A marketing orientation is the key to a sustainable energy future

ELSEVIER

Energy Policy. Vol. 24, No. 2, pp. 187-193. 1996 Published by Elsevier Science Ltd

Printed in Great Britain 0301-4215/96 $15.00 + 0.00

0301-4215(95)00098-4

A marketing orientation is the key to a sustainable energy future

Gary L Nakarado National Renewable Energy Laboratory. 1617 Cole Boulevard, Golden, CO 80401, USA

This paper presents a sampling of recent research indicating a customer preference (demand) for renewable energy as a unique ‘variety’ or ‘brand’ of power. Market oriented industry growth tightly coupled to segmented end-use consumer preferences will ultimately be more robust and sustainable. Examples of emerging alternative models for renewable energy development are given in the conclusion. Kqwor&: Renewable energy; Marketing; Customer preference

A marketing based approach, oriented toward an enhanced understanding of customer preferences - in addition to traditional engineering oriented cost based approaches - may provide a preferable alternative strategy for deployment during today’s early adoption stage of renewable technologies. Various emerging approaches to the evaluation of renewable technologies (which include portfolio theory, the valuation of externalities and the application of option theory), are important advances in presenting financially defensible rationales to increase the appropriate uses of renewable technologies. However, they share a common shortcoming. They prove compelling primarily to planning engineers, economists and policy analysts, and create a mis- taken perception that special considerations are necessary for significant marketing success. By focusing attention on the language and methods that had great efficacy in the environment of the regulatory hearing - in which consumer preferences have little or no role - proponents of renewable energy technologies may miss the most promising opportunity to forge a sustainable development path in the increasingly market oriented energy sector. Moreover, by over- looking the ‘value to the customer’ dimension of renewable energy, analysts ignore what is arguably the most significant market dimension in the diffuse application spectrum of renewables.

A reorientation of this kind would lead to greater emphasis on the sales, distribution, and financing infrastructure necessary to satisfy such preferences. The question is whether the proper tools for analysing the use of renewables are those of capital budgeting for a mature business or, more pointedly whether there is a new business line here, and what invest- ments, skills, and strategies are needed to enter this poten- tially profitable new market opportunity.

Traditional cost based analysis is dependent on monopoly status

Customers are ‘assumed ’ in a monopoly model

Much of the intellectual effort to understand the penetration of renewable technologies in the energy sector has ignored customer preference for different ‘varieties’ or qualities of energy. When considered at all, customer preferences are assumed to centre on the engineers’ primary foci of low cost and reliability. The traditional regulated monopoly (privately or state owned) central station model of the electric utility industry has frequently been immune to any but the grossest influence from the customers’ viewpoint. This has prevented the penetration of technologies and practices that might have strong appeal and value to individual segments of the market served.

The American utility industry has notfocused on elements of customer demand

Fundamentally, the system of regulated monopoly has been a system of price averaging (Peltzman, 1985) for political purposes (including desirable outcomes such as rapid deployment of utility services throughout a region with greatly varying costs) in alignment with utility interests. However, the same ‘averaging’ mentality has led to a ‘one size fits all’ approach in terms of options in product and service availability. As explored by Hirsh (1989, p 128) and others, the conventional management model of the electric utility industry has been derived from the engineering perspective; increasing influence also comes from the financial perspective, which emphasizes cost based analysis of the supply side. This monopoly based structure resulted in an

187

188 A marketing orientation is the key to a sustainable energy,future: G L Nakarado

industry culture that tended to ignore any sophisticated analysis of the electricity customer demand and the segmented dimensions of that demand. Indeed, as late as 1975, Hirsh found evidence that sophisticated understanding of customer preferences was hardly a core competency of the typical US utility manager:

Stunned by the apparent naivete of utility managers, Harvard Business School professors who convened a conference deal- ing with New England’s power need in early 1975 could hardly believe ‘the shared ignorance among some of the most informed people in the country about some very fundamental things concerning the nature of electrical energy demand.’ The managers appeared to know less about electricity demand, they noted, than other business executives knew about the nature of demand for toothpaste, lifesavers or beer.

Only in recent years have utility executives and regulators begun to catch themselves in referring to ‘ratepayers’ rather than customers, a linguistic clue to the previous paradigm of viewing customers as passive players in an engineering and finance-driven model.

