Market transformation describes both a policy objective and a program strategy[1] to promote the value and self-sustaining presence of energy-efficient technologies in the marketplace. It is a strategic process of market intervention which aims to alter market behavior by removing identified barriers and leveraging opportunities to further the internalization of cost-effective energy efficiency as a matter of standard practice.[2] [3] [4] Market transformation has rapidly become the objective of many privately and publicly supported energy efficiency programs in the United States and other countries.
First coined in a paper presented at the ACEEE Summer Study in 1992,[5] the term "market transformation" is underpinned by the classic microeconomic model of markets. The concept describes a downward-sloping demand curve and an upward-sloping, presumably short-run supply curve.[6] In the energy efficiency market, however, standard price and quantity equilibria are often rendered inefficient because of structural market barriers like split incentives, asymmetric information, distorted market power, and hassle costs.[5] [6] Market transformation targets these barriers to optimal efficiency with strategies to shift entire market sectors into a more efficient product mix.
While it recognizes and harnesses the power of market forces and players, market transformation has also been conceptualized as a holistic, market-based marketing strategy, building on the diffusion of innovations theory through a strategic framework for justifying market intervention.[1]
Contrary to traditional energy efficiency strategies, which often focus on small-scale procurement and installation of efficient products, the goal of market transformation is to produce new patterns of "business as usual" for all actors in the marketplace.[7] Programs act on market inefficiencies by removing quantity or price constraints, or by lowering transaction and uncertainty costs.[6] Market transformation program strategies can resemble demand side management (DSM) as well as supplier innovation interventions but with the added goal of long-term energy savings and changing standard business practices.