How Whole Foods Explains Clean Power

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How Whole Foods Explains Clean Power

• Josh Kaushansky

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The Situation

• Presently, consumers of electricity cannot choose
  the origin of their electricity
• No alternatives to going off the grid

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Electricity in the United States
Source Energy Information Administration, Form
EIA-906, Power Plant Report and EIA
920,Combined Heat and Power Plant Report.
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Relevant Literature

• The World Banks 2004 Reforming Infrastructure
  Privatization, Regulation, and Competition report
• It is possible to develop a competitive retail
  market for electricity
• Work by Paul Joskow (2006) on the state of
  electricity markets in the United States

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Electricity Costs in the United States
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The Northwest Exception

• The Renewable Northwest Project
• Services WA, OR, ID, MT
• Provides 0.000193 of total electricity in the
  United States
• Average premium is 12.5-25

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Question

• How much more would people be willing to pay for
  clean power than they presently do?

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Challenges and Solutions

• Problem
• As of the present, cannot separate conventional
  from green energy cannot easily determine
  demand or willingness to buy premiums
• Solution
• Investigate market where there are easily
  distinguished choices between conventional
  products and green alternatives

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The Organic Foods Market

• Easily segregated from conventional counterparts
• No switching costs
• Widely available
• Obvious premium between conventional and green
  product

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Facts about the Organic Market

• Organic produce market sales grew 39 growth from
  2004 (OTA Manufacturers Survey 2006)
• Organic food represents 2.48 of total food sales
  in 2005 (OTA Manufacturers Survey 2006)
• Majority of organic food sold at conventional
  supermarkets since 2000 (USDA Economic Research
  Service, 2002)

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Data and Literature

• USDAs Economic Research Service (May 2005).
  Price Premiums Hold on as U.S. Organic Produce
  Market Expands.
• The Rodale Institutes New Farm Organic Price
  Index
• Ratapol Teratanavat, Essays on Consumer Purchase
  Decisions and Health and Nutrition Information on
  Functional Foods (2005)

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The Model

• Gather data regarding premiums of organic produce
  and quantity
• Discern whether demand growth is outstripping
  supply growth over time
• Use conclusions to forecast premium growth for
  green energy in a competitive retail market

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Hypothesis
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The Relationship
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Results
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Additional Thoughts

• Value-Added Differences Between Organic Food and
  Green Electricity
• Technological Change
• Switching Costs
• Choice Programs (24 states)

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Conclusions

• Premium for product still rising
• Demand for green product rising faster than
  supply, though with diminishing marginal returns
• Supply and demand growth have not yet settled
  into equilibrium
• Consumers willing to pay a premium of 60.1 -
  87.5 in order to achieve similar outcome