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Putting Green Customer Demand to Work

From Powerful Solutions: Seven Ways to Switch America to Renewable Electricity, UCS, 1999

The willingness of many electricity customers to pay more for renewable energy supplies can be tapped within any market structure. The term "green-pricing" has been used to describe programs run by regulated utilities that allow customers to contribute to the development of renewable energy projects. "Green marketing" is generally used to describe offerings by competitive suppliers in a retail competition environment. [1]

As of June 1998, there were approximately 40 utility green-pricing programs around the country, using a number of different models. The majority of programs charge a higher price per kilowatt hour to support an increased percentage of renewables or to buy discrete kilowatt-hour blocks of renewables. Other programs have fixed monthly fees, round up customer bills, charge for units of renewable capacity, or offer renewables systems for lease or purchase. Average market penetration for these programs was about one percent, with approximately 45,000 customers participating nationally, expected to lead to new renewables capacity of about 45-50 MW. [2]

Green-pricing results have varied widely, however, ranging as high as three percent. Among the important variables influencing success are specifics of program design, the extent and quality of market research, the credibility of the utility, the simplicity of the program, the tangibility and visibility of the renewables projects, and marketing efforts, particularly with community organization partnerships. [3]

Texas has approved a green pricing rule, setting standards for eligible renewables, green pricing premiums and limits on administrative and marketing costs. [4]

Many environmental groups have actively supported green marketing. The Natural Resources Defense Council, Environmental Defense Fund, Center for Energy Efficient and Renewable Technologies and Union of Concerned Scientists all have web sites encouraging customers to choose renewable options. [5]

Green marketing has begun to develop in California and Pennsylvania. Marketers in California have cited a number of requirements for a successful retail market which are not fully established. Electricity suppliers will need access to information about existing customers and will need to be able to do metering and billing. Standard methods for switching customer accounts easily will also be needed. Marketers have complained that it has been difficult and time-consuming to switch customer accounts in the early stages of the California market. [6]

Most importantly, marketers have had a difficult time competing with artificially low generation prices offered by incumbent utilities. In California, customers who want to switch suppliers receive a credit on the bills from their utilities equal only to the wholesale electricity generation rate. They are free to shop for any competitive supplier who can compete against the wholesale generation rate.

But competitive suppliers must not only buy wholesale generation to resell to their customers, they must also incur marketing and overhead costs. Marketing costs to persuade customers to switch suppliers in California have exceeded $100 per customer. [7]

Utilities do not have to advertise to keep most of their existing customers. And their overhead costs -- office space, equipment, telephones, customer service, etc. -- continue to be paid by all customers, because even those who switch suppliers do not get any credit on their utility bills for these costs.

As a result of these unfavorable conditions, Enron, a large diversified energy company headquartered in Texas, gave up trying to compete in the California residential market only after a few months. There is little competition in California to offer residential customers lower prices than they can get staying with their utility. Ironically, about the only way marketers can compete is to offer a different kind of product -- such as a green product -- but the cost disadvantage faced by marketers has limited competition for green customers as well.

In Massachusetts and Rhode Island, the initial competitive environment has been even worse than in California. All customers who stay with their existing utility are guaranteed a "standard offer" generation price. The standard offer starts at 2.8¢/kWh, and increases over time. But the wholesale market price in New England has been about 3.5 to 4¢/kWh. Utilities that lose money by having to sell generation at standard offer prices which are below-market are allowed to recover those losses with interest after seven years, thus subsidizing the standard offer. Not surprisingly, during the first year competition has been allowed, no companies have stepped forward to try to compete against the residential standard offer. One company, AllEnergy, a subsidiary of New England Electric, is offering a hybrid service, where standard offer customers of any utility an option to "upgrade" their service by buying blocks of renewables generation, but with limited success to date.

A solution adopted in Pennsylvania is to have the credit on utility bills for customers switching suppliers not only reflect the wholesale generation price, but retail costs that the distribution company is no longer incurring on the customer's behalf. Customers choosing to switch suppliers receive a "shopping credit" intended to cover not only generation costs, but supplier overhead and marketing. The shopping credit varies by company, and is as high as 5.2¢/kWh for customers in the Philadelphia area. As a result, customer response to early offers has been very high. One green marketer recently reported having signed up as many customers in 6-7 weeks in Pennsylvania as they have in 6-7 months in California. [8]

Another partial solution would be to require competitive bidding to serve the standard offer. Marketing and overhead costs to serve the standard offer customers would be low, and companies would be likely to include those costs in their bids. [9] However, this approach would still not create a robust market with many companies competing to provide new products and services to residential customers.