Regulators too have been woefully uninformed about consumer preferences

The structure of the state regulatory process commonly practised in the USA is arguably a forum to ensure that customers’ wants and needs were taken into account. In actual- ity, there is virtually no expertise or experience in the use of sophisticated market research in this process. It has generally relied almost exclusively on the ‘intuition’ of the state commissioners as informed by the political and regulatory process.1 At least in the experience of the author, this has generally led to regulatory decisions affecting issues for which the process had no sound data regarding customer preferences or satisfaction.

Regulatory decisions made solely or largely on cost information and other engineering or financially oriented data, to the exclusion of customer preference data, should come as no surprise. In fact, with the possible exception of potential regulatory action at the extreme of utility incom- petence, the standard regulatory model allows no place in the determination of rates for issues of customer preferences or customer satisfaction. The revenue requirement is a function of investment (rate base), allowed rate of return on and of investment, and expenses (Bonbright et al, 1988). The author, in a concurrence to a decision of the Colorado Public Utilities Commission (Nakarado, 1992, p 359), out- lined a variety of systemic issues which led to a structural bias against consideration of customer preferences in the regulated utility industry:

we have recognized the increasing importance of how regulated companies perform with their rate base investment, and the inadequacy of a form of regulation developed in the late I SOOs, which is based solely on allowing a return on the ac- counting measurement of investment in assets.

‘The New York Public Service Commission is an exception to that gener- alization, and has included data regarding customers’ satisfaction in its ratemaking decisions.

Rate base, rate of return regulation fundamentally allows a regulated utility to earn a fair rate of return on investment, and to recover (but not earn a return on) its expenses. While this may have made sense in the late 1800’s, and is easiest to ad- minister, it ignores all those aspects of an enterprise that are recognized today as differentiating a successful enterprise from a mediocre or poor one. That is, employee and management proficiency, training, a clear corporate mission, opera- tional expertise, marketing expertise, financial expertise, efficient use of resources, dedication to quality delivery of what customers want - none of these elements affect prof- itability in traditional regulation. Intuitively, a system which classifies a decision to buy a truck as an asset thus increasing allowable profit, and the development of an improved opera- tional method which reduces costs by millions of dollars as an expense entitled to no reward, may be costing our constituents a great deal of money . . .

This proceeding was the first docket in my experience to deal explicitly with modem customer research data. It is a continual source of amazement to me how little evidence is presented in Commission proceedings to indicate what the broad mass of customers want. The specific interests of many inter- venor groups and competitors are well represented, but nei- ther the Office of Consumer Counsel, which statutorily represents consumers, nor the PUC staff or Commissioners have access to any broad based scientifically valid data indicating demand or concerns of our constituents . . . [emphasis added].

The regulated monopoly, central station model was developed more than a century ago

There is no inoculation so effective against change as success. That element is key in the difficulties that regulated and state owned monopolies are having in the current transition. In the last 100 years, the electric utility industry has brought profound benefits to societies able to afford the central station model. However, technology and other economic factors have profoundly changed the current market environment. Figure 1 sets out some of the underlying environmental circumstances that have changed, in some cases radically, in the intervening period. The combination of a slow to in- novate, regulated monopoly industry structure and the significant worldwide economic and technological changes that have taken place has created enormous opportunities for companies with the necessary new skills to reinvent the manner of sales and delivery of energy. Indeed, these changes will affect the very nature of the relationship of the electrical service provider and the customer, using comput- ers, interactive telecommunications, real time pricing, and electronic sensors and controls. New contractual relation- ships and communication will be substituted for traditional uses of fuel and materials. This opportunity resembles the dramatic restructuring that has occurred as the computer industry evolved from company mainframes to a distributed, network-based clientserver architecture (Yeager, 1993).

For organizations marketing renewable technologies, there may be similar opportunities as regulated monopolies based on the central station model or new market entrants

A marketing orientation is the key to a sustainable energy,firture: G L Nakarado 189

