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LBNL-40632
UC-1321
Green Marketing, Renewables, and Free Riders:
Increasing Customer Demand for a Public Good
Ryan Wiser and Steven Pickle
Environmental Energy Technologies Division
Ernest Orlando Lawrence Berkeley National Laboratory
University of California
Berkeley, California 94720
September 1997
The work described in this study was funded by the Assistant Secretary of Energy Efficiency and Renewable
Energy, Office of Utility Technologies, Office of Energy Management Division of the U.S. Department of Energy
under Contract No. DE-AC03-76SF00098.
i
Table of Contents
Acknowledgments .................................................... iii
Executive Summary ....................................................v
Section 1: Introduction .................................................1
Section 2: Green Marketing in the Electricity Industry .........................5
What Is Green Power Marketing? .................................5
Utility Green Pricing Experience ..................................6
Retail Competition Pilot Programs ................................8
Merits and Drawbacks of Green Power Marketing ....................9
Section 3: Public Goods and Free Riders ..................................11
Private Goods and Public Goods ................................11
Does Renewable Energy Supply Public Goods? .....................11
The "Free Rider" Problem .....................................13
Section 4: Free Riders in Green Power Programs ............................15
Section 5: Reducing Free-Riding in Green Power Programs: Recommendations
for Marketers ...............................................17
Take Advantage of Community and Social Dynamics .................19
Assure Customers that They Can "Make a Difference" ................22
Emphasize Customer Retention .................................26
Enhance Private Value ........................................27
Section 6: Conclusions ................................................31
References ..........................................................33
Appendix A: Policy Implications—A Research Agenda ........................41
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Acknowledgments
We would particularly like to thank Joe Eto (LBNL) and Diane Pirkey (U.S. DOE) for their
encouragement and support of this work. Helpful review comments were provided by Ralph
Cavanagh (NRDC), Reid Detchon (Biomass Energy Alliance), Chuck Goldman (LBNL), Bill
Golove (LBNL), Brent Haddad (UC Santa Cruz), Jan Hamrin (Center for Resource
Solutions), Benjamin Hobbs (Johns Hopkins University), Ed Holt (Consultant), Richard
Howarth (UC Santa Cruz), Billy Lemons (Enron), Rudd Mayer (Land and Water Fund), Bart
McGuire (UC Energy Institute), Mac Moore (SEIA), Terry Peterson (EPRI), Kevin Porter
(NREL), Nancy Rader (AWEA), Tom Rawls (Green Mountain Power), and Steve Wiel
(LBNL). All remaining errors and/or omissions are, of course, the full responsibility of the
authors.
The work described in this study was funded by the Assistant Secretary for Energy Efficiency
and Renewable Energy, Office of Utility Technologies of the U.S. Department of Energy
under Contract No. DE-AC03-76SF00098.
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v
Executive Summary
Retail electricity competition will allow customers to select their own power suppliers and
some customers will make purchase decisions based, in part, on their concern for the
environment. Green power marketing targets these customers under the assumption that they
will pay a premium for “green” energy products such as renewable power generation. But
renewable energy is not a traditional product because it supplies public goods; for example,
a customer supporting renewable energy is unable to capture the environmental benefits that
her investment provides to non-participating customers. As with all public goods, there is a
risk that few customers will purchase “green” power and that many will instead “free ride”
on others’ participation. By free riding, an individual is able to enjoy the benefits of the public
good while avoiding payment.
This report reviews current green power marketing activities in the electric industry,
introduces the extensive academic literature on public goods, free riders, and collective action
problems, and explores in detail the implications of this literature for the green marketing of
renewable energy. Specifically, we highlight the implications of the public goods literature for
green power product design and marketing communications strategies. We emphasize four
mechanisms that marketers can use to increase customer demand for renewable energy.
Though the public goods literature can also contribute insights into the potential rationale for
renewable energy policies, we leave most of these implications for future work (see Appendix
A for a possible research agenda).
Green Marketing in the Electricity Industry
Green power marketing offers utilities and power marketers a way to differentiate their
products. To date, utility experience with green pricing has been mixed. Some programs have
met their goals easily, while others have been unable to elicit significant customer response
or have encountered stiff resistance from environmental and consumer groups. Though
market research shows a significant stated willingness-to-pay (40-70%), actual participation
in utility-supplied programs has not been nearly as strong—typically running under 3% of
electric customers. The market for green power is growing, however, and future programs
may be more effective than current ones. Limited evidence from retail competition pilot
programs in Massachusetts and New Hampshire confirms that suppliers will use
environmental claims to capture a segment of the residential market. Nonetheless, the pilots
also suggest that a large fraction of residential customers are likely to stay with their existing
utility rather than switch suppliers, and that suppliers may find cheaper ways of “greening”
themselves than by purchasing significant quantities of renewable energy.
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Public Goods and Free Riders
The extensive social science literature on public goods, free riders, and collective action is
relevant to green power marketing because renewable energy offers a mix of both private and
public benefits. Renewable energy is frequently claimed to provide three forms of public
benefits which, because of their nonrival and nonexcludible characteristics, cannot be captured
fully by participating customers: (1) environmental benefits that spill over to non-participants;
(2) research and development and the potential for long-term electricity cost reductions; and
(3) reductions in fuel price and supply interruption risks that cannot be fully captured through
private contracts.
For a public good to be provided at an economically efficient level, the sum of all individual
marginal valuations of the good (e.g., the marginal social benefit) should equal its marginal
cost. Absent policy intervention, however, public goods are susceptible to underprovision
because individuals have strong incentives not to contribute, but rather to free ride on others’
contributions. By free riding, the rational individual is able to enjoy the benefits of the public
good—given its nonrival and nonexcludible characteristics—while avoiding payment. Because
of this incentive to free ride, the standard presumption of neoclassical economics is that
private, decentralized markets cannot be relied upon to provide public goods efficiently.
In more recent academic work, however, the pervasiveness of the free-rider problem has been
questioned, and the degree and conditions under which individuals actually do voluntarily
contribute to public goods has been more thoroughly explored. Though this literature is often
contradictory, the bulk of the evidence suggests that people contribute toward public goods
at levels that exceed that predicted by traditional economic theory. At the same time, it is
clear that there continues to be a significant level of free riding in a wide variety of situations
and that the public goods market failure constitutes an important rationale for government
involvement in the provision of public goods.
Reducing Free-Riding in Green Power Programs: Recommendations for
Marketers
Given evidence of free riding in green power programs, green marketers should be interested
in ways to reduce the level of free riding and thus increase demand for their products. Using
the public goods literature as a guide, we find that there are practical ways for marketers to
boost participation in green power programs. Though we do not believe they will “solve” the
public goods market failure and thus eliminate the need for public policy, we identify four
mechanisms that can be used by green marketers to reduce the level of free riding and thereby
foster measurable support for renewables. We describe the specific implications of each of
these mechanisms for green power programs and highlight how they can be and have been
used by marketers and utilities.
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Mechanism #1: Take Advantage of Community and Social Dynamics
A number of authors suggest that increased communication in conjunction with reduced
group size can boost contributions to public goods. As group size increases, however, the
traditional economic literature generally concludes that communication will not alleviate free
riding because efforts to coordinate contributions, develop implicit contracts, and exert social
pressures become more difficult. Others, however, persuasively argue that communication,
social sanction, and decentralized cooperation for public goods occur more frequently than
is often assumed, and that neoclassical economic theory underestimates the importance of
social norms and values even in large-scale settings. At a minimum, green marketers should
consider: (1) appealing to a sense of community and developing visible, community-based
projects; (2) creating local, renewables-only subsidiaries; and (3) targeting marketing and
communications strategies to take advantage of various forms of social pressure.
Mechanism #2: Assure Customers that They Can “Make a Difference”
Voluntary contributions to public goods can often be increased if individuals feel that their
own participation is pivotal to the provision of the good. Because of this, public goods
contribution programs should be (and often are) conducted under the condition that the good
will only be provided in the event that a certain minimum level of funding—a provision
point—is surpassed. If the provision point is not met, customers can be refunded their
contribution (a give-back). If the provision point is surpassed, excess funds can be used to
reimburse customers or to purchase more of the public good. More generally, we expect that
any mechanism that is used to empower consumers to act and to ensure them that they are
“making a difference” will increase demand for renewables. Likewise, it is critically important
that customers feel that their dollars are being managed appropriately and are being used to
support renewable energy projects. Whenever feasible, marketers should therefore: (1) utilize
provision points, give-backs, and reimbursements in program design; (2) communicate the
importance and effectiveness of individual action in supporting renewables and protecting the
environment; and (3) establish credibility in the management and use of funds.
Mechanism #3: Emphasize Customer Retention
In experimental settings, two of the most important determinants of free riding are repetition
and experience. In a “single-shot” game, 40-60% of individuals are willing to contribute to
a public good, but these contributions often decline dramatically with repetition. Participants
may learn that free riding is more profitable only after observing several instances of free
riding by others and becoming disenchanted by their uncooperative behavior. Because of this,
marketers should: (1) consider urging or requiring customers to make longer-term
commitments to the program; and (2) place special emphasis on customer retention by
maintaining an ongoing relationship with customers, offering additional private rewards to
longtime customers, and continually informing existing customers of how their own
commitment is making a positive impact on the environment.
Mechanism #4: Enhance Private Value
Finally, and perhaps not surprisingly, bundling private goods with public goods can greatly
increase the degree to which individuals will voluntarily participate. Marketers should
therefore: (1) bundle value-added private goods with renewable energy, increase private value
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with the level of customer support for renewables, and personalize the environmental benefits
of the product; (2) be product-oriented and make green products tangible; and (3) offer a full
line of green products, each with a different mix of public and private attributes.
Renewable energy policies have included long-term power sales contracts, resource set-asides, and tax
1
incentives. These public purpose programs have, in large part, been funded and administered by electric
utilities under the supervision of regulatory agencies. This form of funding and administration will no longer
be feasible in a restructured industry, and some therefore believe that renewable energy development could
be an inadvertent casualty in the transition to competitive power markets.
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1.0 Introduction
Price-based competition is expected to be fierce as the U.S. electricity industry is
restructured. Yet retail competition may also create new markets for higher-cost renewable
energy resources. Retail competition will allow customers to select their own power suppliers,
and growing evidence suggests that some customers will make purchase decisions based, in
part, on the environmental characteristics of the power supply. Green power marketing seeks
to target such customers under the assumption that their attitudes toward the environment
will prompt them to pay a premium for “green” (i.e., environmentally preferable) energy
products, including renewable power generation. Green power marketing has been heralded
as offering significant, new, “market-based” opportunities for renewables such as solar, wind,
biomass, and geothermal (Nakarado 1996), causing some to suggest that public policies
supporting these technologies will no longer be needed (Bohi and Montgomery 1997).
