Green Power Takes Off with Choice in Electricty

Fortnightly Magazine - August 1998

FOR THE FIRST TIME IN DECADES, A GROWING NUMBER of consumers are able to choose who supplies their electric power and, perhaps more importantly, where that power comes from. Evidence is mounting that this ability to exercise choice may give a long-needed shot in the arm to the deployment of renewable energy technologies.

National polls consistently reveal that between 40 and 70 percent of those sampled say they would pay a premium for environmental protection or for renewable energy, and utility company surveys reinforce those findings. %n1%n Utilities, affiliates and independent power marketers have all begun to act on this widespread public support, offering environmentally preferred power products and services through various "green power" offerings.

The source of power is important because the electric power industry is a leading contributor to the nation's air quality problems. According to the U.S. Environmental Protection Agency, electricity generation is responsible for 66 percent of sulfur dioxide, 29 percent of nitrogen oxide, 36 percent of man-made carbon dioxide and 21 percent of mercury emissions. %n2%n

Whether green power marketing will add substantially to existing renewable capacity levels, in the absence of policy actions, remains uncertain. So far, states with pilot programs or mandated direct access for electricity supply have seen a marked increase in green power marketing, with multiple services and product offerings coming both from utilities and competitive retail power suppliers.

Nevertheless, many supporters of clean energy argue that too many obstacles stand in the way of a truly functioning, competitive retail electricity market. The new market rules being crafted by state legislators and regulators will dictate the pace and success of green power marketing, as will the ability of those customers who choose to remain with their incumbent providers to have access to green power options.

Green Power Programs: Pricing vs. Product

Green power programs can be distinguished in one sense by the difference between pricing options and product marketing.

More than 30 utilities have either implemented or announced plans to offer a "green pricing" option to their customers. Green pricing refers to an optional utility service that allows customers to support a greater level of utility company investment in renewable energy technologies. Participating customers pay a premium on their electric bill to cover the incremental cost of the additional renewable energy. Green pricing programs come in three basic types. (See sidebar, "Pricing Programs.") Many utilities are offering green pricing to build customer loyalty and expand business lines and expertise in advance of electric market competition. Tables 1 through 3 summarize the different green pricing programs now being offered by utility companies.

Compare green pricing with the more general concept of "green power marketing." The latter describes the ability of customers to purchase green power in a competitive market, one in which multiple service offerings and suppliers exist, many of whose sole business purpose will be selling cleaner power. Retail access pilot programs have provided direct market evidence that many electricity consumers, when given real, competitive market choices, do value and will pay more to purchase electricity from more environmentally beneficial energy sources.

Customer participation in utility green pricing programs has been quite low-running generally between 1 and 2 percent or less. For the most part, these low response rates can be attributed to the experimental nature of many programs. Many suffer from capacity and subscription limitations, a narrow scope and an inadequate corporate and marketing commitment.

However, the experience in retail access pilots has been much different. %n3%n New Hampshire initiated a statewide pilot program for electric retail access in June 1995, in which about 3 percent of each electric utility's peak load, or a total of about 50 megawatts statewide, was opened to competition. Although market share data has not been made available, a survey of participating customers found that 37 percent were either strongly influenced" or "moderately influenced" by the environmental message or image of their power supplier. %n4%n

Nearby, in Massachusetts, in another experimental program for direct access, Massachusetts Electric Co. opened up to 100 million kilowatt-hours of demand in four cities to competition. Overall 31 percent of residential participants chose an "environmentally sensitive" or "green" service option. %n5%n

And in the most recent retail pilot, 15 percent of Pacific Power customers in Klamath County, Ore., who chose among a portfolio of four services, selected a green power product with 100 percent renewables content at a 10-percent price premium. %n6%n

By mid-June, 18 states had either passed legislation on electric restructuring or had issued regulatory orders by which all customers eventually will be allowed to choose an electric supplier. In California, which initiated full customer choice on March 31, several different companies are offering certified green power services.

Competitive Markets:

Obstacles to Consider

Although customer choice holds promise for encouraging greater development of renewable energy sources, many clean energy supporters argue that there are too many obstacles to the development of a truly competitive market anytime soon.

