[BETA] Fortnightly

Green power is now offered to residential and commercial customers by more than 600 utilities in 34 states, and most observers expect that number to grow. We believe the opposite may happen—that in the next five years, almost all of these green-power programs may be gone. This trend already has begun. According to the U.S. Department of Energy, 12 utilities have discontinued green-power offerings, citing, among other things, a lack of profitability.

The most damaging inference from these events is that people do not want renewable energy or don't care about environmental protection, both of which are untrue. The second most damaging inference is that utilities that operate green-power programs cannot make any money at it—also untrue. Using either justification, utilities may be persuaded that discontinuing these programs makes sense. We disagree and believe that green-power programs can be a profit center.

Dollars and Sense

In our estimation, only a handful of utility green-power programs are profitable. The math is quite simple. Consider the costs. The time and materials cost to begin a green-power program typically falls between $10,000 and $500,000. This does not include the costs involving sales and the acquisition of customers, which must be added to this amount. Once a program is operating, it may cost roughly $40,000 to $425,000 per year to administrate. ¹

Second, consider the revenues generated from green-power sales, which ideally should cover and exceed all these expenses. Most purchasers of green power are residential customers who typically consume about 10.6 MWh/year. We estimate that the amount charged to customers to cover costs typically falls between $7/MWh and $12/MWh sold. Only the top 10 programs in the United States have more than 10,000 green power customers; the rest have considerably less. A simple calculation indicates how the number of megawatt-hours sold and the revenue generated fall well short of being sufficient.

One can begin to sense the challenges. Under the current model most utilities employ, they make no profit selling green power, and in many cases they cannot cover the costs of sales and operations. To put it another way, just about every utility program in the United States is looking at extremely long payback periods—anywhere from five to 50 years. Data provided by DOE in its April 2005 list of the nation's top 10 utility green-pricing programs confirms this assessment. ² Even the most successful programs in the country may take greater than five years to obtain a cash positive situation, not including customer attrition, which is typically about 5 percent every year.

Bottom Line

Utility managers are not likely to sustain green-power programs indefinitely if the programs cannot pay for themselves. Many managers of these programs are dedicated to making them successful, but they need to learn how to make their programs profitable. Unless they engage