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Green Price Stability

New approaches account for the economic benefits of renewables.

Fortnightly Magazine - January 2009

FCA exemption might ignore energy costs already embedded in rates. The amount of fuel cost embedded in base rates can be significant, particularly in recent years. For example, OG&E increased the amount of fuel costs in its base rates to 2.9¢/kWh from 1.5¢/kWh as part of the 2005 general rate case.

From the consumer’s perspective, the green power premium would be more fairly priced if it were revisited every time there is a rate case to account for the difference between the cost of the renewable energy resources and the utility’s non-renewable generation mix. 28 With rising energy costs, utilities are rolling higher energy costs into base rates, making this issue more significant for green power consumers. Green power customers obtain the fuel-price stability or hedge benefits of their green power purchases only if changes in energy costs are tracked over time and netted from the green power tariff.

Fixed Green Rate

A different approach to protecting green power customers from energy cost changes is to substitute a specific green generation rate for the conventional energy generation rate. 29 Under this approach, green power customers pay all of the same charges as base rate customers, including transmission, distribution, billing, and administrative expenses. However, instead of paying the standard generation costs, they pay the cost of the renewable energy generation and any supplemental costs (ancillary services and program implementation costs).

Austin Energy has used this approach in pricing its GreenChoice product, which is supplied primarily with wind energy. A key characteristic of the GreenChoice product is the establishment of a separate green charge, which substitutes directly for the utility’s fuel charge. The fuel charge is a line item on the customer’s bill, consisting of forecasted annual fuel and purchased power costs, and estimated fees and charges from the Electric Reliability Council of Texas (ERCOT) incurred to meet service-area obligations. 30 The green charge, on the other hand, is determined by the cost of the renewable energy power-purchase contracts Austin Energy signs to supply the program, plus additional costs such as ancillary services and product marketing, and currently is fixed for 15 years.

The key factor that allows Austin Energy to offer a fixed-rate green power product is that the renewable energy supply is locked in at a fixed rate for 10 to 20 years, depending on the associated supply contracts. Accordingly, business customers, who are the primary target of the program, must commit to the GreenChoice program for a 15-year period, 31 reducing the risk for the utility that demand for the renewable energy project will fluctuate. The utility also has an unbundled rate structure, allowing the green charge directly to substitute for the fuel charge on customer bills.

Although offering protection from fuel-price volatility does not guarantee success in and of itself, it has been a key design element of a number of successful utility green pricing programs. For example, Austin Energy’s green pricing program has led the nation in terms of green power sales since 2001 and its program represents about 15 percent of all green pricing sales nationally. 32 In