Green energy would seem to have a rosy future. Technological advances have helped to lower the cost of renewable power sources such as wind turbine generators, solar cells, small hydroelectric plants, and geothermal energy. Some European governments offer financial incentives to companies willing to build environmentally friendly power plants. And utilities in the western United States, now paying top dollar for every available kilowatt, are seeking extra generating capacity.

Moreover, research indicates that consumers are willing to pay a premium for clean energy. According to Datamonitor, a market research agency, 37 percent of customers in Germany and 46 percent in the United Kingdom said they would pay up to 10 percent extra for it. A surprising number said they would pay more than 10 percent (exhibit).

In response to these suggestive trends, European utilities such as Eastern Group and Powergen, in the United Kingdom, and RWE and E.ON, in Germany, now offer green energy to distributors or direct to interested consumers. Typically, the utility commits itself to produce with, or to buy from, renewable sources all of the energy that it sells through green contracts. Customers thus know that they are paying for green production even if they are not directly connected to the source. Price premiums, often depending on the source, range from 2 percent to more than 30 percent above the utilities’ normal tariffs. Yet in the United Kingdom and Germany, for example, less than 1 percent of electricity customers have chosen the green option.

Why are so few environmentally conscious customers signing up, despite the positive outlook? New research suggests that consumers simply do not trust their utilities’ green credentials but that effective branding could help to overcome such skepticism. Along with Motivaction (a Dutch market research firm) and two UK marketing-communications companies—The Ogilvy Group and The Partners—McKinsey conducted focus groups with residential electricity consumers in three countries: Germany and the United Kingdom, where customers can now choose their power supplier, and Spain, where the residential electricity market will be open by 2003. The results suggest strong interest in "green" as an ingredient for power branding and point to several approaches utilities can use to win over this market segment.

First, the offering must require little sacrifice from the average consumer. Even if most consumers supported green power, and would pay a premium for it, they would act only if the effort needed to switch were minimal (as it usually is), the extra cost not prohibitive, and reliability and service quality assured. Second, any green utility would be wise to exploit the pressure to be green that many people feel. ("My children, especially, nag me all the time about the environment," one respondent said.) To this end, as an example, stickers could be provided to show that a household or a company used green power.

Perhaps the most important task will be to build trust. Most consumers are wary of green hype. In particular, many are skeptical of fashionably green claims made by big incumbent utilities. Typical comments from the focus groups were, "You often feel let down by companies if you want to be green," and "You recycle, but is it actually doing any good?" Clearly, utilities will have to persuade consumers that any power sold at a premium as green really is generated in environmentally friendly ways and provides tangible environmental benefits.

Organizations such as Friends of the Earth and Greenpeace, and even retail brands such as The Body Shop, IKEA, J. Sainsbury, and Virgin, were seen by the focus groups as credible stewards of the environment, at least as compared with most established utilities. Thus, building alliances with existing green brands that have proven appeal is probably the easiest way to capture people who would be willing to pay a premium.

The case for co-branding is strengthened by the example of established green brands that have had some success in the electricity market. In the United States, Greenmountain.com built a 100,000-customer base selling "cleaner" energy through the Internet. The company buys energy from conventional producers but guarantees that its purchase mix is skewed toward environmentally friendly sources such as hydro and wind. In Germany, Greenpeace has tried selling green power to its 550,000 members through a combination of direct mail and conventional advertising. One round of mailing attracted 60,000 customers—an impressive achievement for an offer priced at a premium, given that consumers are reluctant to switch suppliers even when they are offered substantially lower tariffs.

In the Netherlands, distribution companies such as Nuon and Essent sell green electricity with the verification and support of the Dutch World Wide Fund for Nature, which lends its name and logo to green-energy suppliers that meet certain conditions. Nuon and Essent had around 100,000 green customers each at the beginning of 2001. They aim to expand green electricity from its present niche market to a wider one.