RDI'S NEW STUDY, THE CONVERGENCE OF GAS AND POWER: Causes and Consequences, projects gas consumption in the United States will grow 2.4 percent per year, or a 26.8-percent increase from 1998 to...
Green Pricing: Removing the Guesswork
"Green pricing," at typical rates of customer participation, could expand demand for renewable energy beyond current levels by more than an order of magnitude, pushing down production costs for energy resources preferred by environmental advocates. And just as important, that expanded demand would occur outside of the regulatory framework (em matching capacity to customer needs and wants.In practice, the utility asks customers to pay rate premiums to fund the production or purchase of renewable resources. In return, the utility assures these customers that all or a portion of the electricity they use is being generated by renewable resources. In essence, green pricing represents a
free-market solution to some of the problems of demand-side management and resource planning.
Green pricing programs are currently available or under consideration at a score of electric utilities across the nation, and can be used to measure customer support for renewable energy under semi-competitive conditions. They offer insights into the process of unbundling the value of utility electric services to meet the needs of specialized or niche markets. Green pricing programs also provide an opportunity to test, in a low-risk setting, a utility's ability to accurately predict market share and price unbundled services. Given the attention it deserves, green pricing enables utilities to develop programs and products that address needs in small market niches, create business strategies, and target promotions to specific market goals.
Paying Premium Prices
To date, electric utilities offer four major green pricing or "renewable consumer" programs. They have fielded another five programs via limited test markets or market simulations (see sidebars on page 28). Figure 1 presents the proportion of customers that participate in each program at various monthly rate premiums. Each data point represents one program or market simulation. Note that as the average monthly surcharge or rate premium for a program increases, the proportion of customers willing to participate falls off, reaching less than 0.5-percent participation at the $15.00 per month level.
These data suggest that some electric service customers respond to more than just the price of electricity. There is clearly a customer niche willing to pay price premiums for improvements in environmental externalities. Niche markets are groups of customers with special needs and attitudes. These particular customers respond to renewable-based electric supply alternatives even when prices for these electric services are higher. They tend to weigh personal costs and benefits to find the best energy value for their money. In a competitive marketplace, utilities that pursue a least-cost marketing strategy will risk losing these core customers to providers who better meet their needs. The way to meet the specialized needs of these distinct customer groups is through product differentiation. Green pricing or renewable consumer programs are forms of differentiated electric service targeted to meet specific customer needs.
Customers who support green pricing believe that collective
action offers the best chance of addressing environmental problems. They are focused on problems of pollution and resource conservation and are relatively unconcerned about environmental "free riders" (em that is, they are willing to contribute to improve environmental externalities without worrying that those who do