Conservation Update: Growth Spurt for Green Power
This article was featured in the January-February 2007 edition of the State Energy Program's bimonthly newsletter, Conservation Update.
by Lori Bird and Blair Swezey, National Renewable Energy Laboratory
Green power markets have shown strong growth for the past five years. In 2005, retail sales of renewable energy for green power totaled 8.5 billion kilowatt-hours (kWh). This represents an increase of 37% over sales in 2004, and a tenfold increase since 2000.
U.S. consumers spend $50 million to $70 million annually on premiums for green power, which is the additional charge that utilities and power suppliers tack onto their bills for providing electricity generated from renewable energy resources. Altogether, renewable energy sales through green power programs support a generating capacity equivalent to about 2,500 megawatts (MW). Of this amount, more than 2,000 MW are from new installations built after 1997. (This definition of new sources is part of the Green-e certification program for green power.)
Green power markets provide a way for consumers to receive more of their electricity from renewable energy resources. They also provide an additional revenue stream for renewable energy projects and raise consumer awareness of the benefits of renewable energy. Today, more than half of all U.S. electricity customers have an option to purchase some type of green power product from a retail electricity provider.
Utility green pricing programs in states with regulated utilities.
Here, utilities allow customers to purchase some portion of their power supply as renewable energy — almost always at a higher price — or to contribute funds for the utility to invest in renewable energy development. Currently more than 600 utilities, or about 20% of utilities nationally, offer green power programs to customers in their service territories. See a list of utility green pricing programs on the U.S. Department of Energy (DOE) Office of Energy Efficiency and Renewable Energy (EERE) Green Power Network.
Green power marketing, which is offered by competitive electricity suppliers in states with deregulated, competitive electricity markets.
With this option, electricity customers can often purchase electricity generated from renewable sources by switching to an alternative electricity supplier that offers green power. In some of these states, default utility electricity suppliers offer green power options to their customers in conjunction with competitive green power marketers.
Renewable energy certificates (RECs) that are sold separate from electricity.
Regardless of whether consumers have access to a green power product from their retail power provider, they can purchase green power through RECs, which represent the so-called "green" attributes of electricity generated from renewable energy projects.
The following chart provides a summary of this rapid growth in green power markets. The chart is taken from a recent report published on the EERE Green Power Network that was written by Lori Bird and Blair Swezey and is titled Green Power Marketing in the United States: A Status Report (Ninth Edition).
|Utility Green Pricing||1,280||1,840||2,450|
|Renewable Energy Certificates||660||1,720||3,890|
Certificates, Commercial Sales Blossom in 2005
The increases in green power sales in 2005 were driven largely by participation of Fortune 500 companies and other businesses, universities, and federal, state, and local government agencies. In previous years, green power marketers focused their marketing on the residential sector; recent growth can be largely attributed to nonresidential demand.
In fact, 2005 marked the first year that most (65%) green power sales were made to nonresidential customers. During 2005, nonresidential sales doubled, while sales to residential customers declined by 14%. Although sales to residential customers through utility green pricing programs increased in 2005, losses in some competitive markets, such as Pennsylvania and Virginia, led to the overall decline in residential sales. Nearly all REC sales were to nonresidential customers; residential customers played a larger role in utility green pricing programs and competitive markets, where they accounted for more than 60% of renewable energy sales.
Growth rates have also differed in the utility, competitive, and REC submarkets. REC sales more than doubled in 2005, while sales through utility green pricing programs also exhibited strong annual growth of more than 30%. However, sales in competitive markets fell by about 20%, because rising costs associated with supplying customers with renewable electricity service caused some marketers to lose or turn back customers to default service. REC markets now represent nearly half of industry sales, replacing competitive markets as the dominant market sector.
|Customer Segment||Utility Green Pricing||Green Power Sales in Competitive Markets||Sales of Renewable Energy Certificates||Total Sales|
Falling Prices Drive Demand
Green power price premiums have been falling over time because of a combination of higher prices for conventional fuels and lower renewable energy costs. For example, nationally, the average premium charged in utility green pricing programs has fallen from $0.0348/kWh in 2000 to $0.0236/kWh in 2005. Clearly, when the cost differential between renewable and conventional generation is narrowed, green power becomes a more attractive purchase option.
Utilities Exempt Customers from Fuel-Related Price Increases
Several utilities exempt their green power customers from rate adjustments caused by changes in the prices of nonrenewable generation fuels. For three of these utilities — Edmund Electric (Oklahoma), OG&E Electric Services (Oklahoma), and Xcel Energy (Colorado) — rising natural gas prices caused the green power price differential to turn negative at the end of 2005; that is, green power customers were actually paying less for their power than base rate customers were paying for theirs. This situation led to a "run on the bank" that exhausted the green power supplies of two of the three utilities.
