UNDER RETAIL COMPETITION, AT LEAST SOME electricity customers will make purchase decisions out of concern for the environment. A variety of utility green pricing programs already target environmentally concerned consumers. Recent experience in Massachusetts and New Hampshire confirms that utilities and power marketers are gearing up for full-fledged green power marketing to differentiate their products in a competitive environment.
Yet electric service providers marketing renewable energy and other more expensive but environmentally preferable power products run the risk that consumers may not buy green, but instead will "free-ride" on the environmental benefits. After all, why would a customer pay for more expensive green power when at least some others will, and when the environmental benefits of their purchases can be enjoyed by everyone? This logic may have already affected utility green pricing programs, which typically draw less than 3 percent of residential customers (and even fewer commercial and industrial customers) although as many as 70 percent of residential customers say they are willing to pay a premium for renewably generated power.
To boost consumer purchases of renewable energy products, marketers should maximize incentives to buy green. By definition, environmentally preferable products, including renewable energy, supply some level of "public goods."fn1 That is, individuals paying for renewable energy cannot fully internalize the environmental benefits these technologies provide; clean air is something we all benefit from, regardless of who pays for it. Traditional economic theory predicts that many individuals will not voluntarily contribute to public goods, but instead will opt to free-ride on others' contributions.fn2