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.
a rate that might (or might not) prove to be beneficial over the long term.
Clearly, Austin Energy has been able to address successfully these issues in offering its GreenChoice program. To address the issue of revenue risk, the utility successfully has required its commercial consumers to commit to 10- to 15-year purchase commitments, which equals the term of its power-purchase contracts. The value of the product as a hedge against future fuel price increases has been a compelling motivator for Austin’s consumers, particularly its nonresidential consumers, to make long-term purchase commitments. The competitive pricing of the Austin product also has contributed to its success, as consumers perceive that achieving future cost savings is possible. If the product is priced too high above standard electricity rates initially, consumers might not see it as a compelling hedge against rising fuel prices.
REC Purchases and Price Stability
Utilities increasingly are supplying their green pricing programs with RECs unbundled from its underlying power. 39 If RECs are used to supply the program, can the fixed-price benefits of the renewable energy sources be passed on to consumers? That is, if REC costs are additional to fossil fuel-fired generation costs, do the renewables actually convey a fixed price benefit? Or are those benefits retained by the project owner or passed onto the purchaser of the underlying energy from the renewable energy facility? 40
It is possible to structure a hedge product with RECs, but it’s a more complex proposition than if the renewable power were sold bundled with the RECs. To date, a few utilities have structured REC-based hedge products with mixed success.
Two REC-based green power products that also provide a hedge benefit (offered by Portland General Electric and Green Mountain Power) provided several lessons. First, developing such a product is complex and properly structuring the rate can be challenging. Second, if the fixed-price of the green power product is set too high, then the customers might question whether they truly get a hedge value, which might limit program participation. Third, if there are portions of the rate that are beyond the utility’s control, they should be excluded from the fixed-rate product, where it is feasible to do so. Fourth, while the REC-based product provides less risk to the utility because it can enter into shorter-term contracts for renewable supplies, the REC product hedge structure is less desirable and will not result in a true hedge, if the REC price does not reflect the actual cost of the generation. It is therefore difficult to provide a true hedge if the cost is disconnected.
Adjusting for Environmental Costs
The treatment of environmental costs increasingly is becoming an issue for green power consumers, as some utilities are recovering the costs of environmental remediation efforts through surcharges or adders on consumer bills. Should green power consumers pay for pollution control costs or other environmental costs associated with conventional fossil fuel plants if they are purchasing renewable energy generation for their electricity needs?
This question was raised when Public Service Company of Colorado (Xcel Energy) implemented a surcharge on customer