4.7 Sustainable Markets for Environmentally Sound Technologies

Experience with development assistance for renewable energy projects in developing countries over the past three decades illustrates the importance of sustainable market approaches to technology transfer. In the 1970s and 1980s, development assistance agencies attempted to transfer many small-scale renewable-energy technologies like biogas, cooking stoves, wind turbines, and solar heaters. Many projects were considered failures because of poor technical performance, lack of attention to user needs and local conditions, and lack of replication of the original projects. Projects emphasised one-time technology demonstrations that failed to understand or provide incentive structures, failed to demonstrate institutional and commercial viability, failed to account for continuing maintenance requirements, failed to create a maintenance and service infrastructure, and in general failed to generate sustainable markets for the technologies demonstrated (Kozloff and Shobowale, 1994; Barnett, 1990; Hurst, 1990; Foley, 1993; Goldemberg and Johansson, 1995; GTZ, 1995).

These failures identify the need for anapproach thatSuch an approach has been labelled a market transformation promotes technology transfer by catalysing expanded sustainable markets for specific technologies, and thus harnessing the power of market-based incentives to accomplish environmental goals.approach. A market transformation approach promotes replicable, ongoing technology transfers rather than one-time transfers. In such an approach, public policy can consider what are the set of institutions which underlie markets and what are appropriate public interventions to shape those institutions. Many view the development process in a market-oriented context, in which technology transfer is intertwined with development assistance aimed at promoting functioning domestic commercial markets, including domestic production capability, access to financing, stakeholder partnerships, information channels, institutional capacities, and the removal of other market barriers. The need to support markets, market institutions, and entrepreneurs as the primary vehicles of technology transfer can be seen in alternative views of the development process that have come from schools of institutional and evolutionary economics (Hodgson et al., 1994; Saviotti and Metcalfe, 1991).

The three central characteristics of a market are: (i) the number, nature, and capabilities of participants, (ii) the characteristics of the products and services, and (iii) the rules governing transactions (Feldman, 1994). Properly functioning markets generally require the availability of information, acceptable levels of risk, appropriate skills, a system of property definitions, quality and contractual norms or standards, oversight and intermediation bodies, decision-making autonomy for buyers and sellers, and stable political and legal regimes.

The scope of a "market" must be carefully defined. For example, we could speak of a market for grid-connected wind turbines, a market for wind farms, a market for independently generated electricity, and a market for electricity services like motive power and lighting. Each of these markets may face different sets of buyers, sellers and institutional constraints. A market approach draws attention past the producer to the consumer -- what decisions consumers make and why. But a market approach also highlights that consumers do not act alone, but as part of larger social groups. Thus, a market approach can bring into focus, for example, the way communities operate and how markets interweave with community structures and interrelationships.

Governments define the property rights, contract enforcement mechanisms, and many of the rules for transactions that are necessary for markets to work well. Policies that build or facilitate markets can have a strong influence on the characteristics of those markets -- for example, the relative sales share of domestic vs. foreign products, the segments of consumers participating in the market, the ability of domestic producers to participate in the market, the technologies available, and how regulations govern market behaviour. Markets that do not take account of externalities or technological path dependence can result in undesirable outcomes from a development and environmental point of view. For example, many promising technologies (e.g., biomass gasification, efficient electric- wheel vehicles, and the next generation of basic materials manufacturing) may get "left out", because the market demand is in developing countries but the technology developers and financiers are still primarily in developed countries. Thus one important question from a market perspective is: will existing technology markets and incentives result in a transfer of the technologies that are most relevant to developing countries? Policies that promote technology transfer from a market perspective must clearly address the factors that drive technology choice in the marketplace, on both supplier and recipient sides.

The initial choice of the technology is not the only or the most critical factor in its diffusion, which is a dynamic process. Technology is often introduced in niche markets, later expanding into other markets, if supply is reliable, as its costs decline with increasing learning-by-doing and with economies of scale in manufacturing. In Kenya, the charcoal stove design originally adapted from a Thai design was introduced first for the urban market and then expanded to the rural market as well (Kammen, 1998a; also see Chapter 16, Case Study 1 ). Photovoltaic systems were first introduced for the rural affluent market and then smaller systems were introduced for the less affluent in the rural market (Kammen, 1998a; and see Chapter 16, Case study 5). In Inner Mongolia, we see a reverse phenomenon. Windmills were initially adapted from a Swedish design to utilise the steady but low-speed wind resource prevalent in Inner Mongolia (see Chapter 16, Case study 3). However, as incomes grew, adaptation was to larger systems (from 100 W to 300 W) and from intermittent wind generators to more reliable hybrid wind-PV systems that also provide electricity during low wind-speed but high insulation summer months.