Old endronment

Information expensive

Communication expensive

Customers assumed

Computation expensive

Labour low cost

Fuel low cost

Waete disposal no cost

Materials low cost

Centralized mode based on economies of scale

New environment

Information low cost

Communication low cost

Customer satisfaction critical

Computation low cost

Labour expensive

Fuel costs highly variable

Waste disposal expensive

Materials expensive

Distributed model based on systems approach

Figure I Business environment changes since central station regulated monopoly model developed

shift toward more distributed, marketing oriented and customer driven models. There is a strong relationship between the increased use of communication and computation - information - and the increased use of renewable technology that is evident in the distributed utility model (versus central station; see Chapel et al, 1993; Hirsh, 1989; Weinberg, 1995). When system planners approach system design from a position of having a greater variety and information rich set of tools with which to create solutions to their complex problems, renewable technologies will be in a far more favourable environment than the bulk power, commodity oriented planning environment of the past.2 The use of a more diverse set of energy supply alternatives - along with better, faster, feedback loops among the various parts of the energy system - will affect all forms of energy production and use, and will result in a far more efficient use of every technology.3 This distributed, interactive, information rich vision is analogous to and mutually supportive of the emerging concept of industrial ecology. As stated by Kates (1994, p 122) in his article ‘Sustaining life on earth’:

The emergent field of study and action known as industrial

ecology seeks to use the mechanisms of market competition

2With some incongruity, the author will enthusiastically admit that despite the title and general argument of this paper, it is precisely the new approaches to evaluation of renewables that are elsewhere discussed in this journal that will be the enabling theory for this more complex approach to system planning. “It is today less expensive to put a photovoltaic powered hazard light on a transmission line near an airport than it is to install the transformer that would be required to use the power from the transmission line. There are many other analogous examples and they are growing. However, it takes time for utility engineers accustomed to installing transformers to become aware of, and comfortable with, these new technologies. The methodology and principles of when to use one versus another, and how to integrate them, are only beginning to be developed. The National Renewable En- ergy Laboratory (NREL) in Golden, Colorado, and others are working on developing the methodology for optimizing the mixes, or integrating the various technologies in a ‘distributed’ model. This area of knowledge is critical to the successful and effective adoption of renewable technologies.

and efficiency to minimize the amount of energy, materials

and waste. Further into the future lies the substantial opportu-

nity to increase human sustenance without increasing envi-

ronmental burdens. The goal may be achieved through the science and engineering of biological prwcesses, the deveiop- ment of new enew sources and transmission technologies. the creation qfmaterials and ultimately, the substitution ofin- ,firmation,fbr both enem and materials [emphasis added].

With further regard to the ecology analogy as the industry becomes more competitive, it will follow the path represented by an ecological ‘niche’. To understand this concept, we have only to refer to the millions of years of design done by natural evolution in engineering the most energy and resource efficient ‘systems’ known: the diverse systems of species found in the canopy of tropical rain forests. By spe- cializing in very specific portions of trees, altitudes, quan- tity of light or shade, and even in the species of plants utilized, the plants and animals of the canopy are able to ex- tract the maximum amount of nutrients and energy from their environment while minimizing costly conflicts. More generally, these species co-evolve into extremely complex and specialized (ie diverse) systems (Terborgh, 1992). The developing information age will enhance man’s ability to replicate this niche-based approach to design in order to ex- tract the maximum use of our energy and materials. Roth- schild (I 990, p 208) in Bionomics, Economy as Ecosystem, notes in his section entitled ‘Struggle and competition’:

Unrelenting competitive pressure stimulates an evolutionary

process that creates differences, reduces direct conflict, and promotes coexistence. Along with brutal battles for food and

living space, vigorous competition leads to a pro&ration qf new species, each speciaIized,for a slightly different niche. Rather than constant combat, the hallmark of intense compe-

tition is diversity [and consequent specialization to the niche]

[emphasis added].

We can look forward to similar outcomes as the energy industry evolves within a competitive framework.

Summary of regulated monopoly structural analysis

The structure of regulated monopoly has systematically discouraged utility behaviours oriented toward customer data. Regulated monopolies and their regulators have not in the past attended to customer preferences or satisfaction because these considerations were excluded from the regulatory equation that determined profits! This structural bias had a resulting reinforcing feedback effect by thus creating an industry culture that was not accustomed to or experi- enced in a marketing oriented approach. Rather than focusing exclusively on improving the methodological techniques of evaluation of the engineering and financial costs (even though such refinement may be necessary, ie a classi- cal capital budgeting analysis of how the same things can be done more efficiently), the renewables industry should move toward a marketing orientation. From such a marketing orientation, exploring the nature and dimensions of customer demand for renewable energy and the requisite infrastructure and institutional capabilities that are necessary

190 A marketing orientation is the key to a sustainable energy,firture: G L Nakarado

to satisfy, and would be able to profit from, such demand

for a ‘new’ niche-based product4 could become an important, successful approach to a sustainable energy future.