Another approach might be to require utilities to divest of their customers, requiring all customers to choose a competitive supplier. Customers who did not choose would be assigned to a competitive supplier at random.


Aggregation
Customer aggregation is another mechanism for creating a more competitive market in a way that can benefit both the environment and consumers. An aggregator organizes customers into a buying group, thus giving the buying group more bargaining clout and greatly reducing transaction costs for marketers. By combining customers who use electricity at different times of the day and week, and smoothing out sharp peaks or valleys in electricity demand, aggregators can also make it easier and less expensive for marketers to serve groups of customers. [10] Aggregation may be especially important in new markets, where choice is unfamiliar, there is great inertia in the market, and the costs of persuading customers to make any choices can be quite high.

Several different aggregation models are being developed and implemented. In California, state universities have aggregated their demand and negotiated a contract with one supplier. Water agencies throughout the state also formed an aggregation group. [11]

In Colorado, an environmental organization, the Land and Water Fund of the Rockies, is aggregating customers to participate in a wind energy green-pricing program offered by Public Service of Colorado, a regulated utility. [12]

In Massachusetts, large nonprofit electricity users of many kinds, including universities, health facilities, schools, and cultural organizations are being aggregated by the Massachusetts Health and Educational Facilities Authority. The organization, which already had a buying group for natural gas, has expanded to electricity and claims over 500 members with a combined buying power of almost $150 million. [13] Another aggregator, National Energy Choice, is offering an extra 5 percent savings on top of the standard offer discount, plus an additional 5-7 percent savings from energy efficiency improvements, to members of the Massachusetts Municipal Association and two other nonprofit associations.

On an even broader scale, 21 towns on Cape Cod and Martha's Vineyard are aggregating the electricity demand of their more than 150,000 residents, businesses, and town facilities through a municipal franchise model. [14] The towns -- which have a combined peak demand of 335 MW -- issued a request for proposals in August 1998 through an association known as the Cape Light Compact. [15] A number of other Massachusetts towns and counties are also in various stages of considering municipal aggregation. [16] The Massachusetts Restructuring Law specifically authorizes municipal "opt-out" aggregation. The law allows municipalities to aggregate their customers, by vote of town council or meeting, with contracts subject to approval by the Massachusetts Department of Telecommunications and Energy. Although all residents and businesses of participating towns would be automatically included in the aggregation, any customer can opt out of the aggregation and choose any licensed electricity supplier.

Municipal aggregation could be favorable for renewables in several ways. For one thing, towns may set their own minimum requirements for renewables, energy efficiency services, or other environmental criteria, to reflect the public benefits provided by clean and renewable energy options. And, by pooling large numbers of customers and by making the aggregation process automatic, municipal aggregation can greatly decrease marketing costs and ensure that most of the premium for any green electricity options goes directly to produce more renewable electricity generation. Municipal aggregation could also make it easy for customers to choose a green option merely by checking a box on a bill. Finally, customers may find a green option offered through a municipality more credible than one offered by a private company with which they are not be familiar.

Of course, municipal aggregation will not automatically favor green options. The tendency of many towns is likely to be to seek out the lowest cost electricity sources, irrespective of their environmental profile. Concerned citizens and advocacy groups may need to participate in time-consuming local forums to influence aggregation choices. In addition, towns with contracts for waste disposal with waste-to-energy facilities are likely to feel pressured to include those facilities as green options, despite objections from some environmental groups.

Buyers cooperatives, or co-ops, are another traditional form of aggregation. A Vermont group has put together a plan for a regional consumer controlled coop to reduce prices and develop cleaner energy sources. [17]

Government Purchase
A related strategy is using government purchases of green electricity, or direct investment in renewables. The US government is the world's largest energy consumer, with total purchases (electricity plus fuels) of almost $10 billion. [18] State and local governments also consume large amounts of energy. Santa Monica became the first California city to buy from a green marketer to power city facilities. [19] In Nebraska and Colorado, the governors issued Executive Orders for state agencies to look at purchasing green power supplies. In Nebraska, all state facilities to use renewables and energy efficiency where cost-effective. [20]

In 1994, the President issued Executive Order 12902, which set a goal of reducing energy use in federal buildings by 30 percent by 2005 and directing the Department of Energy to develop a Renewable Implementation Plan for increasing the use of renewables by federal buildings and agencies. A number of successful projects have since been developed. [21]

The New England regional office of the U.S. Environmental Protection Agency has made a commitment to purchase at least four percent of its electricity from renewable energy sources.

