"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 not contribute will also enjoy the environmental benefits. They tend to favor market solutions over government programs, and some express a distrust of government involvement. These customers understand the profit motive and support reasonable profits for participating utilities.
Demographically, green pricing program supporters are surprisingly diverse, including both urban professionals and rural families. The green pricing participant is not necessarily from the best-educated or wealthiest customer groups. Membership or prior contributions to environmental groups offers the most accurate demographic predictor of green pricing program participants.
Targeting Niche Markets
Marketing electric services in a competitive environment means learning how to creatively "unbundle" the values of the services for which consumers will pay. Improvements in environmental externalities illustrate only one of a number of unbundled electric service offerings that can be created for targeted customer niches. Developing differentiated products for niche markets involves three steps:
Match programs with customer needs. The first step in developing specialized products is to identify customer needs. Ask whether these needs match with company programs, services or opportunities to increase product satisfaction or brand loyalty. Without accurate projections of customer needs, expensive products and services may be developed that do little to improve the value customers perceive.
Identify willingness to pay. Identifying customer needs is of limited value if customers are unable or unwilling to pay for those services. Willingness to pay (WTP) studies involve presenting detailed product or service scenarios to customers and econometrically estimating WTP.
Size up the market niche. Use an accurate method of measuring the proportions of the customer group that would participate in green-pricing programs. Survey research (em including telephone polling, attitude surveys, and joint studies (em generally overestimates the size of this group. Market simulation or test market methods where customers actually commit to pay specific amounts for service can better separate those who report being willing to pay from those who actually will.
Electric utilities need marketing tools. Environmentally friendly electric resource options can help differentiate companies and their products from other electricity suppliers. Like the customers of telephone companies, electric utility customers who never think about who supplies their basic service will one day make decisions about their primary electric provider based on image, reliability, business philosophy, and perceived value.
Green-pricing programs offer dynamic, positive, low-risk opportunities that utilities can use to test their competitive marketing skills, before those skills become indispensable for company survival. For the few utilities that have employed them, green-pricing programs have provided proxies for a competitive market (em forcing utilities to listen to customers about needs, pricing, and program introductions. These programs have taught utilities to map business strategies and tactics to appeal to market niches, while there's still time for learning. t
Keith A. Baugh is executive director of research for The Eagle Group. Brian Byrnes works for Insight Research, Inc., Clive Jones for Economic Data Resources, and Maribeth Rahimzadeh for Wisconsin Public Service Corp.
Green Utility ProgramsSacramento Municipal Utility District (SMUD). Participants in the photovoltaic (PV) Pioneers Program pay a 15-percent premium (about $6 per month) over a 10-year period to have a 4 Kw, grid-connected PV panel attached to their roofs. The full cost of the rooftop system is subsidized through other municipal income. Current participation is only about 300 customers, even though 2 percent of the customer base express interest.
Public Service Co. of Colorado (PSCo2). Participants in the Renewable Energy Alternatives Program (REAP) support the accelerated growth of renewable generating resources through voluntary monthly pledges. Currently, more than 6,000 customers participate, at an average monthly pledge of approximately $2.
Traverse City Light and Power (TCLP). About 200 customers of Traverse City Light and Power, a Michigan utility, volunteered to pay a three-year premium of approximately $7.50 per month to fund construction of a 500-Kw wind turbine.
Portland General Electric (PGE). The "Penny Jar" Program enables customers to "round up" their monthly utility bills, at an average of 50 cents a month. This amount supports future renewable energy generation programs.Market Tests and Simulations
(Direct Mail Surveys)Public Service Co. of Colorado (PSCo1). A market simulation following a telephone survey asked customers to register to pay a monthly surcharge averaging $2. The rate premiums were being collected to underwrite a 20-Mw mixed technology renewable constructon program. Ten percent of electric customers aware of the program were projected to participate at an average of $1.90.
Wisconsin Public Service Corp. (WPS1). Both a telephone survey and direct mail asked customers to contribute a monthly surcharge averaging $2. The rate premiums were allocated to a 1.2-Mw solar renewable construction program. Around 8.6 percent of electric customers contacted registered to participants at an average of $1.88.
Wisconsin Public Service Corp. (WPS2). Direct mail asked electric customers to contribute a monthly surcharge averaging $2. The rate premiums would fund a 1.2-Mw solar renewable construction program. About 4.7 percent of customers contacted registered to participate at an average of $1.41.
Insight Research, Inc. (PRG1). A market simulation using direct mail asked customers to pay a $13 lease added to their monthly bills to fund installation of an individual PV electric system on their rooftops. Only 1 percent of customers requested an evaluation for program participation.
Insight Research, Inc. (PRG2). Direct mail asked customers to pay a $15 lease added to their monthly electric bills to fund installation of an individual thermal solar hot water heating system on their rooftops. Only 0.4 percent of customers requested an evaluation for program participation.
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