The evidence for significant customer preference for renewable technologies

There is a growing body of research that suggests that the American public prefers, and is willing to pay for, renewable energy technologies. Work done by Farhar (I 994, p 2 I 1) at NREL concludes that:

in the Unitted States, public concern about the environment

has increased over the past decade. In addition, increasing

majorities of the public have, in opinion polls. selected re-

newable energy and energy efficiency over other energy alter-

natives for the past 15 years. Are these two trends linked? The

poll evidence suggest that they could be. Some information

shows that the public is not simply paying lip service to envir-

onmental protection but is willing to pay and take other ac-

tions to protect and improve the environment. Further, the

public prefers policies supportive of energy efficiency and the

use of renewables over other energy options, and policies that foster environmental protection and improvement. Finally,

the poll evidence taken together suggests that the public

wants a broad national agenda of sustainable development, with energy efficiency and the use of renewable energy increasingly institutionalized.

Poll results released after the November 1994 elections indicate a dramatic preference for solar energy sources over all other sources (Hart, 1994). Similar preferences can be identified in many other parts of the world (Dunlap et al, 1992).

Public Service Company of Colorado

In the USA, individual utility companies conducting their own research with respect to their specific territories have reached similar results. In 1992 Public Service Company of Colorado (PSCo) attempted to answer the key question of whether customers’ clear concern about the environment translates into a willingness to pay a premium price. They found (EPRI, 1994) that:

when survey respondents were presented with monthly rate

premiums between [US]$I and [US]$4 (about 2 to 8% of an average monthly PSCo residential electric bill), almost 82% qf those surveyed reported they would be willing to pay this initial amount to voluntarily support development oj’renewable energy [emphasis added].

Portland General Electric

O’Neil and Company (1994) issued a final report to Port- land General Electric (PGE) on its study of least cost planning using focus groups. Among the report’s summary findings were suggestions for major increases in alternative

4As the shift toward a marketing orientation occurs, there will likely be product evolution away from a focus on the manufacture of components toward the sale of packaged systems and other customer-friendly innovations.

resources such as wind, geothermal, solar, biomass, etc and indications the customers would be willing to invest now instead of in the future in these processes. While reliable electric service and reasonable costs for electricity were the two top ranked expectations customers had of PGE, the re- searchers were surprised by ‘the importance the customer placed on environmental responsibility, energy efficiency programs, and generating electricity from green resources. The majority of customers describe each of these a “very important ” expectations (and on a par with safety of opera- tions) and they link each of these to the environmentally re- sponsible choices they want PGE to exhibit in resource acquisitions’ [emphasis added].

Sacramento Municipal Utility District

Similarly, customer research performed by the Sacramento Municipal Utility District (SMUD) has consistently shown strong renewables support, even in the face of significant additional costs required to be absorbed in the rate structure due to the closing of its nuclear plant. SMUD has thus em- barked on an ambitious commercialization effort based on the sustained, orderly development of the grid-connected utility PV market. In a report on SMUD’s successful response to customer support for renewables, Osbom and Collier (I 994) stated that the customers of Sacramento are interested in helping to lead the way to a cleaner, sustainable future. Market research performed for SMUD determined the potential participation levels for the general public, SMUD EV Pioneers,5 and ‘green’ customers.6 The market research showed that:

(1)

(2)

(3)

A quarter of the general population, 32% of the EV Pio- neers, and 57% of the ‘green’ population said they would be willing to pay a premium price (15%) for PV generated electricity from their rooftops. Almost half of the general population, 55% of the EV Pioneers, and 77% of the ‘green’ population said they would be willing to pay a premium (15%) with rate sta- bilization of the PV portion. Seventy percent of the general population, 74% of the EV Pioneers, and 88% of the ‘green’ population reported willingness to participate in a general ‘green pricing’ programme of 1 to IO% of the utility bill to es- tablish a Clean Energy programme to add renewables, such as PVs, to the district’s system but not necessarily on their own roofs.

It appears that there is significant support for premium approaches in the general population, with a potential increase in favourable response rate of over two times by targeting smaller segments of the customer base. The SMUD PV Pioneer programme developed to meet this demand has to date resulted in 400 KW of residential rooftop PV in 1993, 1994, and again in 1995, reporting ‘SMUD continues to get more volunteers than can be accommodated by the programme’ (Osbom and Collier, 1995).

