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DECEMBER 1998

"California Green Power Marketing: Predictably Disappointing"

A Nationally Recognized Renewable Energy Policy Consultant, the Former Policy Advisor to the American Wind Energy Association, Says Deregulation Will Mean the Demise of Wind Power and Other Renewable Energy Sources Unless Community Choice and the Renewables Portfolio Standard Are Written into Electric Restructuring Laws

BY NANCY RADER

The dramatic declines in renewable energy technology costs over the past decade combined with strong public support for renewables would seem to make it inevitable that renewables would fare well under retail competition. Customer choice, the green marketers say, can add substantial amounts of renewable power to the system. Thus far, the California experience provides solid evidence that renewables in the nation's system mix will decline in a deregulated market without strong public policies that promote their use by all electricity suppliers.

Start with the neglected fact that renewables have been in decline while retail competition has been debated over the past five years. Except for a few states where energy advocates have won strong set-asides in the past, such as Minnesota and Iowa, renewables are losing ground. These two states alone account for about 80 percent of renewable energy development since 1994. The news is not so pleasant in California, where biomass capacity has dropped by 25%, wind plant capacity by 9%, and geothermal production by 30% — overall, renewables have fallen from providing about 14% of California's power in 1990 to under 11% in 1997. The renewables funding provided under California's restructuring bill, AB 1890, is far too limited to replace the lost renewables. If energy prices remain low as expected, continued output declines and plant closures are likely.

Next, consider what's on the drawing board for new power plant capacity. In the restructured power market, most new plants will be financed as "merchant plants"—plants built without long-term power purchase contracts. Developers have announced plans for over 40,000 MW of merchant plants across the country, virtually all of which are gas and a few are coal-fired. Mostly due to the one-time AB 1890 auction of production support payments for new renewables in California, there are about 330 MW (net) of announced renewable energy plants without long-term contracts. Thus, the ratio of planned fossil-fuel to renewable energy merchant plants is about 118:1. This is a powerful indication that investors do not see a lucrative future in the green market. It bodes ill for the argument that competition alone will provide a diverse power supply.

Part of the reason that investors favor gas plants is that they are less capital-intensive than renewables. Gas plant capital costs can be paid off in as little as six years, so investors view gas plants as much less risky in unpredictable markets than renewable plants whose fixed costs usually require at least ten years to pay back. Another part of the reason is that gas is currently so cheap. Despite major cost declines in renewable energy technologies—wind, geothermal and various types of biomass plants fall in a cost range of 4-7˘/kWh—new gas plants are far cheaper, coming in at 3˘/kWh or less. This relative advantage will hold for as long as gas prices stay low. Lastly, investors do not perceive "green premiums" as offsetting the higher costs and longer-payback time of renewables. Finally, unlike the lowest-cost renewable resource, wind power, gas plants are fully dispatchable.

And now we get to what green marketing itself has to offer. While a green patina may prove to be quite valuable as a marketing tool for retail sellers trying to gain a foothold in competitive markets, there is little cause for optimism that it will add significant amounts of renewable energy to the system, or even maintain what's there now. Here's why:

• Green marketing efforts are aimed primarily at the residential sector, so two-thirds of electricity sales are unaffected. Few commercial and industrial customers will place themselves at a competitive disadvantage by paying for higher cost power when their competitors don't.

• "Competitive" markets that have been intentionally skewed to favor the incumbent utilities, as California's is, leave very thin margins for new competitors, let alone competitors selling higher-cost renewables products. This was the reason cited by energy giant Enron when it withdrew from the California residential market last April.

• The transaction costs to sign up green consumers are astronomical. Green marketers have stated publicly that it costs $100 in advertising and marketing costs just to acquire a new green customer—over 15% of the average consumer's total annual electric bill! Retaining customers in a competitive market will require continued marketing. Despite spending $10 million in marketing and advertising in California, Enron signed up only 30,000 customers, only a fraction of whom were for its "green" product. After spending $333 to sign up each customer, no wonder Enron dropped out. (Avoiding these huge transaction costs is one of the chief values of community aggregation.)

• The high premium that green marketers have to charge just to cover marketing costs will reduce demand or require watered-down "green" content. This is clear in California, where the vast majority of "green" products on the market now merely resell power from existing utility-owned small hydro and geothermal plants which, according to the California Energy Commission (CEC), will remain operational without additional support. Reselling utility resources does not affect the overall supply of renewables; therefore, claims that consumers "make a difference" by purchasing such products are misleading. Surprisingly, neither "Green-e" certification nor any of the environmental group endorsements conferred to date on California products consider whether the renewables being green marketed are from projects that need a buyer or are merely being redirected from a utility's portfolio. Thus, a "100% renewable" product may be completely meaningless.

