The Economics of Energy Market Transformation Programs

This paper evaluates three energy-sector market transformation programs: the Environmental Protection Agency’s on-going Green Lights program to promote on-grid efficient lighting, the World Bank Group’s new Photovoltaic Market Transformation Initiative, and the federal grain ethanol subsidy. We develop a benefit-cost model that uses experience curves to estimate unit cost reductions as a function of cumulative production. Accounting for dynamic feedback between the demand response and price reductions from production experience raises the benefit-cost ratio (BCR) of the first two programs substantially. The BCR of the ethanol program, however, is approximately zero, illustrating a technology for which subsidization was not justified. Our results support a broader role for market transformation programs to commercialize new environmentally attractive technologies, but the ethanol experience suggests moderately funding a broad portfolio composed of technologies that meet strict selection criteria.