Skeptics, however, have countered that because renewable energy provides public goods, few
customers will voluntarily purchase “green” power and most will instead “free ride” on
others’ participation (Rader and Norgaard 1996). Because the benefits of a public good
cannot be captured solely by the purchasing customer, traditional economic theory suggests
that individuals have strong incentives not to contribute but to free ride and enjoy the benefits
of the public good while avoiding payment. This situation constitutes a market failure and is
often a rationale for government intervention. In part because of the environmental, risk
reduction, and other public benefits provided by renewable energy, renewables have
historically received various forms of public policy support, but these support programs are
threatened by restructuring.
1
Individuals’ interest in and ability to free ride has important implications for green power
marketing. If individuals typically free ride on rather than contribute to public goods, then
they may be unwilling to pay a premium for renewable energy. If this is the case, green
marketing may not substantially increase renewables development and green power marketers
may not be particularly successful. On the other hand, if people—for whatever reason—are
willing to pay for public goods, then they may participate in green marketing at levels
sufficient to create a large new market for renewable energy developers and marketers.
Given the growing number of green marketing programs for renewable energy, the potential
for public goods free riders, and the suggestion that green marketing may be able to supplant
traditional renewables policies, important research questions emerge: (1) Will customer-
driven markets for renewables really develop? (2) What factors influence individuals’
incentives to free ride? (3) How might green marketing programs be designed to reduce free
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riding and thus increase customer demand for renewable energy? (4) Does the establishment
of green markets obviate the need for explicit public policy support for renewables? (5) What
economic and public policy justifications ultimately exist for continued support?
The purpose of this report is to begin to address the first three of these questions by applying
the extensive economic, public policy, behavioral, and marketing literature on voluntary
contributions to public goods and the “free-rider” problem. This academic literature cannot
be used to precisely estimate the level of free riding in the green power market, but it can
provide recommendations to green power marketers on how to reduce free riding and
therefore increase customer demand for renewable energy. Though the literature can also
contribute insights into the potential rationale for renewable energy policies (questions 4 and
5), we leave most of these implications for future work.
This report is organized as follows:
< In Section 2, we review existing green marketing efforts in the electric industry,
highlighting both utility green pricing programs and the retail competition pilot programs.
< In Section 3, we introduce the relevant academic literature on public goods and free
riding. We define public and private goods, identify the public benefits supplied by
renewables, and review the literature on the pervasiveness of the free-rider problem.
< In Section 4, we provide anecdotal evidence of potential free riding in the green power
market. While not irrefutable, this evidence suggests that free riding could significantly
reduce customer demand for renewable energy and that free riding should therefore be
of concern to green power marketers.
< In Section 5, we highlight the implications of the public goods literature for green power
product design and marketing communications strategies. The major contribution of the
report lies in this section. Specifically, we focus on four mechanisms that marketers can
use to increase customer demand for renewables by reducing the incentive to free ride,
and we highlight examples of their use by marketers. Though we do not believe these
mechanisms can “solve” the public goods dilemma and thus eliminate the need for public
policy, we contend that they offer realistic ways to foster measurable support for
renewables despite the public goods problem. These mechanisms, and the specific
marketing strategies that derive from them, should also find broader use by marketers of
other (non-renewable) forms of “green” power and, in fact, by all classes of marketers
who attempt to sell a product with public goods attributes.
< In Section 6, we provide general conclusions. Finally, though this report emphasizes the
implications of the public goods literature for marketing and product design strategies,
in Appendix A we outline a research agenda to better explore the possible roles and
rationales for government intervention in the development of renewable energy markets.
3
This report targets two very different audiences: (1) practitioners (green marketers,
policymakers, and renewables advocates); and (2) academics (economics, marketing, public
policy, etc.). For the practitioners, we hope this report summarizes and extends the academic
literature in ways that provide valuable insights into the necessary modifications of traditional
marketing practices in public goods contexts. For the academics, our review of green power
marketing experience and use of the academic literature is intended to contribute new insights
into the applicability and limits of existing public goods theories.
4
In the parlance of marketing, electricity suppliers will have to move from a product or sales philosophy to a
2
marketing, or customer-oriented, one. Some firms may go a step further, and incorporate an eco-marketing,
or enviropreneurial, strategy (Miles and Munilla 1995, Menon and Menon 1997).
Polonsky and Mintu-Wimsatt (1995) define green marketing broadly as, “the application of marketing
3
concepts and tools to facilitate exchanges that satisfy organizational and individual goals in such a way that
they preserve, protect, and conserve the physical environment.”
Customer motivations to conserve resources for the future and promote technical innovation may also be
4
important in “green” power purchases. These benefits of renewables are also public, however, so much of the
discussion in this report is also applicable for these motivations.
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2.0 Green Marketing in the Electricity Industry
2.1 What Is Green Power Marketing?
Regulated electric utilities have historically been charged with providing a commodity product
to their ratepayers at minimum cost. While some product and service differentiation exists
(e.g., energy efficiency, interruptible power, and time-of-use metering), it has typically been
limited in scope and scale (Nakarado 1996, Hirsh 1989). As retail electricity competition is
introduced, however, electric suppliers are increasingly seeking to add value by further
differentiating their products and targeting unique services to niche markets. Utilities will no
longer be monopoly providers of electric service, and, as is widely recognized in economics,
multiple firms operating in a competitive market and producing perfect substitutes face
immense price competition. To be successful in a competitive marketplace, product
differentiation and a customer orientation are essential (Levitt 1960, 1980).
2
Green marketing takes advantage of customers’ willingness to purchase, and sometimes pay
a premium for, products that provide private benefits as well as public environmental
benefits. Though attitudinal studies typically overestimate actual market response, they
3
consistently report that a large number of residential customers (40-70%) are willing to pay
a 5-15% premium for “green” products, including renewable energy (Baugh et al. 1994,
Farhar and Houston 1996, Nakarado 1996, Farhar 1994, Ottman 1993). Numerous examples
of products sold, in part, based on their environmental characteristics exist in industries as
diverse as forestry to household detergents, and for many electric service providers,
differentiation based on environmental attributes is likely to become a key marketing tool.
4
Residential customers are expected to provide the largest “green” power market, though
business customers have also expressed some interest (Holt 1997a, Byrnes et al. 1996,
Lamarre 1997).
In a regulated environment, electric utilities will continue to be the primary providers of
“green” power. These programs offer utility customers an optional service to support the
acquisition of renewable energy, and are often termed “green pricing” programs (Moskovitz
1993). Under retail competition, however, unregulated electricity suppliers will also develop
full-fledged green marketing programs. Though this report emphasizes the impact of such
Specifically, the table lists utility programs that have already installed renewables capacity or are supporting
5
existing renewable facilities. It excludes programs that are not yet supplying renewable energy to customers
(e.g., Public Service Company of Colorado-Windsource, Fort Collins Light and Power, Portland General
Electric, Cooperative Power Association, Dakota Electric, City of Austin, Arizona Public Service, Hawaiian
Electric, etc.). For a more comprehensive listing of utility programs, see the U.S. DOE’s Green Power
Network (http://www.eren.doe.gov/greenpower/).
The Sacramento Municipal Utility District’s PV Pioneers program is an exception because their program is
6
heavily subsidized.
6
marketing efforts on renewable energy, power marketers will make many types of
environmental claims and not all “green” products will include renewable energy. Experience
is limited in this area, but retail competition pilots in New Hampshire and Massachusetts are
instructive and are discussed below. Table 1 provides a brief, non-exhaustive overview of
some of the utility green pricing and retail competition pilot experience.
5
2.2 Utility Green Pricing Experience
The first utility-run green pricing programs were initiated in 1993 by Public Service Company
of Colorado, the Sacramento Municipal Utility District, and Gainesville Regional Utilities.
Since then, a number of utilities have launched green pricing programs and many others have
explored the option (Holt 1996). Today, approximately 20 U.S. utilities have announced and
are marketing green pricing programs. At least nine utilities have already installed renewables
capacity or are supporting existing renewable facilities based, in part, on customer response
(see Table 1).
Utilities have structured their programs in a number of ways, including:
<< Renewable Energy Purchase: Offers renewable power, often at a premium
electricity rate or with fixed monthly premiums, to customers.
<< Renewable Energy Donation: Offers optional donation programs, the proceeds of
which are used to support renewables projects.
<< Renewable Energy Facility on Customer Premises: Leasing/ownership options that
result in the installation of small renewables projects (typically photovoltaics) on
customers’ premises.
Donation-based programs typically have the lowest average per-customer contributions (often
$2/month or less). Renewable energy purchase programs frequently induce higher
contributions of up to $10/month. Customer-sited facilities generally require the highest
premiums.
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Table 1. Experience with Green Power Marketing in the Electric Industry
Utility Programs Product Customer Funding Participation Results
Traverse City Light Wind power (600 kW) $7.6/month premium 245 residential and 20
and Power business customers have
signed up*
Sacramento Rooftop photovoltaics $4/month premium 350 residential customers
Municipal Utility (total 1.2 MW) have signed up*
District
Sacramento Geothermal (3 MW 50% and 100% blocks 900 residential customers
Municipal Utility contracted; approx. averaging $3.6 and have signed up, with most
District 1 MW customer $7.2/month opting for the 100% block
demand)
Detroit Edison Photovoltaics (28.4 kW) Average $10/month 195 residential customers
premium have signed up*
Public Service of Photovoltaics (15 kW) Average $1/month 16,000 customers have
Colorado donations donated
Northern States Rooftop photovoltaics $36/month (effective) 17 residential customers
Power (total 34 kW) premium have signed up*
Gulf Power Photovoltaics for lighting $1.75/month premium 510 residential customers
(100 W) have signed up
Gainesville Photovoltaics (10 kW) Average $3.3/month 650 customers have
Regional Utilities donations donated
Wisconsin Public Photovoltaics on school Average $1.7/month 2,600 residential
Service rooftops (total 36 kW) donations customers have donated
Wisconsin Electric Biomass and hydro 25, 50, and 100% 7,100 customers have
(5 MW) blocks averaging signed up, with most
$2.75, $5.5 and opting for the 25% block
$11/month
Retail Product(s) Customer Funding Participation Results
Competition
Pilots
New Hampshire No-nuke/no-coal/no- Premiums generally 20% of customers claim
Hydro-Quebec; hydro; less than 1¢/kWh** that environmental factors
pumped hydro; strongly influenced
conservation; bird decision; 40% of pilot
feeders; seedlings; participants did not switch
charitable donations suppliers
Massachusetts SO2 allowances; solar Premiums generally Most customers chose
panels; charitable less than 1¢/kWh** supplier based on price; of
donations; hydropower; the 3.5% residential
conservation; no- customers that chose to
nuke/no-coal/no-Hydro- switch, 30% selected
Quebec; electric car “green” service
raffle
*Participation limited by size of project
**The power supply offerings in both New Hampshire and Massachusetts by non-utility marketers were lower-
cost than the franchise utility provider. The “green” cost premiums stated here are relative to other non-utility
product offers.