IS IT REALLY GREEN? It is important to assure consumers that their "green" purchases are actually contributing to a cleaner energy system. However, because the directional flow of electrons cannot be controlled, "green" customers cannot be assured that the power entering their homes actually comes directly from the renewable generators. What matters is that the customer's purchase commitment results in an equivalent amount of clean generation somewhere on the power grid. Also the New Hampshire pilot experience highlighted a number of issues related to advertising and marketing claims.

To help address these issues in California, the independent, nonprofit Center for Resource Solutions, in concert with power marketers and consumer and environmental stakeholders, launched a voluntary certification and verification program for environmentally preferred electricity products. The Green-e logo allows consumers to easily identify products that contain at least 50 percent renewable electricity content. %n7%n

IS IT NEW? The intent of a functioning green power market should be to increase the overall deployment of cleaner energy sources, such as renewables, and thus improve the environmental footprint of the power industry. Utility green pricing programs have resulted in plans for or actual installation of about 35 megawatts of new renewable energy capacity through 1999.

Given their captive market, utilities can recruit customers before building the renewables capacity needed to serve those customers. On the other hand, competitive green power marketers must have green power supplies available to serve their customers initially and thus are relying on existing renewable energy capacity, at least in the beginning. However, a number of these marketers are planning to sell power from new renewables capacity in the future.

CAN THE MARKET WORK? Green power marketers face high costs in locating and acquiring customers interested in purchasing environmentally friendly power. Residential and small commercial customers, who are most likely to display their personal preferences in electricity purchase decisions, are also the most expensive to recruit. Appropriate vehicles should be designed to help aggregate these customers. Businesses, local governments and community groups can play a role in facilitating aggregation.

Suppliers and customers alike might also benefit from the establishment of a green power supply pool, in which renewable resources with different availability characteristics can be managed and blended into a firm, more market-compatible product. In California, the Automated Power Exchange Green Power MarketTM provides such a function. %n8%n

EES North America

Consumer education will also be key to the efficient operation of the evolving market; consumers must be able to rationally compare product offerings. Some states have established consumer education efforts as a component of their restructuring laws. At a minimum, states are exploring the development of uniform information disclosure standards to help consumers make informed market choices. Disclosure might include product information such as price, fuel sources and environmental emissions. Such disclosure most likely will consist of an information label, similar to the nutrition label now found on food products. %n9%n

TRANSITION CHARGES--HOW LONG? The limited experience from retail pilot programs suggests that customers are more apt to choose a green power service-even if more expensive-provided they are already receiving some measure of savings to start with. However, in almost all states, utilities will continue to recover stranded costs through a customer surcharge, thus delaying true competitive market savings for several years.

Supplier incentives or customer purchase credits may be warranted in some cases to help the green power market get started. California, for example, has instituted consumer rebates for green power purchases to help lower the cost of green power to customers during the stranded cost recovery period. %n10%n

STANDARD OFFERS--HOW LOW? Obviously, prices for green power must remain competitive with traditional power sources to attract more than a small niche of customers. In many states, the standard offer rate to customers has been set very low, even below the wholesale power rate in some cases. These artificially low prices will discourage customers from switching suppliers. And because profit margins will be thin or nonexistent, marketers will be discouraged from offering green power products.

DEFAULT SERVICE--TOO LIMITED? For any number of reasons, many customers will choose not to switch suppliers but to stay with the incumbent electricity provider. Will the incumbent offer green pricing or green marketing options under its default tariff? Customers who choose not to choose nevertheless should have access to a competitive green power option through the default provider.

In the PECO restructuring decision, the Pennsylvania PUC is requiring the competitive default provider to obtain 2 percent of its electricity supply from non-hydro renewables, increasing 0.5 percent per year thereafter. %n11%n And, although still presiding over a regulated market, the Texas PUC is considering a rulemaking that will require electric utilities to offer their customers a green power purchase option. %n12%n

Blair G. Swezey, Ashley H. Houston and Kevin L. Porter are principal policy advisor, staff analyst, and policy analyst, respectively. Information for this article is drawn from the Information Brief on Green Power Marketing, a quarterly publication produced by the National Renewable Energy Laboratory that is available on the Green Power Network, an internet site maintained by NREL for the Office of Utility Technologies of the U.S. Department of Energy. See www.eren.doe.gov/greenpower.

Pricing Programs

For a premium, offers include energy or capacity

requirements, and funding project development.

