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 participating residential customers and 3 percent of participating businesses selected green power options.
While these results look encouraging, it must be remembered that most consumers did not switch suppliers. In Massachusetts, for example, the residential program is only 60 percent subscribed, and 96.5 percent of all eligible consumers have stayed with their existing supplier. In other words, only about 1 percent (31 percent 3 3.5 percent = 1.1 percent) of eligible residents selected a green power product in Massachusetts. These findings suggest that while suppliers can use environmental claims to capture part of the residential market, a large fraction of customers are likely to stay with their existing supplier, at least initially.
Moreover, it is important to note that green products in both Massachusetts and New Hampshire have not always involved renewables. In New Hampshire, which set few restrictions on supplier participation, green offerings have ranged from bird feeders, to tree seedlings, to a no-nuclear, no-coal, no-Hydro-Quebec portfolio. Massachusetts has taken a more controlled approach, selecting six companies to offer several specific products. Even so, green offerings have not always benefitted renewable power generators, particulary non-hydro generators.
California will provide the first real opportunity to test the appeal of green power marketing in a competitive context. With retail access set to begin in January, several energy service providers are planning to offer renewable energy products, including Green Mountain Energy Resources, Enron, Edison Source, and PG&E Energy Services. Others, including Foresight Energy and PacifiCorp, will target the wholesale market for renewables.
Strategy 1
Add Private Benefits
Only the "greenest" of consumers will contribute to green power programs for purely altruistic reasons. One way marketers can attract more customers is by adding personal, private value to the environmental benefits green power products already provide.
Green marketers may want to begin by emphasizing that a green product is a premium offering, not a social program. Green products should also be as tangible as possible so that customers have a better sense of what their money is buying. Here are some ways to make green power products tangible:
Charge a premium rate for renewably generated electricity rather than asking for donations.
Offer renewable electricity in blocks (i.e., individuals can purchase 25 percent, 50 percent, 75 percent, or 100 percent of their electricity from renewables).
Sell project shares (i.e., kW) rather than energy output (i.e., kWh).
Offer rooftop or community-based photovoltaic systems or local wind projects, as the Sacramento Municipal Utility District and others have done to good effect.
More generally, bundling private goods (the benefits of which only paying individuals enjoy) with public goods can greatly reduce incentives to free-ride. Though these private goods should not substitute for the primary green product, they can supply an important source of additional value to the customer. Some green power marketers have already used this approach, and have offered:
price stability on the renewables component of electricity purchases;
stickers, decals and other promotional and/or informational material;
membership kits that include discounts on environmentally friendly products;
matched donations to local environmental projects;
tree seedlings and bird feeders;
energy-efficient products and services; and
electricity bill roundups.
For business customers, adding private value may prove especially important and could include public acknowledgment of participating retailers. In the Massachusetts pilot, for example, Northfield Mountain Energy offers its business customers community recognition through free advertising and a plaque publicizing the environmental commitment of the business.
Marketers also could offer an array of green products and services, each with its own mix of private and public attributes. By developing a product line, a marketer can segment and expand its market. Already, several utilities that initially offered only one option are designing a range of green products. The Public Service Company of Colorado, for example, began with a single green pricing program but now offers multiple products.
Strategy 2
Appeal to a Sense of Community
Green power programs are likely to be most successful when they appeal to a sense of community and tap into social norms and values. Individuals may respond to social, psychological or moral pressures encouraging them to "go green."
Where possible, marketers should consider locally sited, visible projects and community-based marketing. Traverse City Light and Power, a small, municipally owned utility in Michigan, successfully used community-based marketing to build a 600-kW wind turbine that is visible from town. Local subsidiaries may prove more successful at green marketing than large, multi-state or multinational corporations seen as having little interest in any one community.
Marketing should target the most effective forms of social pressures and norms. The Roper Organization has identified several green consumer segments, each with a different level of environmental commitment and motivators. Environmental and public benefits may inspire certain consumers to purchase green energy, whereas local recognition and peer approval will influence others. Still others may be prompted to buy green out of guilt over their role in environmental degradation. In each case, marketing messages and products should be targeted accordingly, and careful market research will be important.
