Business & Money
Investors are asking utilities questions about environmental and social risks. Answers can be a challenge.
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Green Power Takes Off with Choice in Electricty
utilities can recruit customers before building the renewables capacity needed to serve those customers. On the other hand, competitive green power marketers must have green power supplies available to serve their customers initially and thus are relying on existing renewable energy capacity, at least in the beginning. However, a number of these marketers are planning to sell power from new renewables capacity in the future.
CAN THE MARKET WORK? Green power marketers face high costs in locating and acquiring customers interested in purchasing environmentally friendly power. Residential and small commercial customers, who are most likely to display their personal preferences in electricity purchase decisions, are also the most expensive to recruit. Appropriate vehicles should be designed to help aggregate these customers. Businesses, local governments and community groups can play a role in facilitating aggregation.
Suppliers and customers alike might also benefit from the establishment of a green power supply pool, in which renewable resources with different availability characteristics can be managed and blended into a firm, more market-compatible product. In California, the Automated Power Exchange Green Power MarketTM provides such a function. %n8%n
Consumer education will also be key to the efficient operation of the evolving market; consumers must be able to rationally compare product offerings. Some states have established consumer education efforts as a component of their restructuring laws. At a minimum, states are exploring the development of uniform information disclosure standards to help consumers make informed market choices. Disclosure might include product information such as price, fuel sources and environmental emissions. Such disclosure most likely will consist of an information label, similar to the nutrition label now found on food products. %n9%n
TRANSITION CHARGES--HOW LONG? The limited experience from retail pilot programs suggests that customers are more apt to choose a green power service-even if more expensive-provided they are already receiving some measure of savings to start with. However, in almost all states, utilities will continue to recover stranded costs through a customer surcharge, thus delaying true competitive market savings for several years.
Supplier incentives or customer purchase credits may be warranted in some cases to help the green power market get started. California, for example, has instituted consumer rebates for green power purchases to help lower the cost of green power to customers during the stranded cost recovery period. %n10%n
STANDARD OFFERS--HOW LOW? Obviously, prices for green power must remain competitive with traditional power sources to attract more than a small niche of customers. In many states, the standard offer rate to customers has been set very low, even below the wholesale power rate in some cases. These artificially low prices will discourage customers from switching suppliers. And because profit margins will be thin or nonexistent, marketers will be discouraged from offering green power products.
DEFAULT SERVICE--TOO LIMITED? For any number of reasons, many customers will choose not to switch suppliers but to stay with the incumbent electricity provider. Will the incumbent offer green pricing or green marketing options under its default tariff? Customers who choose not to choose nevertheless should have access to a competitive green power option