A recent program introduced by the Public Service Company of Colorado, for example, appears to be having
7
good success in signing up customers, and at least 10 MW of wind power are expected to be supported by this
program.
For an excellent description of the New Hampshire pilot program, see Holt (forthcoming).
8
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Utility experience with green pricing has been mixed (Holt 1997c). Some programs have met
their goals easily, while others have been unable to elicit significant customer response or
have encountered stiff resistance from environmental and consumer groups. Though market
research shows a significant stated willingness-to-pay (40-70%), actual participation in
utility-supplied programs has not been nearly as strong—typically running under 3% of
electric customers. To date, less than 20 MW of renewables have been supported by these
programs, compared to total U.S. non-hydroelectric renewables capacity of approximately
9,500 MW. The market is growing rapidly, however, and future programs may be much more
effective than current ones.
7
2.3 Retail Competition Pilot Programs
Under retail competition, green power marketing may come from both incumbent utility
companies and unregulated retail suppliers. Though a number of states have passed legislation
to open up their electric industries as soon as January 1, 1998, at this point only two states,
New Hampshire and Massachusetts, have established comprehensive retail competition pilot
programs that include residential customers and green power suppliers.
New Hampshire
8
The New Hampshire Public Utilities Commission’s two-year pilot program encompasses 3%
of the state’s electricity load, prorated across all customer classes (approximately 17,000
customers). More than 30 companies have registered as electric suppliers, and a wide array
of marketing claims and value-added products and services are being offered. Of the dozen
suppliers marketing to residential customers, at least six are engaged in some form of green
marketing. As noted in Table 1, these “green” offerings range from bird feeders and tree
seedlings to a no-nuclear/no-coal/no-Hydro-Quebec portfolio. Based on a customer survey,
the environmental message of power suppliers appears to have strongly influenced 20% of
the pilot participants that switched suppliers; 40% of those who elected to participate in the
pilot decided not to switch suppliers, however (Myers 1997). Though the average customer
in the pilot will save at least 10% on their electric bills, “green” suppliers in New Hampshire
charge up to 1¢/kWh more for their services than their “non-green” counterparts; some of the
“green” suppliers offer prices that are competitive with the non-green products.
For a description of the Massachusetts pilot program, see Rothstein (forthcoming).
9
Overall then, only 30%*3.5% = 1% of residential customers selected a “green” option.
10
9
Massachusetts
9
The Massachusetts Electric Company is conducting a one-year pilot program. Whereas New
Hampshire set few restrictions for supplier participation, the Massachusetts pilot has taken
a more controlled approach, selecting six companies to offer a number of different products
in just four cities and preparing a booklet for customer participants describing their options.
Approximately 4,750 residential and 550 business customers have subscribed to the pilot and
have switched suppliers. Though most selected the lowest-cost suppliers, 31% of the
residential and 3% of the business customers signed up with providers that offered “green”
options. Most residential electricity customers (96.5%) elected to stay with their existing
supplier, however, and the pilot is therefore not fully subscribed. As in New Hampshire,
10
“green” products vary substantially, ranging from charitable donations targeted to
environmental groups to the retirement of sulfur dioxide allowances. Green marketers charge
up to 1¢/kWh more than their “non-green” counterparts, though some of the “green”
suppliers offer prices that are price competitive with the non-green products.
Lessons from the Pilot Programs
There are clearly limits to what can be learned from these pilots (see Landon and Kahn 1996,
Lineweber 1997) and we have no intention of fully evaluating them here, but a number of
preliminary conclusions can be reached. First, environmental claims can clearly be used to
capture a segment of the residential market. Second, a good fraction of residential customers
who decide to select an alternative supplier may base their decision, in part, on environmental
concerns. Third, in the near term, a majority of residential customers are likely to stay with
their existing utility rather than switch, thus limiting the size of the “green” power market.
Finally, there is clearly no single definition of a “green” product, and suppliers will use an
array of environmental claims to attract customers. It is not yet clear whether non-hydro
renewables projects will be a significant component of these “green” offerings.
2.4 Merits and Drawbacks of Green Power Marketing
Given the emerging nature of the green power market, it is not yet analytically possible to
estimate its ultimate size or its potential to create significant new markets for renewable
energy. However, because the public benefits that renewable energy provides cannot be
captured solely by those individuals that make voluntary purchases or donations, some
question whether many customers will voluntarily pay more for renewables (Rader and
Norgaard 1996). Moreover, if renewables are perceived as overly expensive, customer
demand may be especially low and the “green” market will only achieve a fraction of the
10
support for renewable energy that might be socially desired and possibly attained through
public policy. Given this concern, skeptics further worry that the initial enthusiasm for “green”
markets could eliminate or delay the establishment of new policies designed to benefit
renewables (Serchuk and Miller 1996). Finally, absent mandatory fuel source and
environmental disclosure, green marketing may be particularly susceptible to misleading
environmental claims, and marketers may easily discover cheaper ways of “greening”
themselves than by purchasing power from renewable facilities (Holt 1997b).
Supporters of green power marketing, on the other hand, argue that it has the potential to
create a new, long-term, customer-driven market for renewables that does not hinge on
government policy (Nakarado 1996). They frequently point to surveys, which indicate a
large, latent demand for renewables, and argue that accessing that demand will be critical for
the long-term success of the renewables industry (Serchuk and Miller 1996). They do not
believe that green marketing will doom renewables policy, and in fact some assert that by
educating customers of the merits of renewables, the establishment of new governmental
programs may be facilitated (Harrison 1997). While these proponents do not necessarily
dismiss the economic legitimacy of the “free rider” problem, they argue that marketers will
find ways to successfully sell renewable energy products.
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3.0 Public Goods and Free Riders
There is an extensive literature in the social sciences on public goods, free riders, and
collective action. This academic literature has important implications for green power
marketers and provides tools for understanding: (1) the nature of renewable energy as
providing both public and private goods; (2) the degree to which individuals will voluntarily
pay a premium for or donate funds to renewables; (3) ways to reduce free riders; and (4) the
appropriate roles of public policy and green consumerism in renewables development. We
introduce this literature in this section by describing the characteristics of public and private
goods, the public good attributes of renewable energy, and the nature and extent of the free-
rider problem. Then, in Section 4, we provide anecdotal evidence of potential free riding in
the green power market. In Section 5, we identify the implications of the public goods
literature for green power marketers seeking to increase customer demand and reduce free
riders. Though we do not fully address the policy implications of the public goods literature
or assess many of the issues discussed in Section 2.4, we outline a research agenda in
Appendix A that could be used to better explore the possible roles and rationales for
government intervention in the creation of renewable energy markets.
3.1 Private Goods and Public Goods
Economic goods can be broadly separated into two categories: private goods and public
goods. A pure private good is one in which the producer unilaterally bears the cost of
production and a single consumer enjoys all of the benefits of consumption. In contrast, a
pure public good has the defining qualities of nonrivalry and nonexclusivity. Nonrivalry
means that one person’s consumption of the good does not limit the capacity of others to
consume the same good, and nonexclusivity implies that it is not feasible to prevent
consumption by those who fail to pay for the good. Common examples of public goods
include national defense, lighthouses, and clean air. In reality, of course, most goods are
neither purely public nor purely private.
3.2 Does Renewable Energy Supply Public Goods?
If renewable energy only supplied private goods, the academic literature on public goods and
free riders would have no relevance. Renewable energy, however, provides a mix of private
and public benefits. The commodity supply of electricity produced by a renewable energy
project and transmitted to an electricity customer is clearly a private good. It is equally clear,
however, that renewables also contribute toward public goods. Specifically, three
characteristics of renewable energy are often claimed to have public benefits because these
Our intent here is to describe the characteristics of renewable energy that are often claimed to have such
11
public benefits, without commenting on the persuasiveness of the claims or the magnitude of the benefits.
This public good is not, of course, limited to renewable energy technologies. Because many of the traditional
12
electric generation technologies are mature, however, they are unlikely to be plagued as seriously with this
form of market failure.
Given the reduced reliance on oil in U.S. electricity generation, this public benefit of renewable energy has
13
likely decreased (Hirst and Eto 1995); however, the potential for natural gas price shocks remain (Jaccard
1995).
12
benefits exhibit the traits of nonrivalry and nonexclusivity and therefore cannot be captured
fully by individual customers; instead, these benefits accrue to all customers, irrespective of
individual participation in green power programs.
11
First, renewables often supply significant public environmental benefits compared to other
forms of electricity generation (Proops et al. 1996, Chupka and Howarth 1992). An individual
customer who purchases renewable energy is unable to enjoy the full local, regional, national,
and even international environmental benefits that their purchase provides. Instead, these
benefits spill over to all customers affected by the cleaner environment.
Second, the research and development and “intellectual property” that goes into creating
renewable energy systems and components is a public good because private actors often
cannot easily appropriate the full social surplus from their innovations, even with patents and
property rights (Teece 1986, Fisher and Rothkopf 1989). In other words, by helping to
commercialize new renewable energy technologies, green power customers are benefitting
all of society in the form of possible long-term electricity generation cost reductions, and may
be unable to capture the full social benefits of their efforts.
12
Finally, the reductions in fuel price and supply interruption risks provided by renewables (Hoff
and Herig 1996) are claimed by some to have public characteristics. Though, at first glance,
it might appear that these risk reductions are largely private goods because they can be
captured by individual customers who purchase renewables, Rader and Norgaard (1996)
argue that risk reduction is systemic and has public benefits because it reduces shocks to the
economy as a whole. Specifically, the authors contend that “electricity producers do not have
sufficient incentives to diversify adequately to avoid the above [fuel] risks because their
profits depend on their diversity relative to other producers and because most of the costs of
the shock reverberate throughout the economy rather than being concentrated among
electricity producers (Rader and Norgaard 1996).”
