The role of utility programs in market transformation

September 26, 2023 by Zack Mast

Partners throughout the Midwest are working together to transform the market for air-source heat pumps in this cold-climate region. This four-part series explores what successful market transformation looks like as we follow a discussion with key players who helped achieve a major shift in Wisconsin’s residential HVAC market.

In Part I of Transforming a Market, we dove into the history of how a coalition of distributors, program implementers, and manufacturers helped successfully transform the market for high-efficiency furnaces. By 1994, the market saturation of high-efficiency furnaces purchased in Wisconsin reached 90%.

Read Part I of the series here.

In Part II, we discuss several factors that utilities can consider when designing programs to encourage market transformation.

In this conversation:

  • Bob Kihslinger – (Retired) Head of HR, Advisor to Sustainability initiative (2020-current) Auer Steel & Heating Supply Company. A longtime employee at Auer Steel, Bob advanced the market transformation from the front lines.
  • Kathy Kuntz – Director, Dane County Office of Energy & Climate Change. Kathy has directed many statewide energy programs throughout her career, amassing decades of experience in energy efficiency and market direction in Wisconsin.

Part II: The role of utility programs in market transformation

Auer Steel saw an opportunity and ignited a market transformation, but a single entity can't transform a market by itself. The distributor had to cooperate with the state energy office and utilities to shape programs that incentivized high-efficiency furnaces.

What role did utilities play in all this? How did it affect programs that could help drive demand?

KATHY: That work that [Slipstream] was doing, that furnace sales tracking where every quarter they do this fancy report that showed what market share was—that was all funded by utilities. This is a pre-Focus on Energy world and the utilities were collaborating on that project over however many years at [Slipstream] to really help them understand the impact of the rebates.

In the pre-Focus world, the utilities were kind of trying to be consistent in what they offered in terms of rebates to avoid market confusion. They wouldn't set one rebate level at 91.5% because some other utility set theirs at 90%. Nobody was trying to be difficult. There was a little bit of collaboration.

BOB: There were there a couple other dynamics going on. Auer Steel wasn't the only distributor in the country who was doing this. There were others around the country, even if it was pretty spotty.

KATHY: My sense from where I sit is Auer Steel was very active in talking to utilities and state agencies about where the market was. If you're going to do market transformation, it's a partnership.

Bob, were the utilities doing joint marketing efforts with you or were they offering contractors funding for marketing high-efficiency furnaces? I suspect not.

BOB: No. I can't recall if we had utilities involved in the programs themselves. But I think there's always this stamp of approval if utilities and government agencies are out there pushing it. The contractor is looking at the whole picture and saying, well, it's not just if this thing is going to work—is it gonna be profitable? Are my people going to be able to service it? What is the state of Wisconsin and what are their programs looking like? Are they in line with it? It all plays in. But we didn't really have a direct program with anyone in the state that I can recall.

Contractors as collaborators

Driving demand is an important step in market transformation, but it's just as important to get the suppliers on board—especially the contractors and distributors who provide, install, and maintain the equipment.

BOB: Not all the contractors were interested in these rich programs. But there were enough contractors interested in in leading with [the high-efficiency furnace] so that the rest of the contractors either had to get in line and accept this product as a lead product or sell against it.

There was a nucleus of dealers as well as a nucleus of distributors who were the point of the spear. Going into preseason orders the next year, we had a whole lot more contractors interested in in getting on board. We had enough of them to really force the market.

KATHY: It's important that contractors trust your program, too.

In the early days of Focus on Energy, we set up an HVAC program. We rolled that out and the legislature noticed this big pot of money going to residential HVAC. We had a meeting with state officials and they were like, "You're gonna lose budget here. You should just cancel that HVAC program because it's new." My response was, "We made a commitment to the industry that we were going to offer incentives. They ordered equipment based on that commitment."

I said, "We can cancel that program, but then we won't have an HVAC program for 25 years." And this state person was like, "Well, why?" And I said, "Because everyone in the HVAC industry will need to die before we can offer a program again!"

They weren't going to forget that I left them hanging with a bunch of equipment they couldn't sell. They're going to need to all retire so that there are new people doing that work.

There are different ways to think about that partnership just being reliable and not being flighty about how you offer incentives and how you help the industry move things.

Seeing end users as partners, too

Ultimately, in many cases it's the end users who will be making the decision to install a new technology in their home. A utility can structure the perfect program, but consumers will only take advantage of it if they trust the people helping to solve their problem—their contractors. Market transformation happens with handshakes.

BOB: I do think that while distributors were involved, the real linchpin here is at the point of sale, where the consumer calls the contractor up and the contractor makes a decision about what they're going to offer this consumer.

Usually, the consumer calls for a furnace or they call for an air conditioner. If the contractor can confidently suggest something else, they might get this consumer to consider a different product. But only if it benefits the consumer, it benefits the contractor, and it benefits everyone else.

KATHY: I think a point that comes out of this that's really important is utilities and efficiency programs cannot transform markets by themselves. They can only do it in partnership with the people who sell the products. I think the HVAC story is one where that vision and leadership was coming from the industry as much as the utility folks—that there was a better way to do this and they were headed in the same direction.

Read more from this series: