How green is your green electricity?

13.11.2014
Figure 1: Customer benefits that can be influenced by marketing (Source: Herbes & Ramme 2014)

Renewable energies are an important element in the fight against global warming. Many countries around the world have set up ­support mechanisms for renewables. However, this support is temporary by nature and governments want renewables to ultimately become competitive with conventional energy sources. Providers ­therefore need to think about which products they can offer consumers and businesses at which prices and how they need to communicate their offers in order to ­make them attractive. This article looks at consumer preferences derived from international research and how electricity products in the market meet these preferences. Germany is one of the most developed markets for green electricity, but our analysis will ­also include facts and examples from other European ­markets such as France or the United Kingdom.

Consumer preferences

In the last 20 years researchers from many countries have explored consumer preferences and willingness to pay for green electricity. What are the factors that drive a consumer to purchase a green electricity ­product and possibly also to pay a price premium for it? First of all there are sociodemographic variables such as income or education. Then there are psychographic variables such as attitudes concerning ­environmental protection. While these two categories might serve providers in targeting the most ­promising customer groups, it is even more interesting for them to know those factors that can be influenced by ­designing a green electricity product and tailoring communication to customer preferences. These ­factors can be modelled as customer benefits. Which benefits can consumers draw from when subscribing to a green electricity product? These benefits can be divided into two categories: utilitarian benefits and psychological benefits (see figure 1)

Utilitarian benefits (left branch in the figure) can be divided into benefits that consumers derive from attaining their final goals, such as environmental ­protection, reducing CO2 emissions or furthering ­energy production in their region, and benefits that arise from the perceived effectiveness of the consumer’s choice. The perceived effectiveness can be increased by information that the provider gives on the environmental impact of a green electricity product or by the provider promising that a certain percentage of the energy corresponding to the product is produced in newly erected renewable power plants. Labels can also increase the perceived effectiveness.

Besides these utilitarian benefits, consumers can also profit from psychological benefits. Consumers might not always be aware of these benefits, but they can be demonstrated in choice experiments and certainly influence consumers’ choices. One of these psychological benefits is the so-called ‘warm glow’, i.e. a feeling of moral satisfaction derived from a consumer’s awareness that they are doing something good for the environment. Consumers experience this ‘warm glow’ irrespective of others knowing about their choice. This is quite different for the second category of psychological benefits that come from what marketing researchers call ‘conspicuous consumption’. This benefit is caused by the consumers letting others (whose opinion is significant for them) know about their choosing a green tariff and enjoying an increased social image. The third psychological benefit is called ‘virtual nature experience’ and consumers experience it when looking at pictures of nature in the providers’ communication.

Marketing green electricity in Europe – some examples

Let us first of all look at some of the European economies, taking a macro view. In Germany, as the most populous country, providers in 2011 already sold almost 34 TWh of green electricity and 12 % of all households had subscribed to a green tariff by 2012. In the UK, this number is below 2 %. In ­Finland, the percentage is also in the low single digits. Looking at the range of choices, consumers in Germany can choose between literally thousands of tariffs; a resident of Munich, for example, can choose between more than 100 green tariffs alone. While there are a number of green tariffs in the UK market, there is currently not a single tariff certified under the renewable energy scheme that is ­available for new domestic customers. However, there are some that are still available for existing customers. Consumers in France can choose between nine green electricity providers operating nationwide. A resident of Marseille, for example, can choose out of 19 green tariffs, ten of which offer 100 % green electricity and nine a green percentage between 10 % and 26 %.

So, apart from Germany, consumers’ options are not very numerous. But apart from the range of ­choices, do the products offered relate to potential customer benefits as already outlined above? Do the products contribute to a reduction in CO2 emissions, are they sourced regionally, do they foster new  installations and are they based on PV or wind power plants?

For Germany the picture is very clear; most of the green electricity sold in the country stems from old Scandinavian hydropower plants (see figures 2 and 3 below), i.e. German utilities buy RECS from hydropower plant operators in Norway, Sweden or Austria and upgrade their electricity to ‘green’. In the UK, not surprisingly, hydropower is also rather dominant due to its low cost. Besides domestic hydropower, UK tariffs are, like in Germany, based on Scandinavian sources. In France it is often not easy for customers to find out the origin of the RECS, but nationwide providers base their offers mostly on hydropower. Out of the ten 100 % green tariffs a resident of Marseille can choose from, four are purely based on hydropower, one is based on 95 % hydropower and for four the source is not disclosed. Only the Lampiris tariff, with a hydropower content of 26 %, relies more on wind power and others.

