Rebates that Shook the Market
Rebates that Shook the Market
A $5 utility rebate can lower the retail price of a CFL by more than double that amount-if the incentive is shifted from consumers to manufacturers. At the same time, administrative costs are lowered to a minimum.
When it comes to residential lighting programs, many North American electric utilities have had frustrating experiences: Despite a lot of effort and money it has been hard to encourage consumers to buy compact fluorescent lamps (CFLs). High initial costs and a lack of faith in the technology seem to scare consumers away. And those who do want to buy CFLs have problems finding them, since many retailers are unwilling to stock the slow-selling lamps.
Most traditional utility rebate programs don't seem to offer a satisfactory way of breaking this vicious circle. Utilities that have tried to sell lamps themselves, to avoid large retail markups, have alienated retailers eager to participate in CFL programs. Furthermore, many rebate coupon programs have proven to be expensive and inefficient.
One example of this is the 9-month program run in 1991 by the American utility Southern California Edison (SCE), that used newspaper ads, rebate coupons to consumers, etc. Within the service territory, which includes ~4.5 million residential customers, the program only managed to trigger an additional sales of 29 000 lamps. For each dollar spent on a direct rebate, a little more than two dollars was spent on administering the program (~70% of the $16.50 for each unit moved by the program).
No one was happy with the situation. The utility regulators demanded that administrative costs be reduced to a maximum of 30% of total program costs. For the program designers at SCE, it was all too clear that a radically new strategy had to be found. The solution was an innovative "manufacturer rebate program".
The new approach that emerged is based on a simple principle: Making the arithmetic of retail markups do the work for you. Typically, the retail price is made up of the wholesale price plus a percentage markup. For example, if the wholesale cost of a given CFL is US$10 and the typical retail markup is 67% (=$6.70), the lamp will retail for $16.70. A $5 rebate coupon would lower the retail price to $11.70. (A price that many American consumers still find too high, according to market surveys by SCE and others).
However, if the utility can achieve a reduced wholesale price, this $5 will actually grow with the markups. Let's go back to our first example: If the rebate is shifted over to the manufacturer instead, the wholesale price will be reduced from $10 to $5. The markup percentage is still the same (67%), but the markup sum is considerably lower-i.e., $3.35 instead of $6.70. Thus, the final retail price is down to $8.35 ($5 + $3.35).
THE MARKET SAYS YES!
After a successful pilot program in 1991 ("the marketplace sucked the lamps up right away", says program manager Bill Grimm) SCE decided to run a full-scale program in 1992. Approximately $2.5 million was allocated for a $5 rebate for 518 000 lamps plus funds for administration.
Of the 35 manufacturers invited to participate, nine decided to join the program. For each of three watt classes, each manufacturer was rewarded a sum of points based on product quality features, for example, high power factor, good color rendering, and high lumen-per-watt output. Manufacturers could earn extra points if they were willing to match the SCE rebate with additional discounts, thus reducing the wholesale cost further, and many also earned extra points by offering promotional plans and cooperative advertising money for their retailers. Based on the manufacturer's relative score, each was given a share of the total 518 000 lamp rebates.
The selected manufacturers committed themselves to passing on the average $5/lamp rebate to the retailers. Manufacturers also committed themselves to selling 30% of their given allotment within the first three weeks of the program, 60% within eight weeks, and the full allotment within 12 weeks. As a proof-of-performance, each manufacturer had to supply SCE with copies of retailer purchase orders, indicating deliveries to retail outlets in the SCE service territory. Manufacturers who did not manage to sell their share within a prescribed period had to give up the remaining allotment, which was redistributed to a more successful manufacturer.
It should be noted that the utility will pay out an average of $5/lamp. This allows the manufacturer the flexibility to apply differing amounts of the rebate to different models in its line. An example of this is manufacturer A who has a low-price magnetically ballasted lamp that normally sells for $5 (wholesale) and a high-quality unit with an electronic ballast and tri-phosphor lamp that normally sells for $16.50 (wholesale). The manufacturer has the freedom to apply only 50¢ of the $5 rebate to the low-price product and the remaining $4.50 to the high-quality lamp, adding to the $5 rebate already applied to that lamp. Thus, the manufacturer chooses to reduce the wholesale price of the low-quality lamp by only 50¢ and that of the high-quality lamp by $9.50, resulting in wholesale prices of $4.50 and $7 respectively. SCE won't mind as long as the manufacturer gives proof that these two units are sold in a 1:1 ratio.
CUTTING ADMINISTRATIVE COSTS
Administrative costs for this program turned out to be very low. For each $5 rebate, administration costs a little more the 50¢. Thus administrative costs account for ~10% of the total program costs, as compared with the 70% chunk of the costs of SCE's previous rebate program. "Part of the reduced administrative costs have been shifted over to manufacturers. In fact, this was one of the program's goals" says Bill Grimm.
Another question raised was whether some retailers would use the very low wholesale price to increase their margin instead of passing on the savings to the customer. Clearly, the retailers' profit per lamp would go down since the wholesale price was reduced. But retailers soon realized that the increased sales volumes more than compensated for the lower per-unit profit. In cases where retailers tried to increase their margins, manufacturers acted as a counterweight since they saw higher retail margins as a potential threat to the program itself. The number of retailers who stocked CFLs in SCE's service territory increased from ~100 to almost 500, and the tougher competition that followed also helped keep retail prices low.
Another concern that has been raised regarding this type of program approach is whether manufacturers really benefit in the long run. "If customers get used to `artificially' low prices, manufacturers could be priced out of market if the program ceases" is one concern raised by a manufacturer. However, since the program is marketed as a utility rebate program, most customers are aware that the very low prices are temporary. And again, manufacturers benefit from the increased market in terms of customer awareness, the increased number of retail outlets stocking CFLs and, of course, the increased volumes.
Although SCE has not studied the program's impact on "normal" CFL prices, Bill Grimm estimates that the average retail price of a CFL sold without any utility rebate has fallen from ~$16 to ~$13.
REPEATED SUCCESS
The 1992 program was so successful that funds from other SCE residential programs were redirected to the residential CFL program. By the end of the year, almost a million CFLs had been sold through the program. Estimated annual electricity savings for the 1992 program were ~53 million kWh. The 500 000-lamp program was successfully repeated in 1993, and another 500 000-lamp program is scheduled for 1994. In 1994, a commercial program for 360 000 CFLs is also planned.
The manufacturer rebate approach has also been applied successfully by SCE in connection with an electric motor program, and has also been adopted by several other US utilities for various technologies, including CFLs. The Boston-based Consortium for Energy Efficiency (the US utility alliance behind the "Golden Carrot" refrigerator procurement program) is now considering the approach for a nationwide CFL program.
See also: Large-scale GEF program in Poland (IAEEL 3-4/95).
Nils Borg
For further information, contact:
Bill Grimm
Energy Efficiency and Market Services, SCE
Tel: +1 909 394 8837
Fax: +1 909 394 8922
