The last ten years have seen consumer interest in protecting the world’s environment increase dramatically. This heightened public awareness, coupled with the signing of the Kyoto Protocol has resulted in substantial demand on energy companies to offer green energy. Domestic consumer views on green energy and the current green tariffs of the major players will both impact the development of this market over the next five years.

Figure 1. Countries all over the world have pledged to reduce emissions under the Kyoto Protocol
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Since the signing of the Kyoto Protocol, countries have made a pledge to reduce their CO2 emissions in a bid to limit global warming. A large share of these emissions come from the power generation sector. It is therefore unsurprising that this industry has become a prime target of both government and environmental groups. The sector as a whole is now actively looking towards renewable sources to replace a proportion of the power currently generated from ‘brown’ fossil fuel sources that have heavily contributed to global warming. These alternative sources include small hydro, biomass, wind and solar power.

The EU’s directive has effectively fuelled the development of green tariffs. Suppliers are now using their ‘greenness’ as a way of differentiating their product range and gaining competitive advantage. At the same time, consumers are evolving from simply being environmentally aware, towards actively adopting green values within their homes. This heightened interest means there is now an increased demand on the part of the consumer for green energy.

Attitudes to green energy

Earlier this year, Datamonitor conducted a survey of over 2000 households in Germany, Sweden and the UK to assess their attitudes towards green energy. These countries were selected as all three are completely open to competition and all three provide extensive green offerings.

The survey found that 62 per cent of households in Germany stated that they would be willing to pay a premium for green electricity. This figure was almost as high in Sweden and the UK, at 61 per cent and 55 per cent respectively.

In addition, the vast majority of the respondents said that they would be willing to spend up to two per cent more for a green tariff. However, the premium that customers would be willing to pay varies according to the individual customer and market circumstances.

The survey’s findings also reiterate that interest in green energy is far reaching and is not directly related to either age or earnings. Over 70 per cent of respondents in the lowest earnings bracket (up to £10 000, $15 021) stated that they would be willing to pay up to two per cent more for green energy. Unsurprisingly, the more affluent respondents stated that they would be willing to pay more, with several high earners saying that they would pay up to ten per cent more for green energy. It is clear, therefore, that suppliers should be marketing their green tariffs to a wider audience.

The incentive to switch

Datamonitor asked consumers what offers would encourage them to switch supplier, if all prices were equal. In Sweden, although free Internet access was rated as the top incentive, over 25 per cent of respondents claimed that they would be more likely to switch supplier if they were offered a green tariff. This positions green energy as a more attractive offer than options such as air miles, gift tokens and supermarket loyalty points. Households in the UK and Germany depicted a similar story.

Switching forecasts

The highest level of switching is expected to be seen in Germany, UK and the Netherlands. Approximately 35 000 German households were on a green tariff at the end of 1998. By the end of 1999, this figure had risen to 230 000. Based on an extensive survey of utility executives, Datamonitor predicts that by 2005 this figure will have risen dramatically to 650 000 German households purchasing their energy on a green tariff.

Figure 2. Datamonitor research: which of the following would make you more likely to switch supplier? UK responses
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The Netherlands presents a similar situation. Some 140 000 households are currently on a green tariff, with this figure expected to rise to 400 000 by 2005. In the UK, there are 13 500 households on a green tariff at present. This figure is predicted to escalate to 250 000 in five years. All major energy suppliers in these countries offer green tariffs and it is likely that other European countries will soon follow suit.

Green switching habits vary slightly by country. Some households will opt to stay with their existing supplier, but switch to the green tariff offering, while others will choose to switch to a new supplier altogether. Datamonitor predicts that in Germany, around 55 per cent of those switching will be on a green tariff with a new supplier by 2005.

The type of green tariff offered varies considerably. One variety comes from renewable energy companies such as Unit and Ecotricity in the UK. These companies acquire all of their electricity supply from renewable sources and so market themselves as 100 per cent green.

Another option comes from companies whose green tariff operates on a fund system, such as the green tariff offering from Eastern. As part of this scheme, customers pay a premium, which goes towards a green fund for investing in renewable generation.

Finally, there are suppliers such as Sydkraft and RWE, which supply their green tariff customers with 100 per cent green electricity, at a premium.

