Everybody's Green

Before the liberalization of electricity markets, the consumers of electricity were served by monopoly utility. When the energy markets opened for competition, consumers were allowed to choose their preferred electricity provider from various providers. Also different sources of energy, like the green power options were introduced. This raises the importance to understand customer preferences when it comes to energy production and competition in the energy markets.

Currently sustainability and renewable energy sources are hot topics. Many countries in Europe make huge investments into green energy production to cut down carbon emissions and the European Union has promoted the use of renewable energy sources with several directives. This gives raise to even more sources of energies the consumers to choose from. Many studies show that consumers have mostly positive attitudes towards renewable energy sources and are willing to pay a premium for green energy consumption.


The key element of measuring consumer willingness to pay comes from the consumers’ preferences, which can be illustrated with a simple indifference curve. In the following graph, we can see the trade-off between the consumption of green electricity and the expenditure on electricity which is not produced by renewable energy.

The graph shows two indifference curves u0 and u1. Initially, the income used to expenditure on non-green electricity is in Y0 and the quantity of green electricity enjoyed is in the level of Q0. Now let us suppose that the quantity of green electricity enjoyed increases from Q0 to Q1 and we move from the initial point A to point C in the indifference curve u0.

At point C the consumer’s income has decreased by the amount BC to reach the point C in the indifference curve. This decrease in income gives the consumer willingness to pay (WTP) for the increase in the green electricity consumption.

Studies show that the WTP is positive for green energy in the most cases. This might be due to the fact of increased environmental awareness and more positive preference and opinions towards sustainable energy.

However, studies show that even though generic green energy has a positive WTP, there exists differences between different energy sources. Different energy sources are not perceived as equally preferred by the consumers. A study conducted in the United States showed that consumers gain more utility from solar energy than from alternative green energy sources. Similarly, In Finland wind energy was perceived as the most preferred source of electricity production.

Geographical differences have an impact on the consumers’ willingness to pay for a certain source of green energy. If the consumers have formed their personal opinion or attitudes towards different energy sources or have had past experiences of them, this has an effect on the willingness to pay for these energy sources. A study conducted in Germany, for instance, implied that the consumers prefer domestically produced energy to foreign energy. In the rural areas of Eastern Finland biomass on the other hand is preferred to other energy sources. This can be explained by the fact that in the Eastern part of Finland the potential supply of biomass energy production is considerable high, which might affect the consumers to prefer energy that is familiar to them and produced near of their habitat.

Also personal perceptions of energy sources affect the consumer choice. If for example in the case of biomass in Eastern Finland the local energy production creates more employment and income in the area, the people of the area might have more positive attitudes towards that source of energy. Perceptions work on the other way as well. After the Great East Japan Earthquake of March 2011 and the Fukushima nuclear plant accident, attitudes towards nuclear power changed radically. After the accident, it was shown that even though the WTP for green energy sources and emission reduction were positive, the WTP for increasing nuclear power in the electricity production become negative. Consumers were not willing to pay for a source of energy from which they had bad personal experiences.

WTP is generally positive for green energy sources but is it overestimated? It is suggested that limited participation to choose the green energy sources may have caused an overestimation of the WTP. Consumers may have evaluated different energy sources according to their preferences, but are not choosing to consume them because of several reasons.

Studies show that despite the positive WTP, there exists limited participation to green electricity. If changing from the default option requires physical effort and expenditures, consumers are less willing to switch their energy source even though they would value green energy mix more than their default one.

We can conclude that there exist several interesting attributes, which affect the consumers’ willingness to pay for green electricity. In general, it is shown that consumers indeed are willing to pay a premium for green electricity mix. This can be a causation for more awareness and positive attitude towards environment and sustainability.

One solution to increase WTP and increase participation would be to make green electricity even more available than today. If the process of switching to more green electricity would become easier, more transparent and less costly, we could see increases in the participation rates and increase the consumption of green electricity.

One way of achieving this could a government-backed program to impose green electricity to consumers without consumers themselves having to put an effort to the process of switching from the default. Several choice experiments state that the consumers are willing to pay for green electricity but the problem is how to choose and order it.