5SMUD customers showing a strong interest and support ofelectric vehicles. “Members of Sacramento area environmental groups.

A marketing orientation is the key to a sustainable energy,fiture: G L Nakarado 19 1

Edison Electric Institute

Perhaps the most striking research finding for utilities in this period of market transition toward a more competitive industry structure has been a line of research funded by the Edison Electric Institute (EEI). With nationwide research performed over a series of years, including data as recent as May 1994, EEI (I 994) reported:’

Restoring service quickly in an emergency and maintaining

reliable electric service remain the most important expecta-

tions the public has for its electric utilities. However, not harming the environment is considered very important as well -even more than keeping rates as low as possible . . . A factor

analysis of performance ratings show that customers tend to

think of electric utilities’ performance in terms of two dimen-

sions: traditional service, which includes reliable service and

power quality, and broader stewardship service efforts, which

include environmental educational programs and activities . .

Analysis reveals that customer loyalty is primarily driven by a utility’s believability. Moreover, believability in turn is driven by stewardship service e$orts. The community service

and stewardship dimensions of a utility’s performance, including environmental programs and activities, demonstrate a

shared community relationship between customers and util-

ities that increases customer loyalty. In a more competitive energy market place where customers are increasingly qferzd mow choice, those who perceive that their utility is peflorm- ing exceptionally in the stewardship service areas will be the utility’s most loyal customers [emphasis added].

Again, it appears that a more competitive environment may contain drivers enhancing the use of renewable energy sources.

A customer driven sustainable future

Curmnt small market penetration of renewable technologies

The present energy market penetration of renewable technologies is extremely small, with the exception of hydro- electric and biomass used as primary energy. The Inter- national Energy Association (IEA) (1994) states:8 ‘Other (than hydro) renewable sources currently make a negligible contribution to the electricity output mix. This is assumed to remain the case throughout the outlook period (to 2010).’ However, in terms of market opportunity, the IEA lays the groundwork for a more sanguine view of renewables’ potential in the same volume, providing (p 62):

In I99 I, the contribution of geothermal, wind, wave and solar generated electricity to the OECD output mix was only 27 TWh or less than one half of one per cent of total power generation. This was concentrated mainly in Europe and

North America.

‘See Cambridge Reports (I 994). This report may be purchased from the Edison Electric Institute, 701 Pennsylvania Avenue, NW Washington, DC 20004-2696 (telephone 202-508-5000). *International Energy Association (1994): Reference Assumption IV.4.2; p 62; Chapter 7. Reference Assumption 11.4.3; p 214.

Electricity generated from these sources is assumed to grow

strongly at an annual average rate of 8.8 per cent per annum

over the outlook period to I36 TWH by 2010. However, due

to the low base in 1991, even this dramatic growth means that electricity generated from these sources is only I .2 per cent of

the output mix in 2010 [emphasis added].

The learning curve effect and the current small market as advantageous

It is this ‘dramatic growth’ predicted by the IEA that may both entice more ‘market oriented’ new entrants to serve this market, and at the same time positively reinforce and enlarge the potential market through what are called learning curve effects. The best way of understanding the process of cost reductions in an emerging product category is through the concept of ‘learning curves’. The principle of the learning curve, which has been found in the development of a wide range of industries (Rothschild, 1990), is that reductions in cost accompany increased production, and that a doubling of the cumulative production of a product will bring with it a reduction in unit cost by a fixed per- centage, or ‘learning factor’ (usually around I5 or 20°h).9 The recent performances of many of the more advanced information and renewable energy technologies follow this path.

The seemingly incongruous claim that having an extremely small market share is advantageous is based on the fact that the use of renewable technologies other than (hy- dropower) is currently so small that doubling production can be achieved very quickly, through a marketing-oriented development of market niches. While considered a niche, remote, off-grid applications are cost effective today; over two billion people currently have no access to a grid or any other form of electricity.10

On this basis, and making the assumption that renewable technologies will move down their learning curves with a learning factor of 15%, renewables could be expected to become competitive with fossil fuel as sources of electricity between 2020 and 2030. Even assuming that electricity production from fossil fuels also has a learning factor of 15%, the conclusion can be reached simply because renewable technology is so much earlier in its development and adoption than fossil fuels technology, which enables progress down the learning curve to be much more rapid.’ 1 This analysis is supported in a paper recently prepared by