Findings from Datamonitor’s survey indicate that customers interested in a green tariff would rather switch to a company that markets themselves as ‘green’ and sells only renewable energy. It is forecast that over 50 per cent of those switching in the UK and 30 per cent in Germany will switch to a green energy company such as Unit or Ecotricity. It is clear, therefore, that companies who market themselves as 100 per cent ‘green’ and sell only green energy, will have a competitive edge over traditional energy suppliers. It is likely that Europe will bear witness to a great number of ‘green’ energy suppliers such as these as consumers opt to switch to green branded companies.

Green drivers

So far, the market for green tariffs has been driven by a number of influential factors. Some of the key influences are:

  • The environmental movement and general environmental awareness
  • National, regional and international environmental legislation, such as Kyoto and the European Commission’s resolution on renewable energy
  • Energy suppliers’ need to gain competitive advantage in the EU’s deregulating electricity and natural gas markets.

All of these forces have played a vital role in the promotion of renewable energy and the market drive for green tariffs. To date, certain European markets have been more active in introducing green tariffs, while others have been more successful. The UK provides a strong example of a market with an extensive range of green offerings. The green energy market in the UK has been primarily fuelled by a combination of intense competition and national legislation, as opposed to a high level of environmental awareness.

In contrast, the Netherlands also has an extensive market for green tariffs. The integral difference is that the success of green tariffs in the Netherlands is a result of a higher level of environmental awareness. They have also reaped the rewards of a strong marketing campaign on the part of the utilities and independent environmental organizations, such as The Worldwide Fund for Nature.

Italy and Spain present a completely different picture. No energy suppliers in these countries currently offer their customers a green tariff, but it is likely that this will change as competition expands. Competing suppliers in these countries will be forced to expand their portfolio and green tariffs will undoubtedly play a key role in these expanded services.

Price and product

The future success of green energy tariffs will rely heavily on the supplier’s ability to meet customers’ demands. Price, promotion and product will all have a heavy influence on customers’ uptake of green energy.

Figure 3. Datamonitor survey: How much would you be willing to pay for green energy? UK responses
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In the UK particularly, the price of green energy has inhibited greater uptake. However, in more environmentally aware countries such as Germany and the Netherlands, customers are prepared to pay the premium. It is worth noting that in the Netherlands, the higher cost of green power has been alleviated by the higher cost of fossil-fuel electricity.

It is imperative that green energy becomes more cost effective. However, this can only realistically occur once the cost of producing green power subsidies and governments introduce more favourable terms for green energy producers. The government has been subsidizing brown sources of energy, such as the coal industry in the UK for years, so it is not unfeasible to suggest that this support can be transferred to the green energy sector. The price of green energy will, however, vary greatly from country to country, depending on the individual country’s renewable energy capacity, the type and level of fixed tariffs.

Promoting green energy

Datamonitor’s research reveals that a large proportion of domestic consumers are totally unaware that green energy exists. This confirms that suppliers must devote a share of their budget towards aggressively marketing and advertising their green tariffs. Green energy campaigns, as demonstrated in the Netherlands, can prove to be a highly successful means of informing and ultimately acquiring customers.

Domestic users have so far been the primary target audience for green tariff campaigns. However, the potential exists for green tariffs to be introduced to the industrial and commercial markets. Companies such as Toyota in the US and the Co-op bank in the UK, have already opted for a green energy tariff, perhaps not only through environmental concern, but also in an attempt to boost public image. Datamonitor believes that other corporations across Europe and the US will be keen to follow this lead. It is therefore apparent that a marketing campaign targeted specifically at large users could prove highly effective.

Certified green

A recent conference held by the IEA sought to understand why green energy products have faired better in some European countries than others. At this conference, it was highlighted that markets with a green certificate or green label system had witnessed a higher level of consumer uptake, than those markets without such a system in place.

This is indicative of the fact that consumers need confirmation and a guarantee that the electricity they purchase comes from a renewable energy source. This is especially important for the traditional utility when trying to compete with companies who have branded themselves as 100 per cent green.

Additionally, the green product will have to be part of a package of services in order to meet growing customer demands in a competitive market. These services will include options such as energy efficiency advice and a 24-hour customer helpline.

Datamonitor believes that as energy companies consider how to expand their marketing portfolios to become more competitive, one message is clear: ignoring green power may be just plain bad business. In fact, consumers are turning to renewable energy by the thousands and they are looking for energy companies that offer a fair price. Profit margins are thin under deregulation and companies new to the market are finding it hard to compete with incumbent utilities solely on price. Offering green power not only gives consumers an additional choice, but it also helps energy companies distinguish their products.