The value chain: a bridge across the microgen chasm?

There comes a critical point in a product’s life where it has to make a leap. That leap will take it from being something bought by the techno-philic few towards the eagerly awaiting masses. This is known as ‘crossing the chasm’.

Many products did not have enough spring in their stride to get them into the popular psyche. Think Sony’s Betamax VCR, the Sinclair C5, WAP phones; the list is a long litany of pumped up promises, failed hopes and dashed business plans.

However, commerce is a not simply about manufacturers selling directly to the end-consumer. There are a number of interdependent actors working within the so-called value chain. This article looks at how we could move towards mass-marketisation of microgeneration technologies by utilising key actor groups within the value chain.

Government programmes, such as Clear Skies, have focused on providing demonstration projects to end consumers in order to show potential customers that, yes, the technology does work.

The thinking is that believers within the market will spend that extra bit more and adopt the new technology. These are known as the opinion leaders in something known as the Rogers Curve of innovation adoption (Figure 1). Once the early majority see the technology in action, they will move to take up the torch.

 
Figure 1: Rogers innovation adoption curve
 
However, in the early 1990s Geoffrey Moore proffered the idea that a chasm existed between opinion leaders and the early majority taking up new technology. Products that made the leap, could make it in the big time. Those that couldn’t were doomed to the footnotes of history.

Many in the microgeneration industry feel that without direct government subsidisation of the products, the chasm beckons because uptake has not been forthcoming from the demand-side. The government’s argument goes that economies of scale can be reached through pump priming the end consumer market. Cost will be reduced and therefore more consumers will decide to buy in mobilising the early adopters. If they don’t then often the blunt tool of regulation comes into play.

The case of missing boilers
This was the sequence of events for condensing boilers. Brought in under the Energy Efficiency Programme, SEDBUK A-rated condensing boilers were being offered grants of up to £80 per boiler. Boiler sales grew at a rate of 77% per annum under such schemes as the A1-Boilers scheme. But things were not moving fast enough as they were still only accounting for roughly 20% of the total new sales market. There were still large amounts of resistance to the newer technology mostly from the industry and customers who had been burnt by shoddy workmanship blamed on the technology.

The government revised Part L of the Building Regulations in 2005, and A- or B-rated boilers became mandatory. In effect, the government dragged the late majority of installers, kicking and screaming along the Rogers curve. It had taken 10 or more years of toil to reach this stage.

Economists would say that regulating in this fashion is not an economically efficient way of changing society. Indeed, trade publication, H&V News proclaimed in April 2006 that the anticipated slump in A-rated boilers had finally arrived, as those who were not convinced of the condensing technology had their boilers fixed rather than upgrading them resulting in an overall collapse of sales as the late majority stopped buying new boilers.

This demonstrates that buried within purchasing decisions lies a complex set of interactions that are carried through the value chain. Regarding the latest microgeneration strategy, what if the somewhat minor sums of grant money fail to help the technology cross the chasm?

The £90 million of public money pledged to the Low Carbon Building Programme is welcome, however it is a drop in the ocean. Surely it is better to mobilise the awesome spending power of the British consumer, who spend close to £2 billion each year on fruit juice alone. So how could we persuade the early majority that microgeneration is a good idea?

Information is thicker than water
Information, particularly of a technical nature, is viscous and does not flow well through the value chain. Therefore actors within the value chain rely on trust built through relationships with their neighbouring actors in order to filter the information to a point where the actor feels confident in making a decision.

In the case of A1 Boilers, the customer relied upon the contractors for information of a technical nature, in this case plumbers and heating engineers to filter the information as to whether to install a condensing boiler or not. When incentivised both financially and otherwise, these actors selectively filtered and therefore promoted the product. For microgeneration, where technologies do not need further demonstration of how well they work – as in the case of solar domestic water heating – utilising this so-called market failure can help to achieve the aims of mass marketisation.

Show us the money
When all is said and done, the business of business is indeed business. Companies which act in a competitive environment try to outdo each other through providing better or cheaper products and services in order to survive.

A market research study carried out by Sustain in May 2006 as to the how the installer base viewed microgeneration was revealing. Questionnaires were sent out to over 4,500 installers registered on the A1 Boilers scheme. Over 10% responded to the survey, which asked questions regarding the way this stakeholder group viewed microgeneration.

