Green pricing

Summary: Green pricing takes advantage of the market for green products and services among those consumers who add value to these goods on the basis of their contributions to saving energy and preserving the environment.

Green marketing is a concept that opens opportunities in new markets or investments by increasing consumers’ roles and commitments to saving the environment. The basic notion of green pricing revolves around price points consumers are willing to meet to purchase green products and services. Consumers place value on green products and services, and their willingness to purchase recycled paper, unbleached coffee filters, and renewable energy services can boost opportunities for green pricing. Customers will often purchase a green product at a higher price. With regard to energy specifically, the term is applied to products and services that take advantage of renewable energy options and thereby confront the global energy crisis. Moreover, as the world is moving toward limited supplies of nonrenewable energy, green pricing can help support new investments in renewable energy sources.

Fossil-fuel-based energy resources—oil, gas, and coal—are limited and hence nonrenewable. At the same time, overuse of fossil fuels has caused severe degradation of the environment, especially the troposphere, as a result of air pollution and an increase in greenhouse gas (GHG) emissions, which in turn has contributed to an increase in average global temperature. Current patterns of using traditional energy resources are not only environmentally intolerable but also unsustainable: Fossil fuels will not be sufficient to satisfy our energy needs in the near future. Notably, we are depending on traditional energy resources without finding any substitution to reduce our overwhelming demand for energy. Many now cannot afford (and in the future most may not be able to afford) energy and utility costs as they have developed in the current economy; moreover, many of the world’s population lack any access to energy. With a rising global population and greater demand among developing economies for energy, the accelerating imbalance in access to sustainable energy is reaching crisis proportions.

Different energy-based utilities, such as electricity, are priced to reflect the costs that customer groups place on the overall system. Customers will pay a bit more for the electricity and other utilities that are environmentally friendly. The extra money that customers pay for their utilities can create a fund for renewable energy projects.

Hence there are multiple benefits of green pricing. First, it can support a wide variety of renewable energy options, such as wind and solar photovoltaic, which are environmentally preferred. Second, it can involve consumers actively in improving the environment; consumers may be willing to pay a premium of 5 to 15 percent over their electricity bill as a “donation” supporting nonpolluting renewable projects. Third, green pricing helps create a mixed energy plan incorporating renewables, reducing overdependence on fossil-fuel-generated electricity, and supporting cost-effective energy plans.

The success of a green pricing program depends on several factors. Consumers’ interest level is important in the design of a successful plan; consumers must show their interest in the concept and their willingness to pay for adopting environmentally preferable utility services. It must be understood that people’s level of understanding and willingness to accede to green pricing will vary with their income patterns and uses; business customers will need to be convinced that green pricing can contribute to their enterprises, and some may not find it effective. Potential customers must understand how such a program will work: whether it influences the degree of their use of electricity, for example, and how their costs are affected if they exceed a certain level of consumption. Surveys and focus group discussions with household and industrial consumers can reveal people’s reactions to a proposed green pricing program and simultaneously begin to educate them about costs.

Consumers’ commitment to and engagement with a green pricing program is paramount. It is important to implement pilot programs that will determine whether their long-term commitment exists or they are likely to exit the program. Any effort to establish a green pricing program must therefore link the costs clearly to the benefits in improved environmental initiatives. Consumers’ awareness of the benefits of green pricing through renewable energy is essential.

It is important to note that customers have inconsistent views on the cost and availability of renewable energy. The majority of people consider switching to solar, wind, and geothermal energy to be an expensive proposition. However, after seeing the benefits of a green pricing scheme—with renewables replacing fossil-fired generation with only a modest 10 percent price increase—most customers seemed surprised that renewables are so inexpensive in view of their benefits in reducing pollution. In the green pricing program of Traverse City Light and Power (TCL&P) in Michigan, for example, customers were able to choose to pay a premium of $0.0042 per kilowatt-hour (2023 pricing) to fund a 500-kilowatt wind turbine. As the benefits became known, more people were attracted to join the program. According to statistics from the National Renewable Energy Laboratory, Portland General Electric in Oregon had the most number of customers on green pricing programs in 2022 with 235,369. The utility company was followed by PacifiCorp, which is based in the Western United States, with 176,897, and Washington State’s Puget Sound Energy with 82,601.

A key principle of green pricing is that it should be linked with an alternative utility product or service and not be perceived as a charitable contribution. What the customer pays for the service should be directly related to the amount of energy the customer uses.

Knowledge-based motivational campaigns work well for promoting green pricing; people are often skeptical and need to be convinced that the premiums will indeed result in environmental benefits and are not based on the utility’s profit motive. To this end, an advisory board made up of knowledgeable experts who can independently verify the feasibility of the program can help legitimate it and thereby increase consumers’ support.

Setting the price point for the premium is equally important and must balance the expense of implementing renewable energy technologies with affordability. Market research must be conducted to assess where to fix premiums, and in some communities a menu of options may be appropriated. Moreover, such research makes it easier to estimate future costs and weigh them against projected benefits. Once reasonable estimates of customer revenues and expenses for required technology can be made, a realistic budget for the program can be generated.

Green pricing, if properly done, will satisfy our demand for nonpolluting and environmentally friendly electricity from renewable resources. Green pricing also creates an opportunity for the electric industry to respond to an increasingly competitive market for clean technology. Even those utilities that want to add renewable electricity sources to their traditional fossil fuel energy sources may benefit from green pricing programs.

While green pricing has the potential to contribute to alternative energies for environmental sustainability, such programs must be carefully designed for consumers’ satisfaction. At the outset, there will be a risk of imposing a financial burden on consumers, but consumers should know that green pricing, in the long run, will make access to renewable electricity easier, less expensive, and environmentally safer. To overcome initial objections, green pricing programs may be undertaken as experiments to analyze the levels of resources available and required for certain communities or country as a whole.

Bibliography

Friedman, Barry, and Mackay Miller. Green Pricing Program Marketing Expenditures: Finding the Right Balance. Golden, CO: National Renewable Energy Laboratory, 2009.

“Hydropower in Green Pricing Schemes: A Sustainable Source of Power?” Refocus 2, no. 6 (July/August 2001).

Moskovitz, David. “‘Green Pricing’: Customer Choice Moves Beyond IRP.” The Electricity Journal 6, no. 8 (1993).

Oltrnan, Jacquelyn A. Green Marketing: Opportunity for Innovation. 2nd ed. Chicago: NTC Business Books, 1998.

Swezey, B., J. Aabakken, and L. Bird. Utility Green Pricing Programs: Design, Implementation, and Consumer Response. Washington, DC: U.S. Department of Energy, Office of Scientific and Technical Information, 2004.

"Voluntary Green Power Procurement." National Renewable Energy Laboratory, www.nrel.gov/analysis/green-power.html. Accessed 1 Aug. 2024.

"Voluntary Green Pricing Program." Traverse City Light & Power, 2023, www.tclp.org/voluntary-green-pricing-program/. Accessed 1 Aug. 2024.