1. 1 Using Bass Diffusion Models To Estimate Product-Specific Net-To-Gross Ratios for Market Transformation Programs November 13, 2014

2. Residential PLA Program 2 Today’s Agenda RPP Program Overview and Market Transformation Review Review of Bass Diffusion Models Applying the Bass Model to Air Cleaners Caveats

3. Residential PLA Program 3 RPP Program Review Program Approach: ‒ Utilize retailer engagement to increase the demand and supply of more energy efficient appliance and consumer electronic products Measures: ‒ RPP offers a portfolio of consumer energy efficiency measures that are delivered through the retail channel partners Incentive Structure: ‒ Incentives are paid to participating retailers for each program-qualified product sold. Evaluation Framework: ‒ While this mid-stream program is primarily a market transformation program, it contains elements of a resource acquisition program.

4. Residential PLA Program 4 Market Transformation (MT) Review MT produces long-lasting, sustainable changes in the structure or functioning of a market achieved by reducing barriers to the adoption of energy efficiency measures to the point where continuation of the same publicly funded intervention is no longer appropriate in that specific market. (Prahl and Keating, 2014) Strategic MT is a program approach that uses ‘the tools of market transformation to make a deliberate and rigorous effort to intervene in [targeted], clearly defined markets.’ Strategic MT programs are expected to have market-transforming effects. (Prahl and Keating 2014) ‒ This views MT as a proactive effort, not an aspirational outcome. ‒ Transforming markets can be hard –it may not work ‒ Not all markets can be transformed and not all acquisition programs will transform markets. ‒ Acquisition programs can support and be part of a strategic intervention. ‒ A strategic effort must be informed and focused to be actionable – and, frankly, evaluable. ‒ History has shown powerful examples of success

5. Residential PLA Program 5 Program-Level Conceptualization of Net Savings Participating Retailers MWh Total Program MWH Nonparticipating Retailers MWh

6. Residential PLA Program 6 Today’s Agenda RPP Program Overview and Market Transformation Review Review of Bass Diffusion Models Product Example: Air Cleaners Caveats

7. Residential PLA Program 7 A Traditional S-Shaped Diffusion of Innovation Curve

8. Residential PLA Program 8 The Bass Model and Two Types of Adopters Innovators: ‒ Adopt new products independent of the actions of others ‒ Their adoption rate is represented as ‘p’, or the “coefficient of innovation.” Imitators ‒ Their adoption is influenced by the adoption rate of others ‒ Their adoption rate is represented as ‘q’, or the “coefficient of imitation.” Defining the Innovator – Imitator Relationship: ‒ Imitator first-time adoption rate is a linear function of the number of previous adopters. ‒ Actual number of adopters limited by total market size, represented by m in the model.

9. Residential PLA Program 9 The Extended Bass Model The basic Bass model has been extended to include price, advertising and assortment and associated elasticities. The extended model considers the role of price, advertising, assortment and consumer behavior (via p and q) as well as retailer behavior in product adoption. Provides a structured environment within which to systematically conduct sensitivity analysis using Monte Carlo simulations in order to converge on plausible NTGRs.

10. Residential PLA Program 10 NTGR Calculation

11. Residential PLA Program 11 Model Focus This approach focuses on estimating retailer share of program- qualified models over time (rather than total volume). Program success based on increasing the share of program qualified products sold. The focus is on participating retailers with the expectation that non- participating retailers will, over time, be affected through causal mechanisms identified in the program theory and logic model.

12. Residential PLA Program 12 Extended Bass Diffusion Model

13. Residential PLA Program 13 Today’s Agenda RPP Program Overview and Market Transformation Review Review of Bass Diffusion Models Product Example: Air Cleaners Caveats

14. Residential PLA Program 14 Product Example: Air Cleaners Technology Characteristics: ‒ UES: 120 kWh/yr. ‒ EUL: 7 years ‒ Incremental Cost: $18 Market Characteristics: ‒ 634,000 households with products in PG&E territory (~12% saturation). ‒ 90,500 in annual sales ‒ 23,000 sales from participating retailers (25% of total). ‒ 2,300 of these sales are program qualified (~10%).

15. Residential PLA Program 15 Without Scenarios: Participating and Nonparticipating Retailers Represents the base case, i.e., business as usual

16. Residential PLA Program 16 With Scenario: Participating Retailers Builds on Without scenario which represents business as usual

17. Residential PLA Program 17 With Scenario: Nonparticipating Retailers Builds on Without scenario which represents business as usual

18. Residential PLA Program 18 Air Cleaner: Participating Retailers With & Without Program

19. Residential PLA Program 19 NTGR, Sales, Benefits and Lifecycle Savings Net-To-Gross Ratio: Total Net Sales: 306,000 Total NPV Benefits: $4,545,000

20. Residential PLA Program 20 Program-Level Conceptualization of Net Savings 97,193 MWH 256,754 MWH 159,561 MWH

21. Residential PLA Program 21 Today’s Agenda RPP Program Overview and Market Transformation Review Review of Bass Diffusion Models Product Example: Air Cleaners Caveats

22. Residential PLA Program 22 Caveats: Forecasting Is Inherently Uncertain We plan to periodically revisit model assumptions Incorporate new data as it is available Adjust model as appropriate

23. Residential PLA Program 23 Risk Management  Martin Joseph and Alec Finney, AstraZeneca From forecasts to informed decisions…… Most Likely Forecast UncertaintyAssess Risk Plan & Accept Risk MonitorAssumptions Quality Behavior

24. Residential PLA Program 24 Next Steps Incorporating Cal TF member feedback into NTGR methodology. o Would you like any additional information about the proposed estimation approaches? o Do you have any changes you would recommend to our proposed methods? Application of the NTGR method to all RPP product categories to incorporate into a Cal TF work paper.