A Brighter Idea: The Untold Story of the CFL (Part 2 of 3)

III. Bringing the Market to the Product

At the same time the CFL was being developed into a marketable product, the energy efficiency industry was developing into a formidable market force. Many states had adopted legislative and regulatory policies mandating the treatment of energy efficiency as a resource for utility investment on par with, or ahead of, traditional supply-side investments. As a result, utility investments in energy efficiency were large and growing rapidly with utility and third-party programs mobilizing hundreds of millions or even billions of dollars to invest in efficiency programs annually. These efforts included mail-in rebates for CFLs to lower their cost and attract the attention of reluctant consumers. While the programs helped drive increased CFL purchases, the administrative cost of these retail-level efforts was relatively high, making it difficult to scale up to a much larger endeavor.

Against this backdrop of growing strength, the innovative ‘‘Golden Carrot’’ program to increase the energy efficiency of refrigerators provided a key lesson. Up to that point, utility efficiency programs were largely run at the retail level, making incremental improvements by offering incentives and information to individual consumers. In contrast, the Natural Resources Defense Council initiated the Super Efficient Refrigerator Program (SERP) in the early 1990s, working in coordination with a coalition of utilities and government agencies to transform the residential refrigerator market by offering a $30 million incentive – the Golden Carrot – to the manufacturer that could build and sell at least 250,000 refrigerators with annual energy consumption of a minimum of 25 percent below the then-current federal minimum efficiency standard and do so without the use of ozone-depleting refrigerants.5

Whirlpool won the bid and successfully designed, built, and sold a new model that exceeded the program requirements. This allowed utilities to dramatically increase the level of efficiency required to get a rebate and led to a substantial leap forward in the next round of federal standards even as other refrigerator manufacturers scrambled to compete by offering their own energy-efficient models. The Golden Carrot program demonstrated that an ambitious and focused investment targeted at the ‘‘wholesale’’ level could transform markets for energy efficiency.

With this success fresh in their minds, utility lighting program managers developed the Upstream Lighting Program (ULP).6 Instead of offering consumer rebates, the utilities provided reimbursement for more efficient lightbulbs at the wholesale level.

The ULP was superior to a retail rebate program in several ways. By reducing the wholesale cost, retailers could pass the savings down to every CFL sold in stores. This meant a customer only saw the already-rebated price, saving them the inconvenience of applying for the rebate. Administrative costs were also reduced because utilities no longer had to shoulder the burden of processing individual rebates. The upstream rebates multiplied into larger savings for consumers, which helped reduce the price differential with incandescents and convince previously reluctant consumers to eagerly purchase CFLs.

Taken as a whole, the ULP allowed for a much larger and more effective effort. Utilities across the country jumped on the bandwagon, as did retailers – notably including Wal-Mart, which pledged to sell 100 million CFLs in 20077 – and federal and state agencies. Manufacturers got a clear market signal that CFLs were going to be sold in much larger quantities and joined the bandwagon, as well, expanding their manufacturing capacity. Volume and competition increased, resulting in even lower prices.

The Upstream Lighting Program was a massive success. In California, utilities provided upstream rebates on nearly 100 million CFLs between 2006 and 2008, surpassing anticipated goals by 150 percent. By 2008, almost 8 out of 10 households in California used at least one CFL, and the average household had over 10 CFLs installed.8 In three years, CFLs had more than tripled their market share. Program requirements and improvements to manufacturing drove continued innovation and made the CFLs more consumer-friendly – in a 2009 survey, Californians gave an overall satisfaction rating of 8.3 out of 10 for the new bulbs, compared to a rating of 6.3 prior to 2004.9 The ULP marketing campaign and increased sales paid off in customer awareness, too. In 1998, only 58 percent of Californians knew what a CFL was but by 2008, that number was up to 96 percent.10

There were enormous benefits to California utility customers from the installation of all these CFLs. Because a CFL uses roughly a quarter of the electricity consumed by an incandescent lightbulb, each CFL that replaces an incandescent saves about $35–50 in energy costs over its 10,000-hour lifetime.11 The nearly 100 million bulbs promoted through the ULP reduced electricity bills by billions of dollars for California utility customers.

A remarkable aspect of the ULP is that the upstream rebates multiplied into even larger savings for consumers. In addition to the lower administrative costs of the upstream rebate, retailers and manufacturers added their own discounts to further reduce the retail price of the bulbs. In California, each dollar a utility spent on an upstream rebate reduced the price of a CFL bulb by $1.50.12 The leverage from the upstream rebate resulted in a reduction in the price of the typical program bulb to only $1.30. As a result, the net cost of the much more efficient CFL (including the rebate) was below the cost of the less-efficient incandescent bulbs that would otherwise have been purchased.13 As a result, California utility customers saved about $1 per bulb just by buying a CFL from the ULP program and collectively they saved over $200 million just from the reduced cost of CFLs achieved by this massive bulk purchase program.

Today there are more than 100 energy efficiency programs spending approximately $252 million on CFL promotion efforts nationwide, a five-fold increase. Spending on CFL efficiency programs is expected to continue to increase as more states demand that before utilities invest in new capacity, they must first achieve all cost-effective energy efficiency measures.14

IV. Giving Credit Where Credit Is Due

The decades-long effort to bring the CFL to its full market potential has been a huge success, with enormous economic and environmental benefits across the globe. One estimate puts the energy savings to date at nearly 200 billion kWh, with total utility bill savings to U.S. consumers of approximately $20 billion.15 As of 2012, CFLs represented 27 percent of the bulbs installed in the over 3 billion medium screw-based sockets in the United States.16 But rather than being universally hailed as a model effort, recognition has been limited for a number of reasons that are worth considering.