100% of installers viewed solar domestic water heating as being relevant to their industry. Some 65% of respondents said that being trained in solar domestic water heating installation would give them a competitive advantage over their peers.

Figure 2: Numbers of installers expressing interest in microgeneration technologies

Interestingly enough, 75% of respondents were also interested in biomass and other forms of microgeneration. The Clear Skies list of accredited installers i.e. those who were eligible to install systems funded by the scheme for their clients to apply for funding was 120, most of these highly specialised. These installed around 2,200 units per year. Many of the non-accredited installers have given the industry something of a ‘cowboy’ reputation through poor workmanship. It is of little wonder that the roll-out of solar domestic water heating has been slow.

If government were serious, creating a scheme that provided incentives for these critical decision-makers would make sense. However, the latest support scheme – the Low Carbon Building Programme – makes this impossible. There are no incentives – and no mechanisms - for allowing incentives to be targeted at these key actors.

Government’s response appears to be that if there is so much interest, why is support needed? That is a fair question, however, plumbers and installers are by nature conservative. Inertia needs to be overcome. A well timed injection of cash, training and qualifications can have that effect, as the A1 Boilers scheme demonstrated.

Competition cuts costs
A typical boiler costs around £1,500 including installation in a domestic situation. Approximately 23% of this is labour charges, the remainder related to parts. This low price is due to the competitive forces at work. An installer cannot charge too much, or the customer will go elsewhere.

Consider solar domestic water heating. The Energy Savings Trust anticipates a slow demand in this technology due to the limited possibility of cost reductions. There are a limited number of installers accredited under the BPEC qualification, as well as being many non-accredited installers operating.

This allows those with the qualification to charge a premium. A ‘typical’ solar domestic water heating installation can cost upwards of £4,000. Up to and over of 50% of this can be on labour charges. By increasing the installer base, there will be a reduction through the competitive forces of commerce. Government appears to be singularly missing this point; a move towards ratios similar to that of the boiler market could deliver savings of around 25%.

Tickling the demand-side
Marketeers and psychologists refer to human wants and needs. Summarised, humans are highly social semi-tropical primates, evolving originally from the rift valleys of Africa. That means we need to feel part of something. It also means that we crave warmth.

The focus of much of the campaigning from the Energy Savings Trust has been to attempt to make people feel part of something, tapping into the deep need to belong and be accepted by society.

Individuals conform at the macro-level by being part of a society or nation. We compete at the micro level in order to stand out. Government works most effectively setting the macro-framework, while individuals make the fibres of society’s fabric. By utilising this competitive tension within the installer industry, government could help to achieve its microgeneration strategy.

The government seems to have recognised a gap in support within the population. The problem of climate change is being defined and negotiated by government, scientists, institutions, the middle classes. Large sections of UK society feel that this is not their agenda.

Hence, the EST’s ‘I’m Doing My Bit’ ad campaign was designed to show collective compliance as society moves towards a low carbon future. It was also about empowerment, an important human want that is much debated in academic circles.

It is interesting that in countries which are less stratified than our own such as Denmark and the Netherland, there is a much greater participation in government led initiatives. Citizens there are much more inclined to feel that they are stakeholders and that the government’s agenda is also their own. This suggests there may be a particularly large rump of laggard householders in the UK hence the case for trained and incentivised installers, is particularly strong.

Saving us from ourselves
In this days and age, where our biggest threat comes from ourselves and arguably our economic system, and, if the scientists and politicians are to be believed that climate change is the biggest threat facing humanity, then we need to use all the resources at out disposal to change our behaviour.

Therefore, what is needed at this stage in the development of behavioural change is a look at how to tap into both these tensions. From the perspective of business, which thrives on competition, using the need for company’s to differentiate their offering can help the technology to take off.

While there are a raft of measures coming online soon, including further building directives, proposals through the Sustainable Energy and Climate Change Bill, we appear to be missing a trick; building a bridge to a new energy future through a transformed installer base.

Disclaimer: The views expressed represent those of the author alone and are not reflective of Sustains corporate position.