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Green Price Stability

New approaches account for the economic benefits of renewables.

Fortnightly Magazine - January 2009

Utilities dynamically can adjust the green power premium in two different ways, by: 1) exempting customers from fuel-cost adjustments, and 2) substituting a fixed green rate for the energy rate on the customer’s bill.

As fuel costs have risen, the use of a fuel cost adjustment (FCA) has become prominent in the utility industry. The Edison Electric Institute (EEI) defines an FCA as “a clause in a rate schedule that provides for an adjustment to the customer's bill if the cost of fuel at the supplier's generating stations varies from a specified unit cost.” 24 Use of an FCA allows a utility to automatically pass through higher (lower) fuel costs—as an adder (credit) to the base rate—rather than wait for formal rate change approval. 25 A handful of utilities exempt their green power customers from the FCA under the rationale that green power customers should be protected from costs associated with the utility’s fossil fuel or other non-renewable generation sources and for their commitment to support renewable energy sources. 26

FCA exemption can have a marked impact on the effective or net price differential (net green power premium) (see Table 2) . For example, the net green power premium for Xcel Energy in Colorado over time, compared to the (theoretical) case where the initial green power premium could have remained constant (see Figure 3) . As shown, the net premium significantly was reduced (and even went negative for a time), as a result of the FCA exemption.

Unfortunately for many green power customers, the FCA represents a short-term collection mechanism used between major rate cases that eventually gets balanced in the next utility rate case. Therefore, in many cases, these higher fuel costs eventually become part of base rates and the FCA is set back to zero, eliminating any pricing benefit. For example, in Wisconsin, Second Nature customers served by Alliant-Wisconsin Power & Light (WP&L) were exempted from FCA surcharges instituted after Jan. 1, 2001 27 (see Table 2) . Two fuel cost increases totaling 0.58¢/kWh lowered the net green power premium to 1.42¢/kWh by the middle of 2001, but a fuel-cost decrease of 0.19¢/kWh increased the premium to 1.61¢/kWh in March 2002. In the summer of 2002, the Public Service Commission of Wisconsin (PSCW) approved a rate increase that incorporated the utility’s additional fuel costs into the base rate energy charge, eliminating the fuel-cost surcharge and reestablishing the Second Nature premium at the full 2¢/kWh.

A typical customer’s base rate is adjusted up (or down) depending on the actual cost of fuel for electricity generation (see Figure 4) . Once the base rate is adjusted, the green power customer pays the new base rate, plus the green power premium, which is higher (or lower) than they should be paying, based on the fixed-price cost of the renewable resources. Therefore, if the green- power premium is not adjusted to account for upward changes in the cost of conventional generation, green-power customers continue to pay a higher premium rate even as the cost differential between renewables and non-renewables narrows.

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