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Green Price Stability

New approaches account for the economic benefits of renewables.

Fortnightly Magazine - January 2009

purchasing green power for its environmental and fuel diversity benefits, and out of an interest in preserving resources and the environment for future generations.

For commercial customers, green power purchases can be motivated by an interest in “doing the right thing,” generating customer, shareholder, or employee goodwill, meeting corporate or organizational goals for sustainable business practices or operations, or for financial reasons, such as mitigating potential penalties for greenhouse gas emissions in the future or providing a hedge against fuel price volatility. 15,16 Green power purchases also can be a market differentiator for businesses, and provide co-marketing and co-branding opportunities. And many large purchasers report receiving valuable earned media and other public recognition as a result of their purchases.

The fact that green power commands a premium is a key factor keeping market penetration low. Recent experience shows that when green power prices reach or fall below parity with base rates, a greater number of customers will make purchases. Research conducted by Portland General Electric shows that even though the key drivers for customers to sign up for the utility’s green pricing program are environmental, customers in the segment who were undecided about signing up for the program would be persuaded to enroll if they personally benefited from lower rates in the long run. 17 Therefore, even customers who primarily are motivated by environmental reasons might be more inclined to participate if the program offered price stability or a hedge against fossil fuel cost increases.

Table 1

With rising fossil fuel and electricity prices, businesses increasingly are looking for price stability in their green power products in order to hedge themselves against rising prices. 18 Even if renewables might be more expensive initially, the availability of a fixed-rate product over a long time period provides much-desired certainty in energy expenditures. This certainty can help businesses better plan their budgets.

Austin Energy has found that its business customers most value the price certainty and savings that come with the utility’s fixed-rate product. Advanced Micro Devices (AMD), an Austin Energy green-pricing program participant since the program began, noted that the fixed-rate product allows the company to reduce overall energy costs. 19

While there is a lot of interest in capturing the value of fixed-price renewable power, it might not be straightforward to execute in a green power program. Utilities face an array of challenges when initially determining a price of a green power product and considering how it should change over time.

Pricing Green Power

Table 2

In the rate-setting process, utilities can choose among several green pricing methodologies that account for the cost differential between renewable energy and conventional energy sources.

In the simplest sense, electricity rates reflect cost recovery of a utility’s investments and operating expenses. These costs include: 1) owning generation; 2) owning transmission and distribution assets; 3) a return on owned assets; 4) purchased-power contracts; and 5) recovery of various operating expenses, including fuel costs, maintenance and administration. Generation, transmission and distribution costs traditionally are rolled up or bundled together into a utility’s rate 20 and not tracked separately in traditionally regulated electricity markets.