91t is important to distinguish the correlation of increased production and decreasing cost from a direct causal link between such factors. A steadily increasing market is likely to lead to a learning curve effect while a tem- porary increase in demand may not. ‘OCumulative oil production on the other hand will take some 20 years to double, and hence costs will fall much more slowly. Coal unit costs are likely to fall more slowly still, as coal has moved even further along its learning curve; whereas annual world oil production is currently some 3.5% of total historical cumulative production, the figure for coal is only about 2%. “See Awerbuch (1994) and the references cited therein. Work performed by Dr Shimon Awerbuch, Nashua, New Hampshire. A similar version of this work will be published in a forthcoming edition of Advances in Solar Energy.

192 A marketing orientation is the key to a sustainable energy,future: G L Nakarado

Dr Chris Fay (I 995), Chairman and Chief Executive Offi- cer of Shell UK, which noted the following:

There are the fossil fuel resources to deliver much greater supplies of energy in the future. But they clearly cannot meet rising demand,forever The latest Shell analy.sis shows that other sources must contribute an increasing share qfter 2020. Fossil fuels supplies may peak around 2030 -at a level some

50% higher than at present-before declining slowly . . .

what about the growing gap between demand and fossil fuel

supplies? Some will obviously be filled by hydro-electric and

nuclear power. Far more important will be the contribution oj alternative renewable energy supplies. Such sources only contribute minor supplies at present. What grounds are there ,fir thinking that such rapid development could take place? .

the energy history of the last two centuries has been charac-

terised by continual response to competitive pressures and

opportunities . . .

New technologies cannot leap from laboratory to mass mar-

ket overnight. They must first be tested in niche markets,

where some succeed but many fail. Costs fall as they progress

down the ‘learning curve’ with increasing application. Major

productivity improvements come with widespread use. This

extended process is the normal pattern of commercial techno-

logical development . . .

Commercialization of alternative energy sources to fill the

growing energy supply gap after 2020 will be a considerable

challenge. However, one can be optimistic about the pace of

market-driven innovation. There is also great potential for ac-

celerating technological advance, and for information tech-

nology to transform the way we do things - markedly

increasing energy efficiency [emphasis added].

A market oriented learning curve analysis can thus be developed that suggests selling renewable technologies solely in the markets that want them, even assuming today’s costs (so-called ‘niche’ markets) could result in a dramatic shift in the world’s energy supply sources to renewables over the long term. The reinforcing feedback nature of these rela- tionships of increasing demand leading to decreased costs leading to increased demand may also result in an enhanced ability to utilize renewable technologies for other systems- based policy approaches.‘*

This paper has argued that a possible scenario for increased use of renewables need not be based on attempting to provide analytical techniques seeming to show that a PV

12For example, the use of a systems-based approach will undoubtedly uncover other powerful drivers for increased renewables penetration. In his recent article ‘Population, poverty and the local environment’ (1995, pp 4&45), Partha S Dasgupta addresses the complex interrelationships between population growth, poverty and environmental degradation that cre.- ate reinforcing feedback loops which can lead to an increasingly destructive situation, including the apparent need for more children to help gather firewood and retrieve water precisely as a result of the reduced availability of wood and potable water resulting from increased population. He concludes, in part, ‘Providing cheap fuel and potable water will reduce the usefulness of extra hands’. These are applications for which renewable technologies are uniquely qualified.

array is more economical than a combined cycle gas turbine located near a long term source of gas supply. Rather, an alternative strategy might be based on the following steps:

0)

(2)

(3)

Gather sophisticated marketing-oriented data. Devel- oping the data necessary to enable or interest utilities or other new market entrants to cost-effectively target those segments of the customer base that are willing to pay the full cost of alternative and environmentally be- nign energy sources now. This cost may be reduced by the strategic learning and customer stewardship benefits to the utility. Develop marketing and delivery infrastructure to serve niche markets. As business organizations develop the experience and infrastructure necessary to serve the niche markets at today’s prices, the learning curve effect will result in cost reductions, which will in turn enlarge the size of the markets for renewable energy. Develop the analytic methodology for optimizing the production, use, and interaction of the various energy sources and uses as an integrated energy system. In addition to developing the distribution and marketing infrastructure to fully serve the niche markets, the energy industry must develop the theory, methodology, and experience with a whole systems approach to planning, design, and operation. This will lead to a much more complex, interactive, diverse, and specialized energy system, thereby increasing both efficiency and robustness.