13
Hardin (1968) suggests a similar result for open access resources.
14
Two collections of essays encompassing the range of perspectives in this general debate are: Friedman (1996)
15
and Hogarth and Melvin (1987).
Johansen (1977) adds that there is little empirical evidence that the correct (i.e., socially efficient) revelation
16
of preferences for public goods by politicians has been of any practical significance. Johansen claims that the
two-tier system of electors and representatives tends to diminish the significance of the problem of true
preference revelation in policymaking. He does not, however, provide a detailed commentary on situations
in which individual (non-political) choice is involved.
13
3.3 The “Free Rider” Problem
Most broadly, for a public good to be provided at an economically efficient level, the sum of
all individual marginal valuations of the good (e.g., the marginal social benefit) should equal
its marginal cost. Absent policy intervention, however, public goods are susceptible to
underprovision because rational individuals have strong incentives not to contribute, but
rather to free ride on others’ contributions. This situation arises because any individual’s
contribution to a public good has a negligible effect on its provision, and by free riding the
rational individual is able to enjoy the benefits of the public good—given its nonrival and
nonexcludible characteristics—while avoiding payment. Because of this incentive to free ride,
the standard presumption of neoclassical economics is that private, decentralized markets
cannot be relied upon to provide public goods efficiently (see, for example, Samuelson 1954,
Olson 1965). This underprovision constitutes a form of market failure and is often a
14
rationale for intervention by the government to encourage or mandate the provision of public
goods.
In more recent academic work, the pervasiveness of the free-rider problem has been
questioned, however, and the degree and conditions under which individuals actually do
voluntarily contribute to public goods has become the subject of a great deal of theoretical
and experimental research in economics, political science, sociology, and psychology. Davis
15
and Holt (1993) review experimental (laboratory) investigations designed to assess the extent
of individuals’ willingness to contribute voluntarily to public goods. This literature offers
divergent results, with outcomes heavily dependent on the specifics of the experimental
design. Though nearly full free riding has been generated in some contexts (e.g., Kim and
Walker 1984, Isaac et al. 1985), a number of studies reveal that 40-60% of individuals are
willing to contribute even though, individually, they would be better off not contributing
(Marwell and Ames 1981, Isaac et al. 1984). Noting these and related findings, Green and
Shapiro (1994) criticize what they see as an insufficient empirical foundation for neoclassical
free-rider theory, writing that “...the empirical basis for the standard rational choice claims
derived from the work of Olson is quite thin.” Green and Shapiro conclude that, at least as
far as collective action and voting behavior are concerned, no causal link has been established
between the incentive to free ride and actual mass behavior. Though Ostrom (1990) does
16
not believe that free-rider-based models are wrong per se, she contends that they utilize
extreme assumptions and that “we do not learn from these models what individuals will do
Specifically, it is hard to establish what would occur in the absence of free riders.
17
14
when they have autonomy to craft their own institutions and can affect each other’s norms
and perceived benefits.”
It is difficult to empirically evaluate the magnitude of free riding in real world situations
(Green and Shapiro 1994, Smith 1980), but actual observations of individual behavior can
17
provide anecdotal evidence of the extent of free riding. Some individuals do indeed participate
in and contribute to charitable and mutual aid organizations. Moreover, consumers have
begun to purchase “green” products (Wasik 1996, Ottman 1993, Cairncross 1992,
Vandermerwe and Oliff 1990, Simon 1992). Though the marketing emphasis for many such
products focuses on personal health, convenience, quality, and price, and “green” product
sales have not been nearly as robust as some had predicted, the recent proliferation of “green”
products may provide some evidence of a willingness-to-pay for public goods. Finally, in as
much as any one individual’s vote is unlikely to decide the outcome of an election, rational
individuals have a strong incentive not to vote, but to free ride on the public good of a
functional democracy (Downs 1957, Tullock 1967, Green and Shapiro 1994); as political
participation in the U.S. suggests, however, though many do free ride on the electoral
process, millions also participate.
Even where people do contribute toward public goods, however, it is not clear whether they
do so with the public good in mind. Where contributions exist, defenders of traditional
economic theory counter that the contributions may not capture true willingness-to-pay
(WTP) for public goods, but rather only the “warm glow” that comes from the act of giving
(Andreoni 1988) or the presence of coercion or sanction, private inducement, or social
pressure (Chong 1996). Olson (1965), for example, asserts that it is because of the free-rider
problem that mutual aid entities such as labor unions resort to centralized enforcement
mechanisms and private inducements (i.e., noncollective goods) to ensure contributions.
Where public goods provision is motivated by these “private” interests, underprovision of the
good may remain.
We believe the public goods theory as traditionally described by neoclassical economists
provides a useful, if idealized, model of human behavior. Because it underestimates the
complexity of influence processes, behavioral change, and human decision making, the theory
is not perfectly predictive. Perhaps the most important lesson that can be gleaned from the
diverse and sometimes contradictory academic literature described above is that people do,
in fact, tend to contribute to public goods at levels that exceed that predicted by traditional
economic theory. At the same time, it is clear that, even with private inducements, sanctions,
or other experimental design variations, there continues to be a significant level of free riding
in a wide variety of situations; indeed, the prevalence of free riding and the corresponding
market failure is a key rationale for government involvement in activities ranging from
environmental regulation to the provision of national defense. The bulk of the evidence
therefore supports the conclusion that the voluntary provision of public goods will typically
be suboptimal, but not zero.
This attitude-behavior discrepancy is, in fact, quite prevalent in environmental and energy issues more broadly
18
(Smith and Haugtvedt 1995, Gill et al. 1986, Richie and McDougall 1985).
15
4.0 Free Riders in Green Power Programs
Although the absolute magnitude of the free-rider effect has been questioned, it is apparent
that free riding can present a significant problem in a wide variety of situations. Moreover,
even if public goods provision is efficient from a societal point of view (i.e., if the market
failure is already corrected through public policy), aspects of the free-rider effect are still
relevant for green power marketers that attempt to sell a product whose public benefits are
not fully appropriable by individual purchasers. If considerable free riding exists in green
power programs, then marketers will have to adapt their product and marketing strategies for
a public goods context. Before we address the ways in which green marketers can reduce the
number of free riders (see Section 5), however, it is important to assess the potential
magnitude of free riding in the green power market. Though the general academic debate on
public goods and free riders provides some insights, more specific evidence of free riding in
the green power market would be desirable. Unfortunately, because it is difficult to assess the
true social WTP for public goods in a collective situation in which all must contribute, it is
not possible to easily estimate the magnitude of free riding in green power programs.
Given current customer purchases of and donations to renewable energy, it is clear that either:
(1) some customers are indeed willing to voluntarily contribute to products with public goods
attributes; and/or (2) that sufficient private value is obtained from purchasing “green” power
to partially mitigate the incentive to free ride on the public goods provided by renewable
energy. At least three pieces of, albeit anecdotal, evidence can shed some light on the
magnitude of free riding in existing green power marketing programs. Though not irrefutable,
this evidence suggests that free riding is a meaningful issue for a large segment of electricity
customers.
First, actual participation in existing green pricing programs (typically under 3%) is far lower
than stated WTP as expressed in surveys and market research (40-70%). One of the
18
potential reasons for this divergent result is that there is no incentive to free ride in a
hypothetical situation (i.e., a survey) but there may well be significant free riding when faced
with an actual “green” product that provides public goods (Rose et al. 1997). It is important
to note, however, that the difference between stated and actual WTP may be explained by a
number of factors unrelated to program free riders, including:
<< Problems with the Surveys: Strategic bias, starting-point bias, the lack of a
perceived budget constraint, the “warm glow” associated with providing the “correct”
answer, the lack of careful consideration on the part of the individual, and a shortage
of information on the particular program;
16
<< Problems with the Products: Green marketing products and services that do not
meet customer needs, poor marketing of the product or program, and the “normal”
product diffusion process.
Because of these “problems,” even with private goods it is normal to use a calibration factor
to adjust stated intent and produce an estimate of subsequent product demand (Morwitz and
Schmittlein 1992, Dickie et al. 1987, Urban et al. 1983, Jamieson and Bass 1989), and actual
purchases often bear a weak association with stated purchase intentions. For green power
programs, isolating these various “problems,” and determining the role (if any) of free riding
in the difference between stated intent and actual participation, should be the subject of
further study; for now, the divergence can only be used as anecdotal evidence of free riding.
Second, though it is difficult to explore the free-rider problem through survey research, as
noted above, several results do provide some insight into the issue. When asked whether they
prefer voluntary individual contributions to renewable energy or a mandatory (collective)
program in which all must pay, a number of customers prefer the latter approach. Although
not a scientific survey, 28 of the 30 customers that responded to the query by Salem Electric
supported the collective payment approach while just two preferred voluntary action (Rader
and Norgaard 1996). Given a more extensive statistical sample of seven utility service areas
(each with a survey sample of at least 300), Freeman (1996) reports that, in six out of seven
cases, customers preferred the mandatory (collective) approach but by close margins.
Research conduced for the New England Electric System also found that a number of
customers wanted the costs to be shared equally by all (Willard and Schullman 1994).
Third, based on the most comprehensive market research conducted to date, the Public
Service Company of Colorado segmented their residential customers into three groups. The
most ardent supporters of “green” power (39% of customers) were generally found not to
care about “environmental” free riders. A large segment of the population (36%), however,
was found to be deeply troubled about program free riders (Baugh and Byrnes 1994).
These three pieces of evidence suggest that a potentially substantial level of free riding will
occur in green power programs. Free riders may therefore represent a significant lost market
opportunity for green marketers. We turn next to strategies for reducing the level of free
riding in order to increase customer demand for renewables.
Dawes (1980) defines a social dilemma as a situation characterized by two properties: (1) the payoff to each
19
individual for defecting behavior is higher than the payoff for cooperative behavior; and (2) all individuals
in society receive a lower payoff if all defect rather than cooperate. Based on this conceptualization, social
dilemmas include public goods, collective social traps, prisoner dilemmas, social fences, and the “tragedy of
the commons” (Wiener and Doescher 1995).
Economists have also developed a number of sophisticated “incentive compatible” mechanisms to encourage
20
the honest revelation of preferences for public goods and have designed efficient cost sharing mechanisms.