Three other utilities — Austin Energy (Texas), Eugene Water and Electric Board (Oregon), and Clallum County Public Utility District (Washington) — offer a fixed-rate green power product, which also provides customers with protection from fuel-price changes. The most successful of these programs is the GreenChoice program offered by Austin Energy, which in 2005 accounted for nearly 20% of all green power sales by the nation's utilities. The utility signs 10-year, fixed-price wind energy supply contracts and likewise requires its customers to commit to a 10-year green power purchase. The program has proven extremely popular with larger commercial customers who, in addition to buying renewable energy, are able to lock in a hedge against future fossil energy price volatility. GreenChoice customers have also seen the utility's base rates increase above those charged for green power.
Why don't more utilities offer fixed-rate green power products or fuel-price exemptions? Utilities are generally risk averse and are concerned that customers will drop the green power service and leave the utility with "stranded" investments in renewable energy projects. Many utilities (and their regulators) strictly avoid any cross-subsidization between green power customers and other customer classes. The Austin Energy model works, in large measure, because the utility and the city are willing to accept these risks. On the other hand, the great success of the Austin program clearly shows that customers place a high value on the fixed-price characteristic of the product.
Renewable Energy Certificate Price Trends
Increasingly, REC sales have come to dominate the green power market. In particular, large national-scale companies and organizations find RECs to be an attractive green power option because of their greater flexibility in cost and procurement. Because RECs can be derived from renewable energy projects located anywhere in the country, there is a greater level of competition among suppliers, which exerts downward pressure on prices. The figure below, compiled from a very limited sample of publicly available data on large REC purchases, shows that, similar to green pricing, REC prices have declined considerably in recent years. REC prices tend to be lower than utility green pricing premiums, again owing to a greater level of competition among suppliers and a national marketplace for RECs. In fact, published market data for October 2006 shows a price range of from $0.015/kWh to $0.009/kWh for nonsolar voluntary REC offers.
Note: In 2004, three publicly announced REC deals were priced at $0.015/kWh.
Whether REC prices will continue to fall is an open question. Because of global demand pressures, market prices for wind turbines and solar modules have been rising, which have in turn increased the costs of some new renewable energy projects. However, costs are also rising for construction of new power plants that use conventional fuels, which may negate any near-term impact on REC prices. Competition for RECs could also heat up as renewable portfolio standard (RPS) policies proliferate and compliance requirements ramp up. Nevertheless, REC prices remain low, and early indications are that 2007 will experience significant growth in green power sales. For example, in October 2006, the EPA Green Power Partnership announced that total annual renewable energy purchase commitments among its partners had risen to more than 7 billion kWh, up from about 4 billion kWh at the end of 2005.
Key Market Issues and Challenges
Green power markets do not operate in isolation from other markets, and like all energy markets are subject to impacts and changes in policies by federal and state governments. Two policies that could have a strong effect on the continued growth of green power markets deal with the reduction of greenhouse gases through carbon trading markets and RPS.
Impact of Emerging Carbon Markets
Renewable energy purchases provide a number of benefits, but many consumer purchases have been motivated, at least in part, by their greenhouse gas benefits. Green power purchasing is an accessible and relatively easy way for consumers, companies, and organizations to reduce their carbon footprints.
Carbon control policies have the potential to substantially influence voluntary markets for renewable energy. Carbon regulation is now emerging in the Northeast under the Regional Greenhouse Gas Initiative (RGGI) and in California as a result of recently adopted legislation. There is increased discussion about carbon regulation at the national level as well. Both RGGI and California plan to implement cap-and-trade programs to achieve carbon reductions, similar to the successful national sulfur dioxide cap-and-trade system developed under the Clean Air Act Amendments of 1990 to address acid rain.
Under a carbon cap-and-trade program, the extent to which renewable energy generation sources affect carbon emissions levels will depend on the program design; for example, whether renewable generation sources are allocated allowances that can be retired or are otherwise considered in setting the level of the cap. This in turn will affect the claims that renewable energy generators and marketers can make with respect to carbon reductions. If cap-and-trade programs are designed such that voluntary green power purchases do not lead to overall carbon emission reductions, this will limit the greenhouse gas benefit claims of purchasers and pose a challenge for green power marketers.
