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.
Because utility costs are bundled together, all generation resources are combined to create a utility system mix of generation. In other words, utilities normally don’t distinguish between individual generation sources for their customers. Therefore, an equivalent mix of the utility’s generation resources and purchased power is provided to each customer.
For green power programs, utilities and regulators are interested in separating the specific costs related to securing green power. In this way, green power products are unique, differentiated electricity products. Since customer participation is voluntary, only those customers that choose to sign up for these programs pay the incremental costs. Green power program participants typically pay the higher cost of renewables in the form of a premium on their monthly bill. There are four main components to the determination of the green power premium: 22
1. The cost of the green power source: This includes the total cost of electricity and environmental attributes from all renewable resources used in the product, whether from wind, solar, geothermal, biomass, or another source, and whether owned by the utility or acquired through a power-purchase contract. The cost of the green power sources are captured through the specific power-purchase agreements for renewable energy or renewable energy credits (RECs), or through the regulatory approval process for utility-owned renewable projects. As long as these are tracked separately from the rest of the generation mix, the appropriate renewable generation costs can be determined. One challenge in determining generation costs results from the uncertainties regarding how many customers will enroll in the program and for how long they will participate.
2. Program implementation costs: Any additional costs attributed to implementing the green power program, including administration and marketing. It is relatively straightforward to determine a program budget. First, the cost of program administration directly is linked to the staff, equipment, and other resources used to administer the program. Second, the marketing costs can be estimated based on the marketing methods used to publicize the program ( e.g., bill inserts, participation in community events). The challenge for determining the level of marketing expenditures lies in determining the appropriate amount of resources needed to attract a sufficient number of customers to the program.
3. Ancillary services costs: The additional costs incurred to integrate variable output resources, particularly wind, into a utility’s system. Ancillary services guarantee the reliability and security of the electric system by responding to constantly changing electric grid conditions. They are the set of activities and functions that electric system operators and market participants perform in order to: 1) balance electricity supply and demand on a minute-by-minute basis; and 2) prepare for longer-term changes in supply and demand over time. 23 Some renewable energy generators, such as those based on wind and solar, have variable output—they cannot be turned on or off to meet changing demand. Moreover, their output can fluctuate over a matter of a few minutes or hours. Managing these fluctuations can add costs to the system. These costs largely depend on the level of penetration of the variable-output renewables.
4. The cost of displaced utility generation