CONTRIBUTION PROGRAMS. Customers contribute to a utility-managed fund for renewable energy project development. Fund bears no relation to customer's electricity consumption. Utilities use funds to implement small renewable energy projects in their service territories. Projects may or may not supply actual renewable generation for the customers.

CAPACITY-BASED PROGRAMS. Customers purchase a fixed block of their electric capacity requirements from renewables. To date, capacity-based programs have offered photovoltaics exclusively, in rooftop or localized applications.

The capacity premiums can mask a very high effective energy premium (in cents per kWh), compared with energy-based green tariff programs. For example, a capacity charge of $3 per 100 watts, billed by Arizona Public Service Co., is equivalent to an energy-based rate of 21 cents per kWh. Detroit Edison's capacity charge of $7.30 is equivalent to an energy charge of 62 cents per kWh. (Detroit Edison credits back to customers the value of the PV-based generation.)

ENERGY-BASED PROGRAMS. Customers purchase a portion or all of their electric energy requirements from renewable sources, with the total monthly premium based on quantity supplied. Subscriptions offered in energy consumption blocks (e.g., 100 kWh, 250 kWh, 500 kWh, or 1,000 kWh) or as a percentage of total monthly consumption (e.g., 25 percent, 50 percent or 100 percent). This type of program offers renewables that are most competitive with bulk power generation. Premiums generally range from 2-3 cents per kWh; 16 of 19 offering energy-based programs include wind energy.

1 Barbara C. Farhar and Ashley H. Houston, Willingness to Pay for Electricity from Renewable Electricity, National Renewable Energy Laboratory, NREL/TP-460-21216, September 1996. For a copy see http://www.eren.doe.gov/greenpower.

2 U.S. Environmental Protection Agency, National Air Quality and Emissions Trends Report, 1995, EPA-454/R- 96-005, December 1996. For a copy see http://www.epa.gov/oar/ aqtrnd95/report.

3 Some have argued that the retail pilot experience may overstate future customer response to green power offerings because those predisposed toward green purchasing may also be most inclined to participate in the pilots. On the other hand, green power marketers would argue that as the market opens, customers will become better educated about green choices through industry marketing efforts, thus increasing the numbers of customers willing to switch.

4 Edward A. Holt and Jeff Fang, The New Hampshire Retail Competition Pilot Program and the Role of Green Marketing, NREL, Topical Issues Brief, NREL/TP-260-23446, November 1997. For a copy see http://www.eren.doe.gov/greenpower.

5 Steven M. Rothstein and Jeff Fang, Green Marketing in the Massachusetts Electric Company Retail Competition Pilot Program, NREL/TP-260-23507, October 1997. Overall, 4 percent of eligible customers switched suppliers. For a copy see http://www.eren.doe.gov/greenpower.

6 The Portfolio Approach to Green Power," Presentation by Barrett Stambler and Andrea Kelly at the Third National Green Power Conference, Sacramento, Calif., June 25-26, 1998. Overall, 6 percent of eligible customers chose to switch suppliers in the first phase of the pilot.

7 Karl Rabago, Ryan Wiser, and Jan Hamrin, "Behold, the Green-e," The Electricity Journal, January/February 1998, pp. 37-45. See also http://www.green-e.org/.

8 Janis C. Pepper, "Opportunities for Wind in the APX Green Power Market(," Paper presented at Windpower '98, April 30, 1998. For a copy see http://www.eren.doe.gov/greenpower.

9 Center for Clean Air Policy, Disclosure in the Electricity Marketplace: A Policy Handbook for States. See http://www.ccap.org. See also the Regulatory Assistance Project's materials on disclosure at http://www.rapmaine.org.

10 Section 445 of Chapter 2.5 of Part 1 of Division 1 of the California Public Utilities Code as added in Senate Bill 90. For more information see also the California commission's web site at http://www.energy.ca.gov/renewables/index.html.

11 Docket No. R-00973953 of the Pennsylvania Public Utility Commission. For the full text of the Order, see http://puc.paonline.com/electric/Restruct_orders.htm.

12 "Green Pricing Tariff," Proposed changes to Section 25.251 of the Public Utility Regulatory Act of the Texas Utilities Code, Project No. 19087. See http://www.puc.texas.gov/rulemake/index.htm.


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