Green power is now offered to residential and commercial customers by more than 600 utilities in 34 states, and most observers expect that number to grow. We believe the opposite may happen—that in the next five years, almost all of these green-power programs may be gone. This trend already has begun. According to the U.S. Department of Energy, 12 utilities have discontinued green-power offerings, citing, among other things, a lack of profitability.
The most damaging inference from these events is that people do not want renewable energy or don't care about environmental protection, both of which are untrue. The second most damaging inference is that utilities that operate green-power programs cannot make any money at it—also untrue. Using either justification, utilities may be persuaded that discontinuing these programs makes sense. We disagree and believe that green-power programs can be a profit center.
In our estimation, only a handful of utility green-power programs are profitable. The math is quite simple. Consider the costs. The time and materials cost to begin a green-power program typically falls between $10,000 and $500,000. This does not include the costs involving sales and the acquisition of customers, which must be added to this amount. Once a program is operating, it may cost roughly $40,000 to $425,000 per year to administrate.1
Second, consider the revenues generated from green-power sales, which ideally should cover and exceed all these expenses. Most purchasers of green power are residential customers who typically consume about 10.6 MWh/year. We estimate that the amount charged to customers to cover costs typically falls between $7/MWh and $12/MWh sold. Only the top 10 programs in the United States have more than 10,000 green power customers; the rest have considerably less. A simple calculation indicates how the number of megawatt-hours sold and the revenue generated fall well short of being sufficient.
One can begin to sense the challenges. Under the current model most utilities employ, they make no profit selling green power, and in many cases they cannot cover the costs of sales and operations. To put it another way, just about every utility program in the United States is looking at extremely long payback periods—anywhere from five to 50 years. Data provided by DOE in its April 2005 list of the nation's top 10 utility green-pricing programs confirms this assessment.2 Even the most successful programs in the country may take greater than five years to obtain a cash positive situation, not including customer attrition, which is typically about 5 percent every year.
Utility managers are not likely to sustain green-power programs indefinitely if the programs cannot pay for themselves. Many managers of these programs are dedicated to making them successful, but they need to learn how to make their programs profitable. Unless they engage in a mid-course correction, and do it soon, many of the green power offerings in the United States eventually will be eliminated.
Green power can be a profit center—a sizable one—that also supports renewable energy power-plant construction. Therefore, we suggest six areas to focus on to make utility-based green-power programs flourish (or at least stop the bleeding and make a profit).
Throw out any current conception about renewable energy and customers, and create a new vision. Think about what might make the green-power program thrive. If a utility wants to have a successful product, it must keep the customer in mind. The customer is not the environmental activist or the government program liaison. The customer is, instead, the average person at home or at a large company or university. Envision what this customer might want: cleaner air, lower costs, price stability—to be a leader, to be cool, to be smart. Then consider the utility. What does it want from green power? Profit, PR, community relations, environmental protection or diversification of generation. Now start to collect those thoughts into a plan.
2. Customer Type
Sales and marketing must be targeted. Even if a company has huge sums to spend, it must choose a sector of customers to pursue. This could be hospitals, which have a health-related mission that clearly links to renewable energy, or socially responsible corporations, many of which are concerned with creating jobs, cleaning the environment, and maintaining an edge on their competition. Or it could be colleges and universities, where students are driving a groundswell of demand for renewable energy. Once a target sector is chosen, build a program around that type of customer.
3. Product Structure
Identify the attractiveness of the green-power product structure to the customer. Some customers are willing to support a clean energy economy no matter what the price, but these customers are few and far between, and very unlikely to consume large amounts of energy. Most customers want financial value. Without an intelligent product structure that offers a financial incentive to customers, sales will be minimal.
Utilities need to understand that green power can offer financial value to both customers and utilities. Currently, two simple methods provide financial value to customers. The first of these is to create a new tariff indexed to the cost of the renewable energy and fixed over time.
For example, Austin Energy offers renewable energy and is able to set a customer's "fuel charge" for up to 10 years. The tariff is fixed, guaranteeing customers a set price. As electricity costs go up over time, those that locked in their rates likely will pay less than those who did not choose the renewable energy option. This is the most successful program in the country, but to date it has not been fully replicated.
A second option is to provide a variable rate based on the cost of the renewable energy relative to the wholesale power market. The customer and the renewable-energy vendor negotiate a "strike price"—the amount the customer is willing to pay and that the vendor needs to earn to sell green power at a profit. If the market price of green power is below the strike price, the customer would pay the difference to the vendor. If the price of power exceeds the negotiated strike price, then the customer would obtain a rebate. This product structure could result in a credit to the customer if renewable energy costs are below the costs of the wholesale market.
4. Marketing Methods
Working in green power markets the past eight years, we have spoken with executives at dozens of utilities that have created green-power programs. Almost all believe that their market is unique and that their internal sales and marketing teams know how to sell the product.
Concurrently, we have witnessed countless dollars wasted in marketing methods that have failed over and over again. Facing mistakes takes courage, but will provide valuable lessons that can eliminate errors in the future and increase sales. At the same time, a review of some of the best and worst practices of other utility programs would be valuable as well. Contacting even a handful of both successful and failing utilities and asking them what is going right or wrong would be of immense value.
5. Sales Team
The sale of renewable energy is the selling of a vision, backed up by a product that offers some financial value (even if this is in the future) or other reward to customers. This is very different from offering a new demand-side management option or a new undifferentiated rate. Therefore, the sales team has to share that vision and effectively communicate it. Too often, we have found passionless sales representatives with a lack of knowledge about renewable energy. Utilities either should invest in educating sales team members and honestly evaluate their abilities to sell the product, or they should use outsourced talent.
6. Indirect Sales
If you dream of selling renewable energy by putting a kiosk with fliers in a mall, think again. The nature of the product is complicated for everyone from residential consumers to energy managers at Fortune 500 companies (of which we have spoken to hundreds). Consumers need to be educated about green power products and their benefits, and they also have to be convinced to make the change. They have questions about cost, product structure, how the electricity gets to one's building if it is generated far away, and how renewable energy is accounted for by the utility. Some kind of discussion is necessary to close a sale, especially with large energy users. This cannot be accomplished through indirect sales methods.
Any suggestion that there is no market for a new product that is not selling well usually is false. Markets take time to build. This has been done for organic foods, bottled water, and recycled materials, to name but a few. These markets succeeded because consumers came to the conclusion that certain products and practices involving health and the environment could be replaced by cost-effective alternatives that produced better results.
Green power is no different. It can be profitable for utilities, but it is going to require some changes in the way the product is structured, marketed, and sold. "If you build it they will come" has not proven to be applicable for green-power programs. Utilities have to build their programs in the right way, with the right rewards and incentives—then the customers will come. If utilities do not do this, then the effort to expand renewable energy markets, protect the environment, and break our country's dependence on foreign energy sources will suffer a great setback, one from which it will take many years to recover.