The Massachusetts restructuring law requires the state to conduct an annual study of the costs and benefits of requiring all state agencies and facilities to purchase a minimum of 10 percent of its electricity from renewable sources. [22]

References

  1. For a comprehensive web site with news, resources and links on green pricing and green marketing, see the Department of Energy site at www.eren.doe.gov/greenpower.
  2. Edward Holt, "Green Power: Where We've Been, Where We're Going," Presentation to the Third National Green Power Conference, Sacramento, Calif., June 25, 1998.
  3. Edward Holt, Green Pricing Resource Guide, Regulatory Assistance Project, Gardiner, ME, February 1997. Available online at www.rapmaine.org/green.html.
  4. State Renewable Energy News, NARUC Subcommittee on Renewable Energy, Fall 1998. Texas green pricing rule is available online at www.puc.texas.gov/rulemake/19087main.HTM.
  5. CEERT: ceert.org. Environmental Defense Fund: www.edf.org/programs/Energy/green_power. Natural Resources Defense Council: www.nrdc.org/worldview/fwguid.html. UCS: www.ucsusa.org/energy/buy.green.html.
  6. Ryan Wiser, Steven Pickle and Joseph Eto, "Details, Details: The Impact of Market Rules on Emerging 'Green' Energy Markets," Lawrence Berkeley Laboratory, LBNL-41812, September 1998. Available online at eetd.lbl.gov/EA/EMP/emppubs.html.
  7. Ryan Wiser, William Golove, and Steve Pickle, "California's Electric Market, What's in It for the Customer," Public Utilities Fortnightly, August 1998.
  8. Tom Rawls, Green Mountain Energy Resources, Energy Workshop, National Conference of State Legislatures, Boulder, Colo., November 19, 1998.
  9. Cheryl Harrington, Regulatory Assistance Project, Presented at National Association of Regulatory Utility Commissioners conference, Orlando, Fl. November 9-11, 1998.
  10. For a guide to aggregation benefits and models, see Kay Guinane, Group Buying Power: Meaningful Choices for Energy Consumers, Environmental Action Foundation and American Public Power Association, Washington, DC, May 1997.
  11. www.acwanet.com/archives/ACWA-USA/aggregatenr.html.
  12. Promoting Renewable Energy in a Market Environment: A Community-Based Approach for Aggregating Green Demand, Land and Water Fund of the Rockies and Community Office for Resource Efficiency, Boulder, Colo., May 1997.
  13. www.mhefa.state.ma.us, www.poweroptions.org/index.htm.
  14. Concept proposed by Scott Ridley, "Consumer-Based Franchises," Electricity Journal, May 1995. Available online at www.local.org/.
  15. Request For Proposals is available online at www.vsa.cape.com/~cccom/county/rfp.htm. Request For Qualifications online at www.vsa.cape.com/~cccom/county/rfq.htm.
  16. For more information on the status of municipal aggregation in Massachusetts, and links to other states, see the website of Cape and Islands Self-Reliance, the leading municipal aggregation advocacy organization, at www.reliance.org/dereg.htm.
  17. Prospectus: Community Energy Cooperative: Comprehensive Energy Services Competitive Prices Through a Network of Regionally Linked Buyers Cooperatives, Draft, February 2, 1997.
  18. Procurement Guide for Renewable Energy Systems: A Handbook for Government, Interstate Renewable Energy Council, January 1997.
  19. State Renewable Energy News, NARUC Subcommittee on Renewable Energy, Summer 1998. Available online at www.nrel.gov/analysis/emaa/projects/sren/.
  20. State Renewable Energy News, NARUC Subcommittee on Renewables, Fall 1997 (CO) Winter 1998 (NE). Online at www.nrel.gov/analysis/emaa/projects/sren/.
  21. Ibid.
  22. Chapter 164 of the Acts of 1997, Section 330.

 

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