Strategy 3
Assure Customers They Make a Difference
Voluntary contributions to public goods often can be increased if individuals feel their own participation is pivotal to the provision of the good.
Public goods contribution programs are therefore often conducted under the condition that the good only will be provided if some minimum level of funding is obtained. For marketers, this tactic is useful for situations where a specific level of demand is needed to construct a renewable energy project. Offering to refund contributions if the funding target is not reached also can increase consumer willingness to pay. Similarly, if contributions or customer demand exceeds the amount needed for the specific project, green marketers could reimburse customers equitably or use the money to support additional renewable energy.
More generally, research shows that people who feel they can "make a difference" are more likely to contribute toward public goods. As such, marketing messages should affirm the concept of individual efficacy in environmental protection. Marketers may also want to appeal to an individual's sense of leadership, suggesting that by buying green they are leaders in their community.
Finally, it is important that consumers know their dollars are managed appropriately and are used to support renewable energy. Some ways to establish product and fund credibility include:
aligning with environmental groups;
setting up customer advisory boards;
disclosing fuel mix and emissions;
being certified or endorsed by third parties; and
publishing annual reports on the status of the program and use of funds.
Strategy 4
Focus on Customer Retention
One of the most important determinants of free-riding is repeat experience. While customers may not free-ride initially, participants may learn it is profitable after observing others do it.
By winning a long-term commitment from customers, marketers can limit opportunities for free-riders. Persuading residential customers to sign long-term contracts for the supply of renewable energy may not be possible, but commitments of one or even two years might be used without a significant loss of customer interest. In Detroit Edison's program, for example, residential customers must sign a two-year contract; for commercial customers, a 10-year commitment is required.
Marketers should also maintain an ongoing relationship with existing customers and offer staged private rewards to long-term customers. For example, if a customer purchases green power for a year, offer a discounted or free month of electricity. After the second year, offer discounts on environmentally friendly products and honor the customer with public recognition. In the Massachusetts pilot program, Working Assets offers new customers Ben & Jerry's ice cream or free long-distance calling. For customers who stick with Working Assets for five months, the company throws in a $25 gift certificate to a green product company.
A Place for Policy and Marketing
We believe that the persistence of the free-rider problem and its impact on the market's ability to supply public goods will remain an important justification for public policy support for renewables. Indeed, public goods offer a standard rationale for government involvement in a wide range of activities, including environmental protection and national defense. Regardless of one's position on policy support for renewables, however, a successful green power market is important in its own right. These programs expand consumer choice and provide a way to profit through raising environmental awareness and accelerating market adoption of cleaner energy technologies. By reducing consumer incentives to free-ride, the strategies we have described will help make green power marketing more effective.
Steve Pickle and Ryan Wiser are senior research associates at Lawrence Berkeley National Laboratory. Work reported here was funded by the assistant secretary for energy efficiency and renewable energy, Office of Utility Technologies of the U. S. Department of Energy.
1We are not claiming that renewable energy is a "public good," rather that the environmental benefits renewables provide - clean air, reduced risk of global climate change - are a form of public good.
2Two classic treatments of the free-rider problem are: P. Samuelson, "The Pure Theory of Public Expenditure," The Review of Economics and Statistics, 36; and M. Olson, The Logic Of Collective Action: Public Goods and the Theory of Groups, 1965.
3See for example, E. Ostrom, Governing the Commons, 1990; or D. Green and I. Shapiro, The Pathologies of Rational Choice, 1994.
4For more details, see R. Wiser and S. Pickle, Green Marketing, Renewables and Free Riders: Increasing Customer Demand for a Public Good, Lawrence Berkeley National Laboratory: lbnl-40632, Berkeley, Calif., 1997. The report is available free at eande.lbl.gov/EAP/UPP/index.html.
5For a review of green pricing and initial utility efforts to target the green consumer, see K. Baugh, et al. "Green Pricing: Removing the Guesswork," Public Utilities Fortnightly, August 1995.
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