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The Economics of Energy Market Transformation Programs

Abstract:
This paper evaluates three energy-sector market transformation programs: the U.S. Environmental Protection Agency's 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.

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Energy Specializations: Energy Access – Sustainable Development and Distributed Energy; Energy Efficiency; Electricity – Policy and Regulation

JEL Codes:
Q01 - Sustainable Development
Q55 - Environmental Economics: Technological Innovation
E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General

Keywords: Market Transformation, learning and experiences curves, benefit-cost analysis, technology diffusion, Photovoltaics, Green Lights, ethanol

DOI: 10.5547/ISSN0195-6574-EJ-Vol20-No4-2


Published in Volume20, Number 4 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.