The practices in Germany as well as the UK and France run counter to consumers’ goals of increasing the share of renewables by furthering new installations. Most of the hydropower plants have been ­running for decades. Nor do these products relate to consumers’ desires to support regional production. Plus, hydropower is not as popular as PV or wind. However, looking at providers’ websites in Germany (we have performed an online content analysis of around 600 green tariffs in Germany), they do address these goals. In the providers’ communication, issues such as environmental protection or climate protection rank highest. Regional production is also frequently on the list of communicated benefits. When we look at perceived consumer effectiveness, providers mention the support of new plants and have their products labelled. Among the psychological benefits, German utilities address the ‘warm glow’ and ‘virtual nature experience’ but not ‘conspicuous consumption’.

In the UK, double counting has been a frequently mentioned concern. It means that providers sell green energy to consumers but also fulfil their renewable obligation (RO) for the same amount of energy and even may sell the Levy Exemption Certificates (LEC) that they receive for the renewable electricity they produce. To avoid double counting, providers would have to hold the equivalent amount of Renewables Electricity Guarantee of Origin (REGOs) and retire both ROCs (over and above the statutory requirement) as well as LECs when selling green electricity. According to a survey by Consumer Focus, only three suppliers in the UK fulfil these conditions. Another characteristic of the UK market is that the existing green tariffs often combine green sourcing (from renewables) with green funds (financial support for renewable projects) and, less frequently, carbon offsetting (compensating emissions with CO2 savings elsewhere in the world).

Another issue is that in Germany, the UK and France, providers leave consumers under the impression that they can support renewables and protect the environment while paying less for electricity than with their current supplier. On many providers’ websites price is a frequently mentioned benefit. But these low prices are only viable as long as providers base their offers on cheap RECS from ­hydropower with more or less no environmental benefit.

We have to conclude that many products in the European electricity markets do not contribute to consumers attaining their environmental goals by ­subscribing to a green tariff. But in providers’ communication protecting the environment and the climate ranks quite high. There is an obvious contradiction between consumer preferences and providers’ ­communication on one hand and the reality of their product offerings on the other. And there is another problem; if providers do not retire CO2 emission ­certificates corresponding to the amount of green electricity sold, the total number of certificates in the market does not change and therefore other players in the market can emit all the more CO2.

The tasks ahead

How can consumers’ environmental goals be linked more closely with green electricity products? On the state level, the necessary measures depend on the systems in place and differ between countries.

On the provider level, it would be beneficial to ­include more electricity from new installations in the portfolios. However, this will increase costs and put electricity suppliers in a situation where they have to convince their customers to pay higher prices. While studies from many countries have indicated that ­consumers are indeed willing to pay a premium for green energy, customers have grown accustomed to low or even zero premiums due to the providers’ above-mentioned ‘it is cheap and green’ communication strategy.

But consumers can also do something. Although the environmental effects of many green electricity products are doubtful, there are always a few tariffs that contribute to the construction of new plants. ­Labels can help to find these tariffs. However, these products will not be the ones where consumers can protect the climate and at the same time save ­money.

 Carsten Herbes

Further reading:

Herbes, Carsten und Ramme, Iris (2014): “Online marketing of green electricity in Germany – a content analysis of providers’ ­websites (link is external)”, Energy Policy 64 (6): 44-47; DOI: 10.1016/j.enpol.2013.10.083

Information on the author:

Carsten Herbes is a professor of international management and renewable energy at Nuertingen-Geislingen University (NGU), ­Germany and Director of the ‘Institute for International Research on Sustainable Management and Renewable Energy’. His research interests include marketing and acceptance of renewable energies, community energy projects, biogas and Japanese business and economy. Before joining NGU he worked as a management consultant and as the CFO of a bioenergy company.

 

This article has been published in Sun & Wind Energy issue 10/2014.