Lynne Kiesling
I firmly believe that retail choice in electricity has instrumental value in and of itself: choice qua choice is a good thing and should be an important policy goal in electricity restructuring, independent of utilitarian evaluations of the outcomes of free choice.
There are, though, several ways that free choice and the removal of entry barriers into retail markets generates better outcomes than regulated monopoly service. When free choice allows consumers to choose among dynamic pricing options, they can face price signals and use technology to reduce their peak electricity use, leading to lower wholesale electricity prices and a reduced need to build costly infrastructure to meet peaks that just sits idle the rest of the time.
Choice also encourages market entrants to bring differentiated products to market, to gain market share by appealing to different dimensions of consumer preferences and to reduce the extent of direct price-based competition. Product differentiation (and its associated price discrimination) benefits both consumers and producers (and thus creates surplus, or welfare, or value) in all cases except for some very special conditions. The connection between rivalry and product differentiation and economic value creation is one of the most unambiguous aspects of freedom of entry into retail markets.
In all of the states that have started to free up choice for their electricity consumers, one of the first ways that entrants join the market is with green power products. Admittedly a niche product up to now (although consumer preferences may change over time as concerns about energy and environment grow), green power generally captures a 2-4% market share in the absence of other policies like renewable portfolio standards or subsidies.
But one of the entry costs facing entrants is the cost of communicating the characteristics of their products credibly to potential customers. In a “lifestyle” product like green power, the credibility of this communication is crucial; if you say you are providing 100% renewable power but are found to be buying your power from the dirty coal plant next door, you will lose your customers and suffer irreparable reputation capital damage.
That’s where services like The Power Scorecard become valuable. The Power Scorecard is a joint project of several environmental nonprofits, and if you live in a state that has retail choice and freedom of entry, you can get an evaluation of the environmental impact of the different retail electricity products available to you. The evaluation also lists the price of the product, so you can compare across products.
The Power Scorecard promotes successful market entry because it reduces the costs to firms selling green power of communicating their value propositions to consumers. It also helps create credibility that the evaluators are independent third parties.