Case Study 2

Public Promotion of Private Investment in Efficient Lighting
Richard Duke and Steve Ryder
Woodrow Wilson School
Princeton University, NJ

Keywords: CFLs; Green Lights; PELP

Summary
Governments and multilateral agencies have promoted efficient lighting markets as a means to reduce greenhouse gases (GHGs). Lessons learned from the Poland Efficient Lighting Project (PELP) and Green Lights (GL) have inspired similar efforts in developing countries.

Background
In 1991, the U.S. Environmental Protection Agency (U.S. EPA), established Green Lights (GL) to encourage Partners to systematically consider efficient lighting investments. Furthermore, it empowers facilities managers to internally advocate for lighting efficiency upgrades.

PELP is a US$5 million initiative (1995 to 1998) funded by the Global Environment Facility (GEF) and executed by the IFC to reduce GHGs by increasing sales of compact fluorescent lamps (CFLs). PELP reduces price and consumer awareness barriers through financial incentives and public education.

Approach
GL is a voluntary programme that encourages public and private institutions to enter into Memoranda of Understanding with U.S. EPA. Partners agree to invest in 90% of profitable lighting efficiency upgrades within five years. Partners appoint implementation managers and submit annual progress reports. GL also recruits utilities and lighting companies to become certified Allies.

U.S. EPA agrees to provide both Partners and Allies with efficient lighting technology workshops, objective information about efficient lighting technology and financing, and assistance publicising Partners' successes.

PELP selected a manufacturer wholesale price reduction approach because it promised the largest increase in CFL sales at the lowest cost. When the subsidy is given to the manufacturer, the sales tax and distribution chain markups are also proportionately reduced. Careful monitoring ensured that subsidies passed down the distribution chain to the retail level. Five Poland-based manufacturers competed to deliver the largest reduction in electricity use for the smallest subsidy (World Bank, 1996).

The subsidy programme was accompanied by an extensive public education component using media, school programmes, environmental fairs and energy efficiency competitions. A PELP logo, along with the allowable retail price, was placed on subsidised products.

Through a competitive process, IFC selected the Netherlands Energy Company (NECO), a Dutch utility entity, to administer PELP. Among others, NECO drew upon services from the Polish Foundation for Energy Efficiency and the International Institute for Energy Conservation. The project also included a pilot CFL-based demand-side management (DSM) programme.

Impacts
GL has over 1,600 Partners (85% corporate, 15% government) and 594 Allies (41% manufacturers, 25% distributors, 21% lighting management companies, and 14% utilities). GL upgrades completed by 1997 reduced U.S. GHG emissions by 0.1% and U.S. EPA projects that this will rise to 0.4% by 2000.

GL does not provide direct subsidies to Partners; however, through 1997, the total administrative budget has been US$90 million and Partners received US$184 million in utility DSM rebates. Through 1997, the private internal rate of return (IRR) for Partners averaged 50%. The social IRR (counting GL programme costs as expenses and excluding DSM transfers from benefits) is still robust at approximately 35%.

In 1995, U.S. EPA launched the Energy Star Buildings programme that employs a similar voluntary approach to encourage efficiency in all aspects of building energy use. GL also inspired a related China Green Lights programme. While U.S. EPA supports international replication of the GL model, programmes must be carefully tailored to country-specific barriers. Moreover, multilaterals and NGOs may prove better positioned to propagate the lessons from this programme given political constraints on U.S. EPA investment in international programmes.

With PELP, US$2.6 million in GEF-funded direct subsidies leveraged US$7.5 million to reduce the cost of 1.2 million CFLs. Thus, US$2.10 of GEF wholesale subsidy per CFL yielded a US$5.90 retail price decrease, a 20% discount. These CFLs will save approximately 725 GWh of electricity and eliminate 206,000 tons of carbon. Public education activities raised consumer awareness of CFLs. Roughly 50% of first-time CFL purchasers learned about CFLs through PELP and 80% said they intend to buy more CFLs.

PELP appears to have achieved the desired market transformation. Polish CFL prices have stabilised and even dropped after the programme ended. This can be attributed to the economies of scale possible in the now-expanded Polish CFL market. GEF recently approved a US$15 million Efficient Lighting Initiative to promote similar programmes in other transitional and developing countries.

Lessons Learned
Principle lessons include: engaging the private sector through manufacturer subsidies or voluntary agreements can reduce barriers to efficient lighting markets; governments can also help transform energy efficient lighting markets by providing credible public information; evaluating programmes like PELP and GL poses analytic challenges; for PELP, the use of respected local companies and NGOs was key to navigating legal and economic obstacles, lowering project costs and promoting capacity for implementing similar projects in the future.

The fundamental programme evaluation obstacle is determining what would have happened had the programme never existed. Free riders and drivers underlie this baseline problem. The free rider effect is the percentage of participants who would have purchased efficient lighting had GL or PELP never existed. The free driver effect refers to non-participants that invest in upgrades due to indirect effects such as spillover of information and price reductions. Duke and Kammen (1999) show that GL has decreased the price of electronic ballasts by approximately 1-2%. This induces additional demand for efficient lighting products.

References
Duke, R., and D.M. Kammen, 1999: The economics of energy market transformation programs. The Energy Journal, 20 (4), 1 - 50.
World Bank, 1996: Poland Efficient Lighting Project. GEF Project Document, Washington, DC.

Contact
Richard Duke
Science, Technology and Environmental Policy (STEP) Program
Woodrow Wilson School
Princeton University
Five Ivy Lane
Princeton, NJ 08540
duke@princeton.edu

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