These mechanisms, which include Clarke-Groves (Clarke 1971), Groves-Ledyard (Groves and Ledyard 1977),
and the Smith public good auction (Smith 1979, 1980), are typically relatively complex and require a
centralized authority and iterative rounds of interaction. They are therefore unsuitable as tools for the private
provision of renewables via green marketing and are of little use to marketers who are interested in increasing
customer demand for their products.
17
5.0 Reducing Free-Riding in Green Power Programs:
Recommendations for Marketers
Given the evidence described in Section 4 on free riding in green power programs, green
marketers should clearly be interested in ways to reduce the level of free riding as a means of
increasing demand for their products. Fortunately, the more recent public goods literature
suggests marketing and product design strategies to do just that. Marketing professionals and
academics are beginning to explore this literature, and the literature on social dilemmas more
19
broadly, as they seek to develop specific, tangible approaches to “selling brotherhood”
(Wiener and Doescher 1991). More generally, Rothschild (1979) and Bloom and Novelli
(1981) identify a set of problems that confront “social marketing” practitioners who attempt
to transfer traditional marketing approaches to “social” products. The most general
conclusion from this work is that traditional marketing strategies must be adapted for
effective use in a public goods context.
Figure 1 provides a roadmap for this discussion and lists some of our key conclusions. While
there are overlaps, we identify four mechanisms that can be used by marketers to reduce free
riders: (1) take advantage of community and social dynamics; (2) assure customers that they
can “make a difference”; (3) emphasize customer retention; and (4) enhance private value.
20
We describe the specific implications of each of these mechanisms for green power programs,
and we highlight how they have been used by marketers and utilities. Our application of these
ideas to the green power market is exploratory in nature, and the effectiveness of each of
these mechanisms has been the subject of some academic debate, but our hope is to provide
concrete recommendations to green marketers on how to increase customer demand for
renewable energy through product design and communications strategies that encourage
Take Advantage of
Community and
Social Dynamics
Enhance Private
Value
Assure Customers
that They Can “Make
a Difference”
Emphasize
Customer Retention
Increase Customer Demand for
Renewable Energy
! Appeal to a sense of
community and develop
visible, community-
based projects
! Create local,
renewables-only
subsidiaries
! Target marketing and
communications
strategies to take
advantage of social
pressures
! Utilize provision points,
give-backs, and
reimbursements in
program design
! Communicate the
effectiveness of
individual action in
protecting the
environment
! Establish credibility in
the management and
use of funds
! Urge or require longer-
term customer
commitments
! Emphasize customer
retention via ongoing
communication and
special rewards
! Bundle value-added
private goods with
renewable energy and
personalize the benefits
! Be product-oriented
and make green
products tangible
!
Offer a full line of green
products
Goal
Mechanisms
Lessons for
Green
Marketers
As one might expect, designing an effective “green” product is more involved than simply reducing the
21
number of free riders. Holt (1997c), Farhar and Houston (1996), Swezey (1997), and LAW and CORE (1997)
all provide additional recommendations to green power marketers.
As part of California’s renewable energy policy, for example, the state legislature has passed a bill to set-aside
22
approximately $5 million for public information and education efforts on renewable energy and green power
markets.
18
Figure 1. Reducing Free Riders: Mechanisms and Lessons for Green Marketers
customers to contribute toward the public good (see Figure 1). Though we do not believe
21
these mechanisms can “solve” the public goods dilemma and thus eliminate the need for public
policy, we contend that they offer realistic ways to foster measurable support for renewables
despite the public goods problem. We also believe that most of our suggestions are cost
effective, as evidenced by their use in existing green power marketing efforts. In practice, of
course, the green marketer will have to trade-off the costs of these mechanisms with their
potential benefits. Finally, though we do not emphasize this application, we think that many
of the recommendations discussed here also have implications for the design of public
information programs on renewable energy.
22
Isaac and Walker (1988b) also note that communication helps individuals learn the optimal group strategy
23
of full contributions.
In the energy efficiency literature, there is a growing consensus that important social and behavioral aspects
24
of energy use have been neglected in favor of technical-economic analysis (see, for example, Stern 1986,
Lutzenhiser 1993, Gonzales et al. 1988, Costanzo et al. 1986, Dennis et al. 1990) .
19
5.1 Take Advantage of Community and Social Dynamics
A number of authors have suggested that increased communication in conjunction with
reduced group size can boost contributions to public goods. For example, in an experimental
setting, Dawes (1980), Isaac and Walker (1988b), and Isaac et al. (1985) demonstrate that
nonbinding communication among a small number of individuals can reduce free riding. In
effect, in a small group situation, individuals are able to establish implicit contracts among
themselves and to exert social pressure so that the “nonbinding” contract is followed. As
23
group size increases (beyond 10 individuals), however, the economic literature generally
concludes that communication will not alleviate free riding because efforts to coordinate
contributions and attempts to “punish” free riding become more difficult. Olson (1965) argues
that, absent a central authority or other significant inducements, large groups are typically
unable to provide themselves public goods. Though Olson (1965) recognizes the possibility
for social, psychological, and moral pressures to increase contributions, these elements are
downplayed except in small group situations. Even where social factors are considered in
economic models of collective choice, they often serve as post hoc rationalization of research
results rather than as critical explanatory variables upfront (Green and Shapiro 1994).
Ostrom (1990), however, suggests that communication, social sanction, and decentralized
cooperation for public goods occur more frequently than is often assumed, and documents
multiple cases of collective management of common pool resources. More generally, authors
such as Granovetter (1985) have taken issue with the undersocialized or atomized-actor
explanations of neoclassical economic theory, which are claimed to not accurately reflect
social and cultural constraints inherent in human behavior, and which may therefore
underestimate the importance of social norms even in large-scale settings. Granovetter
observes, “Much of the utilitarian tradition, including neoclassical economics, assumes
rational, self-interested behavior affected minimally by social relations.” Indeed, studies of
economic behavior suggest that all forms of exchange are strongly influenced by social
obligations (e.g., to friends or family) and normative expectations (e.g., community
standards). Ultimately, however, even Ostrom admits that the effectiveness of
24
communication and community sanction are affected by group size. Others note the
“distancing” and dislocation that occur as markets and economies grow in scope and scale,
and argue that, at a certain point, these effects inhibit communication and community
structure (Princen 1997, Norgaard 1995).
20
Numerous studies have attempted to identify and profile environmentally motivated customers
based on demographic, socioeconomic, cultural, personality, and attitudinal variables (see
Schwepker and Cornwell 1991 and Granzin and Olsen 1991 for good literature reviews).
Many of these studies have found that individuals who are less alienated from their social
world and are more involved in community affairs are also more likely to participate in
environmentally friendly behavior, and that interpersonal influence is linked to consumption-
related behavior. Indeed, Wiener and Doescher (1991) contend that the problem of selling a
public good can be viewed as a problem of gaining cooperation in a social dilemma.
Communications strategies must therefore directly attack the barriers inhibiting cooperation,
thus inducing individuals to take actions that are not in their narrow self-interest. Clearly then,
the lesson for green marketers is that size, social pressures, and communications strategies
matter. Three specific recommendations merit further discussion.
1. Appeal to a sense of community and develop visible, community-based projects: Green
power programs are likely to be more successful when they appeal to a sense of community
and can rely on implicit or explicit social norms and values. Locally sited, visible projects, and
community-based marketing should be considered. Messages that emphasize the collective
harm that environmental problems cause and the need for everyone to work together to help
solve the community problem can foster a sense of “we-ness,” and such messages should be
used wherever feasible (Granzin and Olsen 1991). Traverse City Light and Power, a small
(8,000-customer) municipally-owned utility in Michigan, successfully used community-based
marketing to build a 600-kW wind turbine that is visible from town. The community
enthusiasm for and success of Traverse City’s green pricing program supports the general
idea that local and community-based programs may do well (LAW and CORE 1997). At the
same time, the success of the Sacramento Municipal Utility District program demonstrates
that the program sponsor does not necessarily have to be small to build on this sense of
community pride. Finally, in the Massachusetts pilot program, AllEnergy’s emphasis on its
local roots and commitment to the local environment demonstrates that community-based
appeals are likely to be made by marketers post-restructuring.
2. Create local, renewables-only subsidiaries: An important extension of the discussion
above is that local subsidiaries may be more successful at green marketing than multinational
corporations seen as having little or no interest in any one community. If this is true, size and
community focus may require larger companies to spin-off and decentralize their green
marketing efforts, and maintain a local presence in different communities. A local,
renewables-only subsidiary might be most successful. Companies must trade off these benefits
with the potential loss of corporate brand identity, but subsidiarization is, in fact, already
underway. For example, ReGen Technologies, though not locally based, is the “green” power
division of Allenergy, which is itself a joint venture between two eastern electric utilities (New
England Electric Systems and Eastern Enterprises); and, though green power is not a primary
focus, Enron has registered a local subsidiary in California under the name South San
Francisco Utility Solutions, Inc.
3. Target marketing and communications strategies to take advantage of social pressures:
Wherever possible, marketing messages and product positioning should be targeted to the
As early as 1976, Henion and Wilson (1976) predicted that as the environmental movement grew, the
25
uniformity of the group would dissipate. The challenge for marketers would therefore be to identify the
motivations of various customer segments and to target messages directly to those motivations.
Scott (1977) examines the impact of one particular type of influence strategy on socially conscious behavior,
26
namely the “foot-in-the-door” technique, which entails gaining compliance with an initial small request in
order to facilitate subsequent larger requests. According to self-perception theory, this technique is effective
because people use their own initial behavior to infer a positive disposition toward the issue (i.e., “I am an
altruist, I really must believe in this action.”), thus enhancing the likelihood of subsequent behavior. Scott
(1977) provides modest support for this explanation of the success of the technique, and Gonzales et al. (1988)
contend that the technique may be effective in inducing energy efficiency behavior. These results imply that
green marketers may want to offer a low-renewables-content product initially, and only later ask their
customers to purchase a more expensive product with higher renewables content. Another possible behavioral
influence approach based on self-perception theory is to label someone a “green” or “altruistic” consumer
before asking for a monetary commitment. Though these influence strategies have proven successful in some
situations, Burns and De Vere (1982) demonstrate that, at least as a gasoline conservation device, they are
not always successful.
