[BETA] Fortnightly

UNDER RETAIL COMPETITION, AT LEAST SOME electricity customers will make purchase decisions out of concern for the environment. A variety of utility green pricing programs already target environmentally concerned consumers. Recent experience in Massachusetts and New Hampshire confirms that utilities and power marketers are gearing up for full-fledged green power marketing to differentiate their products in a competitive environment.

Yet electric service providers marketing renewable energy and other more expensive but environmentally preferable power products run the risk that consumers may not buy green, but instead will "free-ride" on the environmental benefits. After all, why would a customer pay for more expensive green power when at least some others will, and when the environmental benefits of their purchases can be enjoyed by everyone? This logic may have already affected utility green pricing programs, which typically draw less than 3 percent of residential customers (and even fewer commercial and industrial customers) although as many as 70 percent of residential customers say they are willing to pay a premium for renewably generated power.

To boost consumer purchases of renewable energy products, marketers should maximize incentives to buy green. By definition, environmentally preferable products, including renewable energy, supply some level of "public goods."fn1 That is, individuals paying for renewable energy cannot fully internalize the environmental benefits these technologies provide; clean air is something we all benefit from, regardless of who pays for it. Traditional economic theory predicts that many individuals will not voluntarily contribute to public goods, but instead will opt to free-ride on others' contributions.fn2

What does this mean for green power marketers? It means they can expect that many consumers are unlikely to pay a premium for renewables. These consumers represent a significant source of lost revenue for green marketers.

Fortunately, much has been written about the conditions in which individuals voluntarily will contribute to public goods.fn3 This work suggests four strategies marketers can use to increase demand for renewable energy. These strategies combat free-riding by adding non-traditional private benefits and changing customer incentives to buy green.fn4 After briefly reviewing recent green power marketing experience, we discuss each of these strategies.

Green Power in New England

To date, utility experience with green marketing - or "green pricing" in a regulated context - has been mixed. At least 12 utilities support renewable generation using green pricing (see Table 1); about 30 have considered or are planning to offer the option.fn5 A number of programs have met their goals easily, and green pricing is becoming more effective as experience is shared. Nonetheless, fewer than 20 megawatts of renewable capacity is currently supported through green pricing programs, which typically draw less than 3 percent of residential customers.

The New Hampshire and Massachusetts direct access pilot programs offer a glimpse into green power marketing in a competitive environment (see Table 2). In New Hampshire, roughly half the suppliers marketing to residential customers are engaged in some form of green marketing. One survey of New Hampshire customers found that power suppliers' environmental messages strongly influenced 20 percent of those who switched providers. Similarly, in Massachusetts, 31 percent of