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...