Numerous studies have found that an important determinant of an individual’s behavior is others’ influence
27
(Bearden et al. 1989). Though the most environmentally conscious consumers may generally be less status
conscious than their counterparts (e.g., Anderson and Cunningham 1972), Pickett et al. (1995) suggest that
individuals who exhibit a lower willingness-to-pay for environmental goods and services might be best
targeted through interpersonal influence via peer pressure. For example, a green marketer could employ local
opinion leaders and/or celebrities to deliver the appeal to “buy green.” Smith and Haugtvedt (1995) and
Wiener and Doescher (1991) go on to suggest that “green” purchases by some individuals may serve a social
identity function, and that these people may only participate in a program if they are confident that others are
as well (i.e., cooperation will be met with cooperation, and defection will be met with defection). In these
cases, marketing messages should emphasize that others are participating or plan to participate, therefore
exploiting the fear of social sanction to establish a “bandwagon” effect. Perhaps for this reason, in public
communications green marketers regularly overstate the magnitude of customer interest in purchasing green
power by using customer survey results. Because the influence of others can have a significant impact,
Granzin and Olsen (1991) suggest that campaigns stress the importance of encouraging family and friends
to participate. Costanzo et al. (1986) argue that “social diffusion” of this type offers a promising alternative
to mass media appeals in inducing energy-efficiency investments because information that is obtained through
personal communication is typically more effective than information obtained through the mass media (Kotler
and Roberto 1989). Perhaps to take advantage of these pressures, in the Massachusetts pilot program Working
Assets offers to send customers that sign up a friend a 30-minute pre-paid phone card. Finally, business
customers may be most motivated by the possibility of recognition and improved corporate image, and green
21
most effective forms of social pressure and social norms. The Roper Organization (1992)
25
and others have identified a number of consumer segments, each with a different level of
environmental commitment and each with a different set of motivators. Some of these
consumers will be inspired to purchase “green” energy by the environmental and other
benefits of their action (i.e., true altruism) and by social norms. In these cases, marketing
messages might be best targeted to the seriousness of the environmental problem and to the
benefits of individual action. Other customers may be more influenced by the possibility of
26
recognition in the local community, by gaining the approval of others, and/or by knowing who
else is contributing (i.e., status and peer pressure); marketing messages and product
positioning should be targeted accordingly. A final group of customers may be guided by
27
marketers should devise a recognition program to attract these customers.
Smith and Haugtvedt (1995) argue that promotions that induce customers to feel that it is their duty or
28
responsibility to make environmentally responsible purchases are likely to be more effective than those that
portray this behavior as idealistic.
The provision-point/give-back combination thus attacks not only the public-goods/self-interest barrier to
29
participation, but also the “sucker” barrier identified by the social dilemma literature (Wiener and Doescher
1991). An individual is a “sucker” if he or she contributes to a public good and that good is subsequently not
provided.
22
a feeling of guilt over their contribution to environmental ills, and marketing messages might
emphasize the personal responsibility each individual has in improving the state of the
environment. A mixture of marketing messages and product offers will be required to
28
maximize residential and business customer purchases of or donations to renewable energy,
and careful market research can help refine product communications strategy. The Public
Service Company of Colorado, for example, has conducted detailed market research in order
to develop more effective product features and communication themes. Not surprisingly, they
have found that product demand varies with different marketing messages, and that target
marketing based on attitudinal segmentation can be effective (Fish 1997).
5.2 Assure Customers that They Can “Make a Difference”
Related to the importance of group size and community is the issue of “making a difference.”
Voluntary contributions to public goods can often be increased if individuals feel that their
own participation is pivotal to the provision of the good (Chong 1991). Because of this,
public goods contribution programs should be (and often are) conducted under the condition
that the good will only be provided in the event that a certain minimum level of funding is
surpassed. If this minimum aggregate contribution level, frequently called a provision point,
is not met, participants are often refunded their contribution. A combination of provision
points and refunding mechanisms (also called a give-back option) can increase the incentive-
compatibility of public goods provision and increase voluntary WTP because these
mechanisms eliminate the risk that customers will “waste” their money if the provision point
is not met. Moreover, potential contributors face a risk that failure to contribute will result
29
in the complete absence of the public good and each contributor may therefore perceive
himself or herself as potentially pivotal to the provision of the good.
The game theory literature has evolved over time, but generally supports the incentive-
compatibility of the provision-point/give-back combination (Palfrey and Rosenthal 1984,
1988, Bagnoli and Lipman 1989). An experimental assessment of provision points by Isaac
et al. (1989) finds that a provision point alone can increase public goods provision, but that
contributions decline rapidly with repetition. Provision points combined with give-back
options, however, can increase contributions to 90% of the socially efficient level and the
normal decay of the aggregate contribution level appears to be eliminated by the give-back
Though provision points, give-back options, and reimbursement mechanisms could be used by unregulated
30
electricity suppliers post-restructuring, they are more likely to be applied in utility-based green pricing
programs.
23
option. Bagnoli and McKee (1991) report similar results. The provision-point/give-back
combination does not always perform this impressively, however. For example, if meeting the
provision point does not require contributions by all participants, as would typically be the
case for green power programs, then the provision-point/give-back combination may provide
a smaller incentive to contribute toward public goods, what Isaac et al. (1989) call the “cheap
rider” problem. Under these conditions, though the provision-point/give-back combination
can still be effective in increasing contributions, it seems unlikely that it would raise
participation to 90% of the socially efficient level. Finally, equitably reimbursing contributors
if total contributions exceed what is necessary to fund the project may be another way to
reduce free riding (Schulze 1994, Smith 1980). Alternatively, money collected in excess of
the provision point could be used to extend benefits and therefore increase the production of
the public good (Rose et al. 1997).
Rose et al. (1997) perform a field experiment and a laboratory investigation intended to
specifically test the effectiveness of these mechanisms in the context of a utility-run green
pricing program. In the field experiment, only 16% of the individuals indicated that the
provision point increased their interest in the green pricing program. The give-back option,
on the other hand, was widely favored; 46% of the respondents indicated that this attribute
increased their interest. Despite these results, econometric analysis of the actual behavior of
the subjects suggests that interest in the provision point is a significant explanatory variable
in the participation decision, whereas interest in the give-back option is not a significant
explanatory variable. In their laboratory investigation, Rose et al. (1997) find that, while
demand revelation is not perfect, the provision-point/give-back/extended-benefits combination
results in nearly the efficient-contributions level. For green power marketers then, the
following recommendations apply.
1. Utilize provision points, give-backs, and reimbursements in program design: Provision
points and give-back options would be most appropriate in donation-based green marketing
programs and for situations where a specific customer demand is necessary for the
construction of or contract with a renewable energy project. In these cases, the provision-
30
point/give-back combination should be strongly considered; customers should be assured, for
example, that if sufficient funds are not obtained to build a specific project, their contributions
or premiums will be given back. Moreover, if contributions or customer demand exceed the
amount needed for the specific project, green marketers should assure their customers that
they will be reimbursed equitably (e.g., payments could be returned on a proportional basis)
or that additional renewable energy will be supported (extended benefits). Provision points,
give-back options, reimbursement, and extended benefits help customers feel that they are
“making a difference” and have the ancillary benefit of reducing the likelihood of marketer
mismanagement of funds. Though experience with these devices in the green power market
is too limited to determine their overall effectiveness, a number of green pricing programs
For example, Niagara Mohawk Power Corporation performed market research on provision points and give-
31
back options (Miedema 1995, Rose et al. 1997), and had intended to include such mechanisms in their green
power program. Their program has since been put on hold, however (note that the utility did return customer
contributions when the program was put on hold). Traverse City Light and Power and Fort Collins have both
successfully used provision point mechanisms.
Fine (1990) and Ellen et al. (1991) caution that emphasizing the severity of the social problem can be risky
32
because it may enhance concern at the expense of perceived effectiveness. That is, at some point, the gain in
terms of increased concern will be offset by making the problem appear to be so overwhelming that there is
nothing a single individual can do. Instead of focusing on the magnitude of the social problem, marketers may
instead want to emphasize, in a positive manner, that the problem can be solved. Wiener and Doescher (1991)
argue that such an approach may reduce the “sucker” barrier discussed earlier.
Ackerman (1997), for example, argues that individual recycling efforts are driven by: (1) the ease with which
33
individuals can participate; and (2) the visibility of the actions taken to promote the public good. Though
individuals may care passionately about the threat of global warming, Ackerman argues that it is far more
difficult to mobilize individual action on this issue because it is hard to have an immediate, perceptible impact
on the problem.
24
pledge refunds if a given contribution level is not reached, and others will refund contributions
if they exceed a pre-specified level.
31
2. Communicate the effectiveness of individual action in protecting the environment: On
a more general level, if individuals are to contribute toward a public good, we expect that any
mechanism that is used to empower consumers to act and to ensure them that they are
“making a difference” will increase customer demand. Schwepker and Cornwell (1991) and
Balderjahn (1988), for example, find that individuals with a higher “internal locus of control”
(i.e., people who feel they have more control and can “make a difference”) are more likely to
contribute toward public goods. Similarly, Ellen et al. (1991) and Webster (1975) show that
“perceived customer effectiveness” contributes significantly to the prediction of many pro-
environmental behaviors. These studies suggest that product promotion strategies that
recognize that an individual can, by his or her own efforts, improve the environment can be
very effective. Wiener and Doescher (1991) further advise marketers to use appeals that give
individuals a sense of leadership, that is, the impression that they can lead their community.
Marketing messages that emphasize (or even overstate) the marginal impact of an individual’s
investment in a public good and the importance of the collective cause are common and,
despite theoretical prescriptions to the contrary, experimental assessments (Isaac and Walker
1988a) and practical experience (Walsh and Warland 1983) show that customers do respond
to these variables (though outright dishonesty will likely result in a loss of credibility and
consumer backlash). Finally, “scope reduction” strategies that reduce the perceived size of
32
the social dilemma by focusing on a smaller, distinct goal (such as the construction of a
locally-sited PV project) can also increase participation by enhancing perceived customer
effectiveness (Wiener and Doescher 1991).
33
3. Establish credibility in the management and use of funds: It is also critically important
that customers feel that their dollars are being managed appropriately and are being used to
As noted by Pieters (1991) with reference to recycling, “Consumers tend to be motivated to spend time and
34
effort to separate their garbage if they perceive their behavior is effective. If actual recycling does not take
place, the motivation to participate drops rapidly and dramatically.”
Williamson (1985) refers to this as primarily a problem of opportunism combined with an information
35
asymmetry between customers and marketers.
Many consumers view environmental claims skeptically (Cairncross 1992, Ottman 1993) and a large number
36
of environmental ads contain misleading, vague, and deceptive claims (Kangun et al. 1991). The Federal
Trade Commission’s environmental marketing guidelines can provide some guidance as to the legal
requirements of “green” claims. To further reduce the potential for customer backlash, Polansky (1995) lays
out a checklist of nine guidelines for green marketing claims, most of which emphasize the need for clear,
specific, substantiatable, product-related promotions.