• Despite the fact that most green marketers are acquiring utility renewables at very little cost, green consumers are being asked to pay between 1˘ - 3˘ per kilowatt-hour extra for these products. What's more, the green marketers claimed in a recent petition to the CEC that, on top of the consumer premiums, they need a 1.5˘/kWh public subsidy from the AB 1890 renewable energy fund to pay for the cost of remarketing utility-owned renewables. (Astonishingly, this petition was cosigned by the Natural Resources Defense Council and the Environmental Defense Fund.) The CEC turned them down, but the petitioners successfully enlisted Senator Byron Sher to legislatively reverse the CEC's decision for a period of six months.

• The small portion of new renewables that are green marketed are likely to be the same ones supported through public policy, such as systems benefits charges. That is, new renewables are likely to be built for the green market only if supported by public policy. Sales in the green market may make those public subsidies go a little further, but they will not be wholly additive to what the subsidies would have accomplished on their own.

• No one knows how polling data will ultimately translate to actual consumer behavior, but the safe bet will be consistent with economic theory: consumers generally act in their own self-interest. People as voters support policies that require everyone to pay a little more for benefits enjoyed by all. As consumers, however, most are not altruistic enough to volunteer to pay large green premiums without getting any personal benefit, especially if they don't trust marketers' claims. Enron, which has made a far larger commitment to renewables development than any other green marketer, learned this the hard way. Complaining to the San Francisco Examiner, Enron's Gary Foster said, "even those environmentalists who said they would be willing to pay more for renewable products showed that if it comes to price they will go with price." In an April 22 press release, however, the NRDC blamed Enron for never giving "the emphasis or marketing support [to its green product] that the company has provided for its cheap commodity lines. We hope that Enron draws the appropriate lesson and comes back with a unified message and emphasis on environmental value." But it is unlikely that NRDC knows more about succeeding in business than Enron.

• Perhaps the most sobering statistic is that one-third of California's residential consumers would have to sign up for a 100% renewable energy product, unwatered-down by Pacific Northwest hydropower, just to subscribe what the state has now (due to strong renewable energy policy in the past). Ten months after the market opened and after tens of millions of dollars in advertising, less than 0.4% of residential consumers (about 25,000) are estimated to have subscribed to green products that contain from 50-100% renewables.

How then, can California environmentalist-consumers alleviate their green guilt? Answer: invest in home energy conservation, a far more effective way to curb personal environmental impact caused by electricity consumption. Consider the premium paid for one of the best green products on the California market (which shows how weak the competition is). Green Mountain Energy Resource's "Wind for the Future" product costs 2.1 cents extra for every kWh used in exchange for a promise that 10% of your power will come from a new wind turbine sometime in the next year and a half. A quarter of the product is system power or big hydro, and the rest is just redirected utility-owned renewable power, making the utility's system equally "browner." (Purchasers of this product must also agree to a 3-year contract or pay a $25 early termination fee.) An average household consuming 6,000 kWh annually will pay Green Mountain an annual premium of $126 for this product, whose only redeeming feature is the 600 kWh of new wind energy. And this cost ignores the $189 extra that consumers will pay before the new wind even comes on line.

Now consider that, for $126, one can purchase at least seven compact fluorescent lamps (CFLs) which will save 5,000 kWh over their lifetimes—a far bigger environmental payback than the 600 kWh of new wind you get from the green power purchase. CFLs last up to 13 times longer than incandescent lightbulbs and use one-fourth of the electricity to operate. Of course, once you have replaced your own incandescent bulbs, you will have to distribute CFLs like candy canes at Christmas, but that should be at least as rewarding as claiming that you buy green energy. Consumers can find out how you can make the rest of your house energy efficient with the Lawrence Berkeley National Laboratory's nifty Home Energy Saver website. Notwithstanding Green Mountain's alluring pitch that "you don't have to sign petitions, march in rallies or call Congress to help make our planet cleaner," what consumers should not do is alleviate their green guilt simply by purchasing a green electricity product, certainly not those currently on the market. To make a real dent with renewables in the nation's energy supply, consumers must, in fact, demand from their elected representatives that restructuring legislation include a Renewables Portfolio Standard, which requires all sellers of power to include a growing fraction of renewable energy in their power portfolios. And, to provide consumers with the bargaining power that will be necessary to obtain meaningful clean power products at decent prices, strong community aggregation policies are required. Unfortunately, California's restructuring legislation failed miserably on both counts and these shortcomings cannot be remedied by green marketing.


Copyright (c) 1998 by the American Local Power Project.