The economics of energy market transformation programs

This paper evaluates three energy-sector market transformation programs: th e U.S. Environmental Protection Agency's Green Lights program to promote on -grid efficient lighting; the World Bank Group's new Photovoltaic Market Tr ansformation Initiative; and the federal grain ethanol subsidy. We develop a benefit-cost model that uses experience curves to estimate unit cost redu ctions as a function of cumulative production. Accounting for dynamic feedb ack between the demand response and price reductions from production experi ence raises the benefit-cost ratio (BCR) of the first two programs substant ially. The BCR of the ethanol program, however, is approximately zero, illu strating a technology for which subsidization was not justified. Our result s support a broader role for market transformation programs to commercializ e new environmentally attractive technologies, but the ethanol experience s uggests moderately funding a broad portfolio composed of technologies that meet strict selection criteria.