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Waking the green giant

Persuading domestic electricity users to implement ‘green’ energy is not the uphill struggle some suggest despite it being more expensive. But utilities should be more active in encouraging the seven million Europeans ready to make the switch.

Europe’s residential green energy market has had little to boast about until the extraordinary growth of customers on green tariffs in The Netherlands over the last two years. Indeed, excluding the 2.2 million Dutch customers, the average penetration of green tariffs at the domestic level is less than 0.5 per cent. Even the Dutch market success has been attributed to substantial tax support from the government and the unusual situation of the green market opening to competition prior to that of standard electricity.

Given this situation, it may come as a surprise that Datamonitor is predicting that seven million customers in six European countries could convert to forms of green tariff by 2008. Indeed, to date there is only the Dutch example ” where 32 per cent of customers are now taking green energy ” which provides a practical demonstration of the environmental sentiment that remains a latent force in many customer bases.

The mental map of the green supply purchasing
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Domestic green use

Part of Datamonitor’s high forecast of seven million customers is based upon the role that the government will play in future years. To date, governments have done little to encourage green tariffs at the residential level, preferring to place responsibility upon generators and utilities to supply certain amounts of green energy. The involvement of the household customer has therefore been minimal, with many customers still unaware that they can choose green energy, or even what green energy entails. However, as environmental targets become increasingly demanding, greater attention will need to be placed upon the residential customer’s significant energy consumption and consequent contribution to global warming.

In the meantime, however, customers will remain confused and ignorant regarding the green options that lie open to them. Utilities have tended to view green energy as being little more than a tool to improve the corporate image. Indeed, in Datamonitor’s survey of leading European utility executives, 75 per cent believed green energy’s contribution to be most important to image, with just two citing the environment as the driving force behind their green tariff options.

Marketing budgets to develop green awareness and involvement have therefore been restricted, and minimal effort employed to convert customers to green energy. Having said this, utilities in the USA have achieved conversion rates of five per cent and beyond with budgets of less than $100 000 a year. Indeed, the examples set by American utilities ” where price premiums are the norm in contrast to the early stages of the Dutch boom in discounted green tariff uptake ” suggest that utilities need not restrict green power programmes to the delivery of a green-washed image.

The lesson that has yet to be learnt by most European utilities is that they must adapt their marketing theories if they are to succeed. Whilst utilities have become increasingly professional and effective in targeting customer groups for standard electricity, the marketing rules and theories are significantly different for the emotionally driven product of green energy. Best practices observed in the US indicate a greater role needs to be played by PR campaigns, that customers reject promotional direct mail, and prefer a straightforward and factual approach to what is essentially a serious issue.

State of green market development in the EU
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Customer willingness

What has become clearly apparent is that customers are more than willing to accept a hybrid green tariff, where only a proportion of consumption is guaranteed to come from green sources, be that hydro, wind, biomass, solar, or another generation type. This should come as good news to utilities with little or no available green power.

At present, the supply of green energy will often come with the consequence redirecting ROCs that could otherwise be profitably sold, or the need to buy ROCs to cover any new green supply obligations. However, the finding that customers are willing to pay a premium for even a minimal amount of green energy in conjunction with the benefits in terms of lifetime value through reduced churn make this equation worth redressing.

Clearly there are significant risks in promoting uptake in what is widely viewed to be a small niche market. Most utilities, like other businesses, have to turn a profit to keep shareholders contented. The argument to date has been that the green market is simply too small and would require extensive marketing budget to exploit. However, as American utilities have shown, clever marketing can achieve significant market development at relatively low cost. Additional findings have been that green customers are three times less likely to leave their utility, and that they are positively disposed towards their supplier (as opposed to the passivity and apathy that is the norm). Not only is the green customer less price-sensitive, they are more loyal, more satisfied, and have a higher customer lifetime value. In this context, suppliers should revaluate the level of support they give to green tariffs.

Having said this, many suppliers can point to the fact that they have set up green tariffs, but few customers have enquired about them, let alone put pen to contract (less than one per cent of Europeans). In contrast, Datamonitor estimates the total potential market potential in Europe for premium green energy to be over 35 million customers, nearly 23 per cent of the customer base. This is despite recognition that market uptake in comparable products like ethical investment, Fair Trade coffee, and ecologically friendly Ecover washing powder have failed to win more than a handful of the most environmentally aware and active customers.

Therefore it appears that there is a major gap between customers who rate themselves as green supporters and the tiny pool of customers willing to take such products. So why have sales teams consistently failed to win this business? Datamonitor believes the answer to be that customers are unaware, uninvolved or wary of the product on offer. In contrast, the bottle water market succeeds on the basis of alleged health benefits and the concept of purity. This market has soared in both value and importance due to heavy marketing. Translating this to the green energy market, Dutch utilities like Essent, Nuon, and Eneco have combined their marketing budgets with previous government fiscal support resulting in 32 per cent conversion of customers to green tariffs.

Participation allurement

The key barrier to green energy development in the rest of Europe is therefore not necessarily the product on offer ” which has been available for many years in markets like Germany, Finland, Sweden and the UK ” but customer understanding and trust of green energy as a concept. Awareness, understanding, and support for the product concept need to be developed. Crucial to translating acceptance into action, customers must be made to know that their contribution will benefit the environment, but also that their effort is recognised.

Indeed, a common focus group finding from consumers is that they will only participate if everyone else participates. To lure and then retain the less environmentally active customer, utilities need to provide the self-gratification and congratulations to the customer for making a difference to the world they live in. One example of this would be Utah Power’s “Blue Sky Community” award for villages or towns with five per cent or more customers on green energy.

Failure to attract the early majority of “light green” customers through unrefined marketing messages and low marketing budgets will result in the low scenario forecast of just 2 per cent green tariff conversion by 2008. Essentially, this is akin to the stumbling block experience by the co-operatives, and other emotionally driven products and services.

According to Alex Patient, Utilities Analyst at Datamonitor: “Utilities have been wary of targeting a market that is perceived to be expensive and with few rewards. However, best practices demonstrated by Dutch and American utilities in particular show that this need not be the case, and that there are significant benefits in terms of image, customer loyalty, and customer value.

“If utilities are to succeed in developing the green market’s vast potential, not only must they assign larger and sustained budgets to marketeers, but also adopt the emotionally driven marketing theories to apply to this non-standard product range.”