention strategies and points of impact
  • Identify baseline operations
  • Design the market intervention strategies
  • Prepare the materials to support the intervention
Find, hire and train an experienced, expert staff to support the intervention  6-12
Initiate the program and test the intervention strategies 12-24
Implement and assess the intervention strategies in a phased-in, sequenced series of strategically focused intervention efforts 36-60
Implement exit strategies that wean the market off the intervention strategies 12-36
Total time required 80-162
Additional and follow-up market observation and assessments Ongoing
Follow-up market re-interventions to maintain the transformation effort As needed over the life of the goal
Note: Times assume program budgets are set at levels to counter undesired market trends in relation to the size of the total market to be influenced.

Adoption of Technologies

There are five different types of technology adopters. Most people fall into the category of early majority or late majority.
The Adoption Process The diffusion model defines the process by which market actors adopt an innovation. During the first stage the actors become aware of an innovation. Next comes a persuasion stage, during which the actors seek and process information in order to decide whether to adopt the innovation. The persuasion stage is followed by a decision stage, which in turn is followed by an implementation stage. Deciding to adopt and actually implementing the decision are separate acts that may occur days, months, or even years apart, which is why implementation is a separate stage. Finally, in the confirmation stage, actors reevaluate and either confirm or reverse their decision to take action. A study conducted for the Federal Energy Management Program (FEMP) found that the entire adoption process took from a few months to several years, depending on the technologies that were adopted. Types of Adopter Different market actors need different periods of time to move through the adoption process and take action. Adopters are generally categorized into one of five groups: innovators, early adopters, the early majority, the late majority, and laggards.

Innovators are a very small group, one that pursues technology aggressively. Innovators are sufficiently tolerant that they will use a technology that is not reliable, understanding that they will need to work with it to make it perform for them. Their feedback can help manufacturers to refine a technology. Early adopters appreciate the potential benefits of a technology and will use the technology when they see that its benefits meet their own needs and desires.

The early majority may have some interest in the technology, but they are driven more by practical motivations. These people will wait and see if a technology delivers on its promises, and they tend to rely on the advice of others in their own group. Once a few members of the early majority has converted, they then talk the rest into joining them. This is the market takeoff point--the point that transformation programs need to reach before planners can consider exit strategies. Products that don't succeed in moving the early majority will not become self-sustaining, and efforts to transform the market will become less effective.

The late adopters are not comfortable with new technology and will wait until a product has become the standard before they buy it. The laggards simply don't want to have anything to do with the technology and adopt it only when they have no alternative.

Attributes of the Innovation As for the innovative product or service itself, it has five key attributes that determine how quickly it will be adopted. These attributes are relative advantage, observability, compatibility, trialability, and complexity. Relative advantage is the degree to which an innovation is perceived as being better than the alternatives. It is based on many factors. These include profits, costs, comfort, prestige, time savings, level of effort, and immediacy of the reward. Economic profitability tends to explain considerably less than half of the variance associated with relative advantage.

Innovations are more likely to be adopted when people can see, feel, touch, or experience them in some way. This attribute is called observability. Relative advantage and observability are the most important factors that influence the rate of adoption.

Energy-efficient products often have characteristics that place them at a disadvantage relative to other products. These characteristics can act to increase the time that is needed for market transformation programs to work. Products that are adopted rapidly often have low initial costs, for example, while energy efficiency products often have high initial costs. Complexity--a trait also associated with many efficiency products--is another barrier to acceptance. The simpler the device or the idea, or the easier it is to use, the more likely it is to be adopted.

Talk It Up Finally, there are two main communication channels--broadcast and interpersonal--through which news of innovations can be spread to potential purchasers. Broadcast channels involve the mass media. Interpersonal channels involve people talking with one another. Which channel is carrying talk of a specific innovation can significantly influence the rate of that innovation's adoption. The transformation of the market does not kick in until the interpersonal channels really begin to work.



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