The Government is focused on addressing market failures for green energy, and whilst necessary, it is not sufficient; marketing failures must be addressed as well.
This article starts by accepting that households’ consuming and purchasing strategies will change dramatically over the next decade to a pro-social, environmentally sustainable configuration.
For extreme free marketers, there is little more to add to the discussion. Price signals and changing customer preferences will encourage suppliers to develop less carbon-intensive solutions such as heat exchange pumps and hydrogen fuel. The market will decide which combination of energy technologies we adopt. Then why is it not happening?
Development of the market for low carbon solutions
Public policymakers point to market failures inhibiting the development of low-carbon solutions. The infrastructure investments required in, for example, a national home heating solution, are likely beyond any supplier. In the absence of Government backing, the stock market would be unlikely to finance private investment.
Complementary goods and services also need to be co-developed, such as tens of thousands of tradespeople trained to install new solutions and suppliers of generation, transmission, and consumption hardware. Suppliers won’t invest ahead of demand, but there will be no demand until all these externalities are in place. A chicken and egg conundrum!
Finally, markets often fail to develop under conditions of extreme risk. Asking households to invest in, for example, heat exchange technology and reconfigure their homes to accommodate it, is a significant investment in an asset whose return is measured in decades and thus subject to enormous uncertainty. Financial theory holds a positive relationship between risk and return, and rational consumers will expect higher returns than they could achieve from stocks and shares. That return is either substantially lower energy costs or assurance of supply, yet big investments in green energy are currently financed by increased energy prices.
Public policy focuses on overcoming these inhibitors to promote a viable market.
The Government chooses the technology because it is not realistic to assume a range of alternatives, and then it:
- Legislates to make these choices compulsory, encouraging manufacturers to invest in home heat exchange units, increasing supply and choice whilst reducing prices;
- Subsidises conversion to low energy;
- Will tax failure to convert;
- Decides how much households pay versus suppliers versus Government;
- Sets a timetable for the new market to develop.
Market vs marketing failure
Market failure and public policy are well discussed academically and in mainstream media. Whilst it's naive to believe that a free market will develop green energy in the absence of Government intervention, it is equally naive to assume that merely removing some elements of market failure ensures the development of a competitive, functioning market for green energy.
Market viability is necessary but not sufficient. We currently observe both market and marketing failure. The former is the subject of intense public scrutiny and debate; the latter does not get sufficient attention.
Marketing practices can support consumer response to public policy. Government is mandating the new forms of energy/ heating whilst ignoring who will create the compelling, branded offers to make that demand real.
Conversion to more efficient solutions is a product-service bundle that comprises finance, equipment, design, installation, and service. Currently, it is left to the “market” to create the value propositions and it is not evident that clearly branded and well-communicated offers are being developed.
Who will create a branded supply chain for a comprehensive solution?
The major players are heat exchange manufacturers, energy “retailers”, plumbers, and energy advisory groups. The big energy suppliers are probably best placed in terms of brand and customers but have not traditionally been in the demand generation business; their skill is operating under license and selling fuel. Their green tariffs don’t seem very transformative, and they relate to the energy retailers’ supply chains rather than creating a comprehensive product-service offer. Manufacturers' brands of heat exchanges are generally not well known and are intermediated by plumbers (installers). Installers are usually not well branded or experts with emerging technology.
Creating well-marketed offers is challenging. Changing consumer attitudes and behaviour are notoriously tricky in sustainable consumption. Consumers always tell researchers that they strongly intend to engage in pro-social behaviour, but their actual choices are rarely commensurate. This gives rise to the “say-do” gap much discussed by marketing academics in the field. This will require consumer insight and management of the highest calibre. Can existing suppliers get to grips with converting consumers to sustainable energy when it is merely one offer in a portfolio competing for resources?
Market-building challenges for green energy
What can we learn from the past efforts of Government in market-building? Mobile phones and cable have developed sustained, competitive markets. In both cases, companies with relevant marketing experience (mostly) were awarded licenses. Regulation created the rules whilst operators generated demand amongst consumers using traditional Segment-Target-Position marketing.
Has that happened with, for example, heat exchange home heating that is being mandated? There are many challenges:
- Some of the housing stock is too old.
- There are insufficient installers and no obvious plan to train people.
- Limited product branding.
- Energy companies are conflicted.
Effective policy requires more than merely addressing market failures; we must avoid marketing failures to build the market for sustainable solutions.
This article was first published on the Worshipful Company of Marketors website.
Professor Stan Maklan - Professor of Marketing and Technology, Director of the Marketing and Strategic Sales Group. Stan specialises in working with organisations to help them adapt their marketing practices and update their competencies in response to changing customer need. He works with clients to develop marketing organisation and practices for a digital world, with particular expertise in marketing strategy, planning, measurement and accountability. As head of the Strategic Marketing and Sales group, Stan offers unique insights, clarifies complex subjects and challenges managers to advance an agenda of becoming market and customer-centric. He regularly works alongside senior teams, acting as a catalyst for a critical assessment of market and/or customer strategy, plans and the implementation of technology-led marketing change.