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School of Business | Department of Economics | Economics | 2011
Thesis number: 12731
Green electricity pricing in the Finnish retail market
Author: Kauppi, Kristiina
Title: Green electricity pricing in the Finnish retail market
Year: 2011  Language: eng
Department: Department of Economics
Academic subject: Economics
Index terms: kansantaloustiede; economics; energiatalous; energy economy; ekologia; ecology; sähkö; electricity; kestävä kehitys; sustainable development; markkinat; markets; hinnoittelu; pricing
Pages: 123
Key terms: green electricity; retail market; WTP; price discrimination; value pricing
The objective of this study is to examine the green electricity pricing behavior in the Finnish retail electricity market. The first part of the study gives an overview of the current state of the Finnish electricity market with an introduction to renewable electricity trade. Then, the motivational factors behind consumers’ environmental behavior and willingness-to-pay for green electricity are discussed, after which the study continues to present the main determinants of the electricity price in the Finnish market. Finally, the underlying pricing strategies are discussed from the viewpoint of potential price discrimination in the green market. The objective of the second part is to examine empirically the actual green price development in the Finnish retail market and compare the results to the theoretical discussions presented.

By combining the anti-competitive characteristics of the Finnish retail electricity market to the theory of consumer willingness-to-pay (WTP) for eco-products and electricity pricing, the theoretical discussion shows how green retailers might have incentives to use perceived value pricing strategy and thereby pursue to use a higher premium on their green contracts. The higher WTP of eco-consumers might be a tempting niche-segment for a retailer; despite the fact that the higher price might prevent other customers from buying the product.

Research data consists of the Finnish retail price data for household customers from the period 2006-2010. The findings were conducted by studying two electricity contract types: open-ended offer prices and one year fixed term contracts. Data was obtained from the Energy Market Authority.

The main findings of the quantitative research demonstrate there have been clear similarities in the pricing patterns between green and brown electricity contracts, but the difference between them has varied. In average, green electricity has still been slightly more expensive than conventional electricity. Although green premiums have been relatively low, which suggests retailers have not been able to exploit their pricing power significantly. However, there were substantial price dispersion between retailers, which might be a sign of either opportunistic pricing, or alternatively, a sign of exploitation of inactive customers and higher WTP. Nevertheless, the low market share of green electricity contracts suggests there are still factors in the Finnish market that hinder environmental buying behaviour – other than price.
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