Pilot projects are demonstrating the potential of smart metering and smart rates to make the most of supply and demand resources. But as empirical studies show, not all pricing designs are equally...
Green Price Stability
New approaches account for the economic benefits of renewables.
addition, a number of utilities that offer some form of fuel price protection to their green power customers have been ranked in recent years among the top 10 U.S. green pricing programs with respect to green power sales or participation, including Xcel Energy, Edmond Electric, Holy Cross, Oklahoma Gas & Electric, and We Energies. 33 Programs that offer protection from price volatility also tend to have lower price premiums—about half of the utilities offering the lowest premiums for new renewables exempted customers from fossil-fuel charges or offered a fixed green rate, according to the most recent rankings based on year-end 2007 data. 34
But while fixed-rate green power products offer a compelling value proposition to consumers and contribution to program success, most utilities don’t offer such programs for several reasons.
First, the ability to substitute a green rate for either the energy rate or fuel charges (as in Austin) requires an unbundled rate structure. Most utilities in traditionally regulated electricity markets do not explicitly delineate the various utility cost components on the customer bill. Generation, transmission, distribution, and administration costs generally are rolled into a standard service charge and a usage charge.
Second, is the question of risk allocation. Regulated utilities usually enter into long-term power purchase contracts (10-25 years) or decide to own new renewable generation for the life of the project. As state-regulated entities, investor-owned utilities face greater challenges and scrutiny in accepting the risks of long-term renewable energy contracts. If consumers don’t make a similar long-term purchase agreement, the utility is exposed to the risk of absorbing the higher cost of the renewable energy generation, either in base rates or with shareholders. While it might be possible to hold nonresidential customers to long-term contracts if they perceive a hedge value, it is more challenging to hold residential consumers to similar requirements because of their shorter planning horizon.
Third, the adaptability of a utility’s billing system can place some limitations on product design and pricing. According to Mat Northway of Eugene Water and Electric Board, “The billing system often dictates the product, i.e., how easy (or difficult) it is to change the billing system.” 35
The challenges associated with billing-system software and programming was echoed by Douglas Smith of Green Mountain Power. Substitution of a green rate for the standard energy rate might be difficult to implement in some billing systems. 36
Finally, some utilities might have concerns about what happens if the green power product price falls below base rates. The question revolves around whether or not it is problematic for the utility to provide one resource at lower cost to only one segment of the utility’s customer base. In fact, one utility (Utili-Corp United) decided to abandon its program altogether and roll the renewable energy supplies into base rates when the cost of renewable energy approached that of its conventional energy sources. 37, 38 On the other hand, if the product initially is offered at above-market rates and customers are willing to make a long-term purchase commitment, then the customers are accepting the risk and locking into