25
support renewable energy projects. A fundamental tenet of economic theory is that, when
34
certain conditions are satisfied, profit-seeking firms will supply goods and services efficiently.
Some of the most important of these conditions are that consumers can, without undue cost
or effort: (1) make reasonably accurate comparisons of the products and prices of different
firms before the purchase is made; (2) reach a clear agreement with the chosen firm
concerning the goods and services that the firm is to provide and the price to be paid; and (3)
determine subsequently whether the firm complied with the resulting agreement and obtain
redress if it did not (Hansmann 1980). One can easily see that these conditions may be unmet
when dealing with “green” power, especially due to the intangibility of the product, the public
goods it provides, the separation between the customer and the power producer, and the
difficulty in policing private marketers. In this case, a particular type of market failure has
occurred, what Hansmann (1980) calls a “contract failure,” and customers will under consume
the good. To reduce this principal-agent problem, enhance credibility, and increase customer
35
participation in green power programs, marketers should consider:
< Alliances with environmental groups
< Customer advisory boards
< Comprehensive, company-wide environmental initiatives to improve corporate image
< Disclosure of fuel mix and emissions
< Certification or endorsement by third-parties
< Developing an industry-wide code of conduct
< Annual reports on the status of the program and use of funds
< Visible community-based projects with clear environmental benefits
< Product-related programs rather than donation-based ones
Finally, marketers should generally avoid vague environmental claims. Specific, factual claims
can increase credibility. Though individual green marketers can and have considered all of
36
the mechanisms listed above, we believe that continued work to improve credibility and
increase customer trust are necessary, especially as we move toward retail competition.
A potential offset to this effect is that appeals to environmental values may create more customer loyalty than
37
other marketing approaches.
In the Traverse City program, for example, residential customers make a 3-year commitment and commercial
38
customers a 10-year commitment to pay the specified price premium. Detroit Edison’s program requires
residential customers to sign a 2-year contract, which will be extended automatically after that period unless
the customer requests in writing that the agreement be terminated; for commercial customers, a 10-year
commitment is required. The Sacramento Municipal Utility District, Northern States Power, and Wisconsin
Public Service also ask for 5-10 year customer commitments.
26
5.3 Emphasize Customer Retention
In experimental settings, two of the most important determinants of free riding are repetition
and experience (Davis and Holt 1993). Repetition refers to the iterative process of
contributing where contributions are made not once but repeatedly over time. Laboratory
experiments generally show that, in a single-shot game, 40-60% of individuals are willing to
contribute to the public good, but that contributions decline with repetition, and sometimes
dramatically. For example, in five sessions reported by Isaac et al. (1985), average
contribution rates declined from 38% of the efficient contributions level in the initial period
to 9% in the terminal period. As detailed by Andreoni (1988), it is not entirely clear why
contributions decline with repetition. One hypothesis is that these reductions may come from
“learning” effects. That is, participants may learn that free riding is more profitable only after
observing several instances of free riding by others and becoming disenchanted by their
uncooperative behavior. Perhaps for the same reason, Isaac et al. (1984) report that when
participants are experienced with the contribution mechanism, free riding increases.
It is not yet clear whether repetition (and learning to free ride) will tend to reduce customer
participation in green power programs over time; existing programs have not been operating
long enough to test this hypothesis empirically. Customer retention is important for all types
of goods, however, and the literature suggests that retention may be especially difficult when
public goods are involved. This has two important implications for program design.
37
1. Urge or require longer-term customer commitments: Green marketers should consider
urging or requiring customers to make commitments to the program. If customers are given
the option to participate or not participate on a monthly basis as might be the case under
traditional electric utility billing cycles, repetition and learning effects would be exacerbated.
Although one would not expect to be able to persuade many residential customers to sign
long-term (> 3 years) contracts or commitments for the supply of renewable energy, shorter-
term commitments (several years or less) might be imposed without a significant loss of
customer interest. By establishing a longer-term commitment, repetition is reduced and the
opportunities to “learn” to free ride are diminished. While there are trade-offs with customer
acceptance and flexibility that must be carefully weighed, a number of utilities are already
using customer contracts to reduce the participation risk in their green pricing programs
(Wiser and Pickle 1997). In the retail competition pilot programs, some suppliers require
38
O’Brien and Jones (1995) describe the benefits and pitfalls of rewards more generally, and argue that rewards,
39
if designed appropriately, can increase customer loyalty. They write, “A company must find ways to share
value with customers in proportion to the value the customers’ loyalty creates for the company. The goal must
be to develop a system through which customers are continuously educated about the rewards of loyalty and
motivated to earn them.”
27
customers to stay with them throughout the duration of the program, whereas others put no
restrictions on switching.
2. Emphasize customer retention via ongoing communication and special rewards:
Customer retention must be a top priority. Rothschild (1979) suggests that, while
communications tools may be used to induce customers to purchase a product that supplies
public goods on a trial basis, only ongoing product benefits and positive reinforcement will
lead to repeat purchases; otherwise, there will be little reason to integrate the behavior into
the belief structure and incentives to defect will be high. Therefore, it is critical that marketers
not only expand their customer base, but also maintain an ongoing relationship and marketing
presence with their existing customers and be constantly vigilant of defectors that learn to free
ride. To counter the tendency to defect, a marketer may want to offer staged private rewards
to long-term customers. For example, if a customer purchases “green” power for a year,
39
offer that customer one free month of electricity; after the second year, offer the customer
discounts on environmentally friendly products and honor the customer through public
recognition. In the Massachusetts pilot program, for example, Working Assets offers a
selection of special offers (Ben & Jerry’s ice cream or free long distance service), and will
provide a $25 gift certificate from Real Goods to customers that stay with Working Assets
for 5 months. Marketers should also continually inform their existing customers of how their
own personal commitment (and the commitments of other participants) are making a positive
impact on the environment.
5.4 Enhance Private Value
Only the “greenest” of consumers will be satisfied solely with an opportunity for altruism.
Therefore, the bundling of private goods with public goods can greatly increase the degree
to which individuals will voluntarily contribute. Olson (1965) notes the importance of private
value for large organizations providing a public good, writing, “large organizations that are
not able to make membership compulsory must also provide some noncollective goods in
order to give potential members incentive to join.” The joint production of private goods with
public goods can be critical in providing positive inducements to individuals to contribute
(Cornes and Sandler 1996). The key recommendations for green power programs are
threefold.
1. Bundle value-added private goods with renewable energy and personalize the benefits:
Wherever possible, green marketers should bundle features that add private value beyond the
public benefits that renewables provide (Swezey 1997, Holt 1996). For any individual
In the marketing of a Public Service Company of Colorado green pricing program, the Land and Water Fund
40
has found that personalizing the environmental message is essential. A clear, concise message that
emphasizes the benefits of participation in terms of the elimination of the adverse environmental effects of
a household’s energy use has been successful, and translating those environmental benefits into specific terms
(i.e., lbs of CO offset) has proven effective (Mayer 1997).
2
There is a growing awareness that a firm’s image impacts its ability to sell products (Michman 1985). Brown
41
and Dacin (1997) provide an interesting study of the impacts of corporate social responsibility associations
(i.e., corporate social responsibility image) on the perception of the company’s products by consumers. They
argue that paying attention to and managing the associations that people have about a company are important
strategic tasks, as these associations can significantly impact the success of new product introductions.
28
customer, marketers should increase the value of the private goods with the size of their
donation or renewable energy purchase, therefore providing a positive inducement to
customers to maximize the size of their contribution. Moreover, wherever possible, green
marketers should make the environmental benefits of their products as personal as possible;
for example, appealing to personal health rather than general reductions in air pollution
levels. In point of fact, most “green” products are sold only in part based on their
40
environmental and other public benefits (Ottman 1993). Product qualities such as price,
quality, convenience, and personal health are often emphasized first.
Some green power marketers have heeded this advice and have been innovative in supplying
private value to their customers. Examples have included:
< Price stability on the renewables-component of electricity purchases
< Stickers, decals, and other promotional and/or informational material
< Membership kits including discounts on environmentally friendly products
< Tax deductibility of donations
< Matched donations to local environmental projects
< Ancillary products that provide additional visibility such as a tree planting program
< Tree seedlings and bird feeders
< Energy efficiency products and services
< Bill round-ups (i.e., rounding up bills to the nearest dollar and using the funds thus
collected to support renewable energy)
Business customers, in particular, may secure private value from the promotional material and
recognition offered by the green marketer, which can improve the business’s image and
therefore increase sales and improve employee morale. Using a limited survey of businesses
41
in Traverse City, Michigan, Holt (1997a) finds that smaller business customers may be more
motivated by the owner’s personal philosophy than by the business advantage gained through
improved image. Larger business customers, on the other hand, may be more influenced by
Given experience with a Public Service Company of Colorado green pricing program, Mayer (1997) confirms
42
Holt’s findings about small business customers. She has also found that larger businesses are far more
interested in the public relations benefits of participation, though additional study will be needed to determine
precisely what benefits are most valuable to different types of businesses.
By selling in blocks, the green marketer is likely to capture a greater market share because the flexibility
43
allows customers to select their own optimal “price point.”
Several utilities have used the project-share approach. Though it may be more product-oriented, green
44
marketers should trade-off these benefits with the potential difficulty in explaining the concept to customers.
29
business interests than personal ones. A recognition program that includes stickers and other
42
display items, and newspaper adds featuring a list of business participants should be
considered by green marketers. In the Massachusetts pilot, for example, Northfield Mountain
Energy offers its business customers community recognition in the form of free advertising
and a plaque that publicizes the business’ environmental commitment. Similarly, Enova
Energy offers its business customers cost-saving energy efficiency advice and environmental
promotional material.
Very little market research on the value of bundling these ancillary products and services is
publicly available. However, Osborn (1997) reports the results of market research conducted
by the Sacramento Municipal Utility District. Customers were asked if they were willing to
pay a 15% premium for electricity generated from rooftop photovoltaics; 26% of the general
population responded affirmatively. However, when offered the same product but with rate
stabilization (i.e., a guarantee that electricity prices will not vary), a full 49% of the population
expressed interest. Clearly, bundling private goods with public goods represents an important
way of increasing interest in a “green” product, and price stability may be a particularly
valuable private good.