Conclusion

At the current scale of market penetration, it is likely, based on a learning curve analysis, that only niche markets need be captured in order to make significant gains in cost reductions and to create an orderly infrastructure build up. How- ever, the potential market is much greater than the term niche would imply. Niche markets are not necessarily small or insignificant. For example, even the US utility market, which suffers from the current market contraindications of overcapacity, uncertain transition, and the fact that the infrastructure for the central station model is largely installed, has potential for significant growth based on traditional economics in niche markets. The Utility PhotoVoltaic Group (UPVG), a group of US utilities interested in promo- tion of the deployment of photovoltaics, has estimated the potential US market alone at nearly 9000 MW (see Figure 2) (Applications and Markets Work Group, 1994).

While this estimate is based on a presently optimistic assumed price of US$3.00 per watt total system cost, it never- theless suggests an extremely significant (nearly 9000 MW) market, while looking at less than 15--20% of the total expected global capacity demand.

Further, as the utility industry gains marketing experience in a more competitive environment, management may come to behave in a manner that which reflects the more sophisticated view set forth by Professor Theodore Levitt in his classic Harvard Business Review (1980, p 83) article ‘Marketing success through differentiation - of anything’:

A marketing orientation is the key to a sustainable energy future: G L Nakarado 193

T and D area support

T and D radial support

‘PV friendly’ price

Residential building Remote buildings

Commercial buildings

Livestock watering

Utility buildings

EV charging

Cathodic protection

1

/ Estimated range I

I I I I I

0 1000 2000 3000 4000 5000

PV demand (MW)

Figure 2 PV demand in megawatts

Source: From Applications and Markets Work Group (1994).

There is no such thing as a commodity. All goods and ser-

vices are differentiable. Though the usual presumption is that

this is more true of consumer goods than of industrial goods

and services, the opposite is the actual case.

In the marketplace, differentiation is everywhere. Everybody

- producer, fabricator, seller, broker, agent, merchant - tries

constantly to distinguish his offering from all others. This is

true even of those who produce and deal in primary metals,

grains, chemicals, plastics, and money.

Present research suggests that with product differentiation may come significant increases in renewable demand. Some 80% of the market for increased energy capacity in the coming decades is projected to be in the international market, where renewables will have a relative economic ad- vantage compared to US domestic markets. A market oriented approach will provide an increased stimulus for the renewable energy industry to continue the recent trend toward enhancing the ability to sell, finance and deliver solutions to customers with real world needs and preferences. This approach, based on selling to the market that is avail- able today, provides the key to a sustainable energy future.

Acknowledgements

The views and opinions of the author expressed in this journal article do not necessarily state or reflect those of the United States Government or Midwest Research Institute. The National Renewable Energy Laboratory is managed and operated by Midwest Research Institute for the United States Department of Energy.

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Research with PGE Resideniial and Commercial Customers prepared for Portland General Electric

Osbom, D and Collier, D (1994) ‘Utility commercialization of grid-connected photovoltaics’ presented at the ENEL Workshop on Modular PV Plant for Multimegawatt Power Generation, Paestum, Italy. 7-9 July 1994

Osbom, D and Collier, D (I 995) ‘Sustained orderly development applied to the commercialization of utility grid-connected photovoltaics’ ASES Solar 95 Conference Minneapolis, Minnesota

Peltzman, S (I 985) Deregulation: The Expected and the Unexpected Se- lected Paper No 61, Graduate School of Business, University of Chicago, Chicago, IL

Rothschild, M (I 990) ‘Struggle and competition’ Bionomics Economy a.7 Ecos_wsrem Henry Holt, New York

Terborgh, J (I 992) Diversitv and the Tropical Rain Foresf Scientific American Library, New York

Weinberg, C (1995) ‘The electric utility: restructuring and technology -a path to light or dark’ Prsfii.7 in the Public Interest: NARUC-DOE and Sustainable Energv Strategies in a Competitive Market Proceedings 7- 10 Ma-v 1995. Madison. Wisconsin National Association of Regulatory Utility Commissioners, Washington, DC

Yeager, K (I 993) Why Renewables? Wh_v Now? Conference at Center for Resource Management, Santa Fe, NM

A marketing orientation is the key to a sustainable energy future

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