First, efficiency opportunities like the CFL fly in the face of a simplistic economic worldview in which consumers always choose the option that will save them the most money. This perspective doesn’t account for the realities of how people buy lightbulbs or market failures like lack of information and attention, as well as the reluctance to change lightbulb-buying habits that have persisted for decades. (CFLs faced an additional hurdle with some consumers concerned about their mercury content, even though the level is extremely low – typically 3 milligrams per bulb, which is up to 200 times less than in a mercury thermometer.)

Second, the broad-based, collaborative effort that it took to transform the lightbulb market makes it difficult to attribute benefits to a single factor in a particular initiative in a specific year. As a result, conventional efforts to evaluate the ULP program have typically failed to capture its full impact.

Attribution is particularly difficult for market transformation programs because of their wide-ranging, long-term character. A successful market transformation program always requires the coordinated efforts of multiple actors. Attempting to determine what share of the success each was responsible for is like trying to figure out whether the motor or the drive train makes your car move. By the same token, the benefits extend beyond the program cycle and therefore, cannot be accurately captured in an assessment focused solely on that period.

These problems can dramatically understate the true benefits of market transformation programs like the ULP. A prime example is the experience in California, where the California Public Utilities Commission’s (CPUC) Energy Division issued a report on the investor-owned utilities efficiency programs between 2006 and 2008 that included evaluation of the ULP initiative. The California Public Utilities Commission staff estimated the ULP saved consumers $50 million, but my independent analysis found the net benefits were actually more than 20 times larger – over $1 billion. A flawed economic analysis, problems with attribution, and failure to account for benefits outside a narrow three-year program cycle resulted in a gross underestimate of benefits and a large overestimate of program costs.

The factor the evaluation study attempted to approximate that had the biggest impact on the final savings estimate was how many CFLs would have been sold in the absence of the program, a parameter known in the energy efficiency literature as the net-to-gross ratio (NTGR). Unfortunately, as the CPUC study reported, none of the complicated statistical analyses employed to estimate the NTGR produced a useable result and the authors instead chose to rely on an estimate of 54 percent based on ‘‘best judgment.’’

In other words, the evaluators estimated the utility program was ‘‘responsible’’ for only about half of the savings achieved. Since this program was such a substantial part of the portfolio, this one estimate led some to conclude the utility programs provided far less benefits than anticipated and to even go so far as to say that incentives should no longer be provided for CFLs. But an analysis of CFL sales growth trends shows the opposite is true: Annual sales of CFLs in California increased 10-fold from 2003 to 200817, more than twice the rate of growth in the rest of the nation. If one simply assumes that the sales growth in California would have matched the growth in the rest of the country, the benefits credited to the ULP would double.

The evaluation study made two other fundamental mistakes. First, it failed to account for the savings to consumers from buying fewer incandescent lightbulbs. As described earlier, consumers saved money just by buying the ULP-discounted bulbs. Second, CPUC policy rules only credited the ULP with savings from bulbs installed by the end of 2008. This meant that all the program costs were included in the analysis, but one-third of the benefits were left out.

Together with the flawed attribution analysis, these three factors resulted in an underestimate of net benefits of over $1 billion. All told, every $1 invested in the ULP produced over $7 in benefits in energy-saving and pollution reductions.18 With five-year returns providing a seven-fold return on program costs, the ULP compares favorably to investments more commonly associated with highly successful venture capital funded startups.

Endnotes:

5. Allen D. Lee and Robin Conger, Market Transformation: Does It Work?— The Super Efficient Refrigerator Program, Pacific Northwest National Laboratory, VOL03/069, 1996.

6. There were a number of early programs targeting rebates upstream, not all of which were called the “Upstream Lighting Program.”

7. Environmental Protection Agency’s paper Energy Star Product Retrospective: Residential Lighting, at “http://www.energystar.gov/ia/ products/downloads/Residential_ Lighting_Highlights.pdf

8. The Cadmus Group et al., Compact Fluorescent Lamps Market Effects Final Report, prepared for California Public Utilities Commission, Energy Division, April 12, 2010.

9. Id.

10. Id.

11. See, e.g. http://www.energysavers.gov/your_home/lighting_daylighting/index.cfm/mytopic=12060.

12. On average, each bulb rebated through the ULP received a rebate of $1.57 while the average discount at the register was $2.63.

13. Each CFL with a net cost (including rebate) of $2.87 replaced approximately 6.5 incandescent bulbs with a discounted net present cost of $3.50.

14. D&R International, Energy Star 2010 CFL Market Profile Data Trends and Market Insights, prepared for U.S. Dept. of Energy, Sept. 2010.

15. D&R International, forthcoming publication.

16. Navigant Consulting, Inc., Part 1: Review of the Lifecycle Energy Consumption of Incandescent, Compact Fluorescent and LED Lamps, prepared for U.S. Dept. of Energy Solid State Lighting Program, Feb. 2012.

17. Peter Miller, Reanalysis of the 2006- 08 Upstream Lighting Program, Natural Resources Defense Council, July 20, 2011.

18. Id. 

 

A Brighter Idea: The Untold Story of the CFL was originally featured in the October 2012 issue of Electricity Journal.

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