2. Be product-oriented and make green products tangible: Green marketers should be
product-oriented (emphasizing that this is a premium product, not solely a social program)
and “green” products should be as tangible as possible so as to increase perceived private
value (Moskovitz 1993). The limited evidence we have suggests that a program based on
paying a premium electricity rate for renewably-generated electricity elicits a higher monthly
financial commitment than programs asking for optional donations (Farhar and Houston
1996). Because customers seem to like the flexibility that the donation approach provides in
the level of financial commitment, however, a number of green pricing programs are now
offering renewable electricity in blocks (i.e, individuals can purchase 25%, 50%, 75%, or
100% of their power from renewables). Though this approach maintains the product focus
and longer-term customer contracts are possible, it allows flexibility in the level of financial
commitment. To make the purchase even more product-oriented, marketers may also want
43
to consider selling project shares (i.e., kW) rather than energy output (i.e., kWh). As further
44
evidenced by existing programs, tangible rooftop or community-based photovoltaic systems
and local wind projects are likely to be more attractive to customers than purchases of
unspecified renewables from another state because they provide visible proof of the
30
customer’s own personal commitment (Holt 1996). In fact, this type “private good” is
particularly useful as it also plays into the community and social value dynamic described
earlier.
3. Offer a full line of green products: Marketers should also explore offering an array of
“green” services and products, each of which may have a different mix of private and public
attributes that appeal to different market segments (Weijo and Boleyn 1996). For example,
one product offering could include rooftop photovoltaics and price stability, whereas another
could include renewable power purchases and discounts on environmentally friendly
merchandise. By developing a product line, a marketer will be able to expand and segment
their total market and may be more successful at positioning and marketing their products to
a range of residential and business markets (Bloom and Novelli 1981). Though early
experiments with green power programs typically emphasized a single product, utilities and
marketers are now beginning to offer a wider diversity of products and services. The Public
Service Company of Colorado and the Sacramento Municipal Utility District, for example,
both began with a single green pricing program, but both have now expanded their programs
to include several product options. Post-restructuring, a number of green power marketers
are also likely to offer multiple “green” products.
31
6.0 Conclusions
In this report, we have reviewed current green power marketing activities and have begun to
assess the academic literature on public goods, free riding, and collective action. We find that
green marketing does present important new opportunities for renewables and that there are
practical ways to strengthen green power programs and reduce the level of free riding.
We believe the public goods theory as traditionally described by neoclassical economists
provides a useful, if idealized, model of human behavior. Because it underestimates the
complexity of influence processes, behavioral change, and human decision making, the theory
is not perfectly predictive. One of the most important lessons from the more recent academic
literature is that people do, in fact, contribute toward public goods at levels that exceed that
predicted by traditional economic theory. At the same time, it is clear that there continues to
be a significant level of free riding in a wide variety of situations.
Given the evidence of free riding in green power programs, green marketers should clearly
be interested in ways to reduce the level of free riders and thus increase demand for their
products. We have identified four types of activity that, by either changing the structure of
the public goods dilemma or by adding nontraditional private benefits, can be used to do just
that: (1) take advantage of community and social dynamics; (2) assure customers that they
can “make a difference”; (3) emphasize customer retention; and (4) enhance private value. We
have highlighted how each of these can and have been used by marketers and utilities to
increase customer demand for renewable energy. Our basic conclusion is that green marketers
should take into account consumer free riding and seek to reduce it by adopting practical
changes in product design and communications strategies tailored to “green” power products.
Though the strategies described in this report can reduce the number of free riders and
therefore help foster measurable support for renewable energy, there are clearly limits to
voluntary contribution mechanisms for the provision of public goods. Specifically, we do not
believe that the mechanisms described in Section 5 can “solve” the free-rider problem from
a societal perspective and thus eliminate the pubic-goods market failure. Thus far, however,
we have carefully avoided the specific implications of the public goods literature for
renewable energy policies. But we are still left with the following question: Does the
establishment of green markets obviate the need for explicit public policy support for
renewable energy? Green power marketing can contribute to the provision of public goods,
but we believe it imprudent to rely exclusively on green consumerism as a substitute for more
overt policy approaches. Therefore, we feel that the cultivation of green power markets
should be encouraged in conjunction with the development of state and federal renewable
energy policies. We recognize, however, that these beliefs are not shared by all. Therefore,
while we do not address this issue in depth in this report, Appendix A outlines a research
agenda that could be used to better explore the roles and rationales for government
intervention.
32
33
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Specifically, market failure provides a necessary condition for government intervention when pareto efficiency
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is the only public policy goal.
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Appendix A: Policy Implications—A Research Agenda
We structure this Appendix as a list of research questions. The first four questions explore
whether there is an economic case for government intervention, whereas the final one
addresses what specific forms of intervention might be warranted. None of these questions
can be answered unambiguously and there must always be a role for broader non-economic
considerations (e.g., intergenerational equity and other non-pareto-efficiency criteria). We
believe, however, that a more detailed assessment along these lines could provide valuable
(though not complete) insights into the role and rationale for government intervention.
Question #1: What Are the Limits of Customer-Driven Markets for Renewable
Energy?
The academic literature on public goods suggests that free riding will limit voluntary customer
demand for renewable energy. At the same time, however, it is clear that at least some
individuals are willing to participate in green power marketing programs and that a number
of relatively simple mechanisms can be used to reduce the propensity to free ride. Even where
green marketers avail themselves of these mechanisms, however, economic theory still
suggests that rational individuals will face strong incentives to purchase electric power on a
least-cost basis and free ride on the public benefits provided by renewables. But the mere
existence of free riders is not a sufficient condition for public policy intervention. In cases
where externalities and other market failures are small or are already corrected, or where
there is only a limited amount of free riding, a market outcome absent new policy may be
acceptable. Where significant market failures remain, however, and where substantial free
riding exists, there may be a rationale for government intervention.
Question #2: What Market Failures Can Impede the Development of Renewables?
Economists recognize a variety of market failures that can impede the achievement of
economic efficiency (Fisher and Rothkopf 1989, Jaccard 1995, Harris and Carman 1983),
three of which have the potential to thwart the continued development of renewable energy:
(1) public goods and externalities associated with environmental costs, research and
development, and fuel price and supply risks; (2) price distortions related to unequal tax
treatment and subsidies provided to traditional forms of electricity generation; and (3) lack
of accurate, unbiased information on the benefits and costs of different electricity products
available to customers at low cost in a form that can be assimilated and processed. The mere
existence of market failures provides a necessary, though not sufficient, condition for some
forms of public policy, and an assessment of the magnitude of these failures could help
45
inform as well as lend insight into the proper design of policy intervention.
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Question #3: Have These Market Failures Already Been Corrected?
Some of the potential market failures listed above may already be partially or entirely
corrected. For example, existing environmental regulations, government R&D programs, and
renewable energy tax credits all play a role in energy markets. Whether there is a need for
further intervention is determined, in part, by the magnitude of the remaining market failures.
Question #4: What Are the Costs and Benefits of Further Government Intervention?
Identifying the remaining market failures is an important first step in determining the rationale
for government involvement. But market failures are common, if not pervasive, in the real
world (Sanstad and Howarth 1994). If the existence of market failures was a sufficient
condition for government intervention, the role of government would be sweeping (Friedman
1981). More generally, policymakers must recognize that the institutions that seek to correct
these failures are neither perfect nor costless, and that public policies can have negative side
effects (Harris and Carman 1986, Williamson 1996, Golove and Eto 1996). Therefore, an
assessment of the costs and benefits of specific forms of intervention in the renewable energy
market would be desirable; this form of analysis requires moving beyond the neoclassical
theory of market failure and towards a comparative institutional framework (Friedman 1981).
Where the social benefits of government intervention outweigh the social costs, there is an
economic rationale for correcting market failures through public policy (Harris and Carman
1983).
Question #5: What Form of Intervention Is Most Appropriate?
Ideally, support might be targeted directly to the relevant market failure. In the “first-best”
world of neoclassical economics, this might include pollution taxes for environmental
externalities, government R&D and patent protection to promote innovation, removal of
subsidies and uneven tax treatment, and government provision of information. Though such
“first-best” strategies should be explored, in the “nth-best” world in which we live, sacrifices
must often be made for the sake of expediency, simplicity, and feasibility. Formidable barriers
confront policymakers who attempt to establish a carbon tax, eliminate subsidies to the
nuclear and fossil fuel industries, and increase R&D budgets. Even establishing the “correct”
level of a carbon tax is no easy task because this determination will depend not only on
uncertain scientific evidence and imprecise economic modeling, but also on societal decisions
on intergenerational equity. In neoclassical economics, it is customary to evaluate efficiency
by comparing an actual form of organization with a hypothetical ideal. In transaction cost
economics, on the other hand, the standard is one of “remediableness.” As Williamson (1996)
describes, “hypothetical ideals are operationally irrelevant. Within the feasible subset, the
relevant test is whether (1) an alternative can be described that (2) can be implemented with
(3) expected net gains.” Inefficient results are thus sanctioned because inefficiencies are often
“intentionally created in the public sector as a means by which to protect weak political
property rights and/or to obtain approval for programs that would otherwise be defeated
Individual obligations could be made tradeable to increase flexibility and reduce costs.
46
43
(Williamson 1996).” Moreover, in the presence of uncertainty, imperfect information,
transaction costs, and bounded rationality, “first-best” policy may require regulatory
mechanisms that do not directly attack the market failure (Friedman 1981, Sanstad and
Howarth 1994). Given these observations, policies designed to aid renewable energy
technologies directly should also be considered.
Policies are often classified based on the magnitude of the regulatory intervention (Harris and
Carman 1984). One set of policies works within the existing “market” structure, and some
of these would help green marketers capture customers who might otherwise free ride. For
example, mandatory fuel source and environmental disclosure targets the information market
failure and would facilitate the comparison of competing “green” claims post-restructuring
(Holt 1997b, Moskovitz et al. 1997, Levy et al. 1997). In addition, mandatory disclosure is
expected to reduce the number of green power free riders by enhancing the credibility of
“green” claims and ensuring customers that they are “making a difference.” Another set of
policies is more interventionist in nature, including: (1) a renewables portfolio standard, which
would require each electric supplier to purchase a fraction of their electricity from
renewables ; and (2) a system-benefits charge, which would impose a ¢/kWh surcharge on
46
electricity rates to provide support for renewables (Rader and Norgaard 1996, Wiser et al.
1996, Wiser and Pickle 1997, Kirshner et al. 1997). Though not mutually exclusive, a more
thorough evaluation of the merits and drawbacks of these, and other forms of support is
needed.