There are many lessons to be learned from this experience for promoting technology transfer. Some of these lessons stem from the failures mentioned above. Others reflect the importance of technology adaptation, the need for enterprise and technological capability, the selection of compatible technology, and the need for a supportive and appropriate policy environment (Norberg-Bohm and Hart, 1995; Mugabe, 1996). Monitoring and verification protocols can also be useful (see Box 4.3).

BOX 4.3 MONITORING AND VERIFICATION PROTOCOLS

Energy efficiency investments in the buildings, industrial, energy sectors have been constrained due to inconsistencies and uncertainties in their performance (i.e., actual energy savings achieved), and because financing for efficiency investments has been limited and inflexible. The existence of monitoring and verification protocols can help to reduce these inconsistencies and uncertainties. As a recent example, several dozen national organisations in 16 countries have developed industry best practices, including voluntary standard on implementation, measurement and verification of energy efficiency and called the International Performance Measurement and Verification Protocol (IPMVP) (U.S. Department of Energy, 1997). The IPMVP is being translated into 11 languages and is being widely adopted in countries ranging from Russia and Ukraine to South Korea, Brazil, Mexico and China. Multilateral Development Banks such as the World Bank are using the IPMVP as the technical basis for large scale energy efficiency financing. Use of the IPMVP results in higher and more persistent levels of energy efficiency savings, and in a standardised approach to contract development, implementation and monitoring. This uniform approach cuts transactions costs, allows project pooling and facilitates project financing. As a result of the rapidly increasing application of the IPMVP, there is increased efficiency project financing, with improved project performance, and increased availability of lower cost financing for energy efficiency projects.

The case of the failure of biomass gasifiers for the fueling of irrigation pumps in the Philippines is an example of the need to address the entire market (Bernardo and Kilayko, 1990). Some years after installation, only one per cent of the gasifiers remained in use. The gasifiers themselves were not to blame so much as the market institutions that would have supported them: inadequate user training and poorly funded service and spare parts infrastructure led to poor maintenance and equipment failure. The agency overseeing the programme lacked resources and installed gasifiers without sufficient testing. Users were not sufficiently convinced of the benefits of the gasifiers to invest further resources. Supplies of needed inputs (i.e., charcoal) were difficult and expensive to obtain.

Conversely, the case of improved cookstoves in East Africa shows a long and important history of how sustainable commercial markets evolved from what were initially one-time aid-based projects. The most popular improved stove, the Kenyan Ceramic Jiko, has become the mainstay of the Kenyan urban market, and is produced, sold, and serviced by a large and diffuse network of formal- and largely informal-sector artisans. The efficient use of the KCJ addresses economic, environmental, and public health challenges. The KCJ and the commercial network that supplies the technology has also become a model for direct emulation, or for adaptation to promote improved stoves in numerous nations. Comparisons with the successes and problems with these spin-off programmes highlight a number of critical issues in the feedback between design and use, and the limitations of economic analyses of some emerging technologies and informal markets.

Since the late 1970s, the Inner Mongolia Autonomous Region (IMAR) of China has achieved widespread dissemination of small, stand-alone wind electric systems among its rural herding population. This success has been attributed partly to actions taken by the IMAR government to create a local market for wind systems among individual household customers (including a modest subsidy provided directly to manufacturers), and the development of an extensive local manufacturing, sales, maintenance, and training infrastructure.

There is a growing literature on market transformation for energy efficiency (Geller and Nadel, 1994; Golove and Eto, 1996; Levine et al., 1994). The National Association of Regulatory Utility Commissioners defines market transformation as "changing the types of products or services that are offered in the market, the basis on which purchase and behavioural decisions are made, the type or number of participants in the market, or in some other way altering this set of interactions in a self-sustaining way" (Hastie, 1995). The literature on market transformation has its roots in utility demand-side-management (DSM) approaches. Instead of targeting "participants" with rebates and other DSM programmes, a market transformation approach considers that utilities should act to transform the broader market in a sustainable manner, reduce market-barriers, and expand the role of energy-efficient products and services. The literature offers many specific strategies for market transformation and regulatory approaches to encourage utilities to pursue these strategies (Geller and Nadel, 1994).

Successful market transformation programmes for energy efficiency have included the Poland Efficient Lighting Project (see Chapter 16, Case Study 2), where a combination of subsidies, consumer education, and marketing greatly expanded the market for compact fluorescent lights. The Thailand Demand-Side Management Project (see Chapter 16, Case Study 23) also contained market transformation elements for fluorescent lights that resulted in 100% of the market shifting to more efficient lighting designs.

A market transformation approach promotes replicable, ongoing technology transfers rather than one-time transfers. In such an approach, public policy can consider what are the set of institutions which underlie markets and what are appropriate public interventions to shape those institutions. It is useful to consider a broad brush of measures within a market transformation approach such as: technology adaptation, the need for enterprise technological capability, subsidies, consumer education, and marketing.

Other reports in this collection