The design of emerging regulatory programs to reduce carbon emissions will thus have important implications for the operation — and perhaps even the viability — of voluntary renewable energy markets in the future. In the meantime, a growing number of companies and organizations are marketing carbon-offset products to help consumers reduce their carbon footprints, covering everything from offsetting the carbon emissions associated with personal car and air travel to "greening" the electricity used at business conferences. Carbon offsets face many of the same issues and challenges of definition, verification, and certification as green power; in fact, verifying carbon offsets is more challenging than for green power because of the wide array of offset activities.
Carbon offset products can be both a threat and opportunity for green power. If offset products include renewable energy as a component, this market will provide a stimulus for renewable energy development. On the other hand, any number of alternative measures could qualify as carbon offsets, which creates competition for green power as a carbon reduction strategy.
Interaction with Renewable Portfolio Standards
The implementation of RPS — policies that require electricity providers to supply a certain percentage or amount of their delivered energy from renewable energy sources — can also have important implications for voluntary markets. RPS policies have been adopted in 21 states and the District of Columbia through legislative actions, regulatory orders, or ballot initiatives.
Depending on the design, an RPS policy can either support or limit the voluntary market for renewable energy. Most important is whether renewable electricity used for voluntary green power programs should be counted toward the RPS requirement. By counting voluntary purchases, suppliers may have an easier time meeting the RPS requirements at a lower overall cost. On the other hand, counting voluntary market sales toward RPS compliance undermines a fundamental tenet of these markets: Voluntary purchases support renewable energy development that is additional to policy mandates for which all customers share the cost.
Most states with an RPS policy have determined that voluntary green power purchases should not be counted toward RPS compliance. For example, Minnesota statutes require the state's utilities to offer their customers the opportunity to purchase some or all of their energy from renewable energy sources and to make good faith efforts to generate or otherwise secure enough electricity from qualifying renewable energy technologies to represent 10% of total retail electric sales by 2015. In considering how to integrate these two policies, the Minnesota Public Utilities Commission determined that counting green pricing sales toward the renewable energy objectives was not consistent with the public interest or other state energy policies that seek to encourage renewable energy development.
In Texas, a 2005 law that increased the level of the state's RPS included a section that requires all renewable energy capacity in the state to count toward RPS compliance. If implemented, this could have a deleterious effect on voluntary market sales from Texas-based renewable energy projects. Most voluntary market customers expect their purchases to be additional to any policy requirements. In fact, such "additionality" is a primary requirement of the Green-e certification program and for membership in the EPA Green Power Partnership.
Is Green Power Simply an Evolutionary Step in Renewable Energy Development?
When, if ever, does premium-priced green power become unnecessary? Most new green power today is being supplied by wind energy, which is arguably becoming more widely cost competitive with conventional electricity supplies. Should customers continue to pay a premium for green power once it becomes cost competitive? For example, when Minnkota Power Cooperative, which serves 11 distribution cooperatives in Minnesota and North Dakota, recently lowered the premium charged for its Infinity Wind Energy Program from $0.015/kWh to $0.005/kWh, one distribution utility Nodak Electric — decided to drop the premium-priced program altogether and include the wind energy in its base rates.
Some argue that green pricing should focus on renewable energy technologies, such as solar energy, that are furthest from market competitiveness and thus need additional financial support. And many believe that an RPS is a fair and effective policy for accelerating renewable energy development and sharing the cost of that development among all consumers. On the other hand, many customers want to support renewable energy beyond the minimum deployment levels called for in an RPS, which is typically 10% to 20% of total electricity supply. For example, many customers, including large Fortune 500 companies, choose to offset 100% of their power use with green power and are willing to pay more for that opportunity.
Green power markets continue to play an important role in educating the public about renewable energy sources and options. And there is ample evidence that these voluntary markets encourage new renewable energy development as well as support and build on RPS markets by providing an additional market outlet and revenue source for renewable energy project output.
About the Authors
Lori Bird and Blair Swezey, National Renewable Energy Laboratory
Lori Bird is a senior energy analyst with the National Renewable Energy Laboratory (NREL) in Golden, Colorado, specializing in the area of green power market analysis and renewable energy policy. She has co-written a number of publications pertaining to green power marketing, including reviews of green power marketing experience and trends in utility green pricing programs. She maintains the Green Power Network, a Web-based clearinghouse of information about green power products and consumer issues.
Blair Swezey is a principal policy advisor at NREL, where he leads green power market analysis. He has also managed integrated resource planning and utility analysis activities at NREL. He previously served on executive staff of the Electric Power Research Institute in Palo Alto, California. In 2005, Swezey received the national Green Power Pioneer award for continuous achievement, vision, and dedication to the green power industry.