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.
most renewables-based plants is stable over time, subject only to variations in operations and maintenance (O&M) costs and resource availability, which tend to be predictable. 8 Thus, whether a utility owns its renewable generation or purchases renewable energy through a power-purchase agreement, the price is known and essentially fixed over time. 9
There are large differences in the structure of the costs among generating sources. For example, the majority of the projected generation cost for the wind plant is in the up front capital investment, while most of the natural gas generation cost is in the fuel expense (see Figure 1) . The challenge for capital-intensive power projects is that the up front cost of power projects usually receives greater scrutiny from utility regulators. However, the long-term costs and rate impacts of projects with significant fuel costs are dependent on fuel price projections that cannot be known with certainty. Furthermore, once the project is in operation, fuel price increases and decreases tend to be passed to customers through periodic, real-time fuel price adjustments. The initial capital costs of power plants are more predictable than fuel costs and easily can be planned into electricity rates.
Although nearly 50 percent of U.S. electricity supply is generated from coal, the natural gas generation share has been increasing—natural gas generation now accounts for 20 percent of U.S. electricity generation compared to 13 percent just 10 years ago. Notwithstanding commodity price trends in late 2008, the growing dependence on natural gas as a generation fuel has caused electricity prices to increase significantly. 10
Recent trends in natural gas prices have highlighted the risks inherent in reliance on fuel-based technologies without fixed-price fuel contracts (see Figure 2) . Not only have higher prices been a burden, but the volatility of prices also is problematic for both operations and planning.
Even coal-fired generation is subject to fuel-price escalation and volatility. U.S. Energy Information Administration (EIA) data show that the average cost of coal delivered to U.S. electric generating plants rose 30 percent from 2004 to 2007 as a result of both minemouth price increases as well as transportation cost increases. 11 And spot market coal prices have increased even more dramatically, with Central Appalachian coal prices exceeding $140 per short ton in the summer of 2008 compared to about $45 a year before. 12 Coal generation costs also might be subject to future emissions control costs ( i.e., for carbon and mercury), which generally aren’t reflected in current or projected plant costs.
Typically, these cost increases are passed on to ratepayers. As a result, some electricity customers are beginning to value renewable energy generation for its stable-price characteristics in addition to the environmental benefits. And green power customers are beginning to expect to receive this fixed-price benefit as a component of their product purchase. 13
Valuing Fixed-Price Renewables
What motivates consumers to purchase green power? Utility market research has found that for residential customers, the decision is predominantly an emotional one; while for commercial customers, it is a business decision. 14 Both sets of consumers often are interested in