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The market cannot fix all

In the dark days of the early 1990s, it looked like the runaway restructuring train had run over the American wind industry. But these days business is picking up, thanks to pro-wind policies coming to fruition, better wind economics, and, in a small way, customer choice. Regulated utilities and competitive marketers offering green power have discovered a market out there. To be sure, it's not a big market, and it might never be. But it offers a fix to the temporary dead end caused by restructuring.

The transition from theory to practice is not always simple. The elegant economic theories of market competition are right now bumping up against the difficulties of actually switching America's largest industry-electricity-from decades of monopoly regulation to some semblance of a competitive market. And what of wind? In the dark days of the early 1990s, it looked like the runaway restructuring train had run over the American wind industry. But these days business is picking up, thanks to pro-wind policies coming to fruition, better wind economics, and, in a small way, customer choice. Regulated utilities and competitive marketers offering green power have discovered a market out there (page 32). To be sure, it's not a big market, and it might never be. But it offers a fix to the temporary dead end caused by restructuring.

Green pricing was originally envisioned by David Moskovitz, a former Maine utility commissioner, as a way to get around the roadblock of least cost planning. Renewables were not least cost, but why not let people who want to, buy them anyway? The concept has melded with the self-interest of utilities. It offers them a way to practice marketing in preparation for real competition. As a result, however, most utility green pricing programs are simply marketing exercises, more concerned with publicity than low cost. This isn't all bad for wind, since market research shows that only it and PV are considered pure green by consumers, and wind is much cheaper than PV. Biomass is hobbled by a poor public image-trees are supposed to be saved, not cut down. Still, wind may be competing for a big piece of a small pie. Nobody yet knows if customer concerns for the earth will ever grow large enough in the US to drive a substantial green power market.

Approaching green power as a marketing exercise leads to some odd distortions. Detroit Edison sells PV power to customers for about $0.50 per kWh, but the high price is not a deterrent. The program is sold out. California introduced some of its own distortions. Commonwealth Energy, California's largest competitive marketer, recently switched 38,000 customers over to green power from brown, without raising the price. What caused it to see the light? A sense of civic duty? A visit from Al Gore? No, a subsidy from the California Energy Commission that immediately boosted its profit margin. As long as the subsidy is there, Commonwealth will be happy to save the Earth. And when the subsidy dries up in 2002, so long Earth.

In comparison with what was accomplished elsewhere, California energy advocates got a surprisingly poor deal from restructuring. According to the Energy Programs Consortium, California's fund for energy programs is $12.70 per head of population, compared to about $33 in Connecticut and Massachusetts, which also got Renewables Portfolio Standards (RPS). Even Montana managed $14.20 per head. All of California's support ends in four years. And there is no portfolio standard there.

Making it a fair choice

Surveys show that people are willing to pay more for renewables, typically in very high numbers. But drawing a literal conclusion from these studies is wrong; in practice response to green power offers has often been poor. Willingness-to-pay is symbolic. Research by the New Mexico utility commission approached the question in a novel and more relevant way. Like other studies, it asked people how much more they would be willing to pay for green power, and got a typical range of responses. A quarter said they would voluntarily pay $4 more a month. But then the study asked if it would be better to require all customers to share the cost of renewables-$2 a month for each. Over 80% preferred that option. This is the true message from willingness-to-pay surveys. Huge majorities want renewables, but only a few are willing to let everyone else free ride off their munificence. These huge majorities bode well for renewable energy policies like the RPS.

Ironically enough, it can be argued that such policy measures are more economically efficient than markets at delivering renewables, at least in the early stages of demonstrating the technology and catalysing a first market. Green Mountain Energy Resources spent $20 million on marketing in California, signing up enough customers to build two new 750 kW wind turbines (and to support some existing low-cost geothermal and hydro plants). Meanwhile, the municipal utility in the tiny Iowa town of Waverly decided-through a citizen advisory panel-to buy two 750 kW wind turbines as part of Enron's big Storm Lake project.

Thanks to declining wind power costs, strong renewable policies can be quite affordable. According to a new report by the Union of Concerned Scientists (page 29), America could have 20% renewables by 2020 (a 20/20 vision?) and still see a 13% savings in electricity prices. An aggressive RPS could create a market for wind worth $18 billion a year by 2020.

The significance of an RPS is that it is a policy that can dovetail with green marketing. Obliging consumers to buy a fixed amount of renewables, by mandating a minimum standard for green power in the supply portfolio, does not preclude the same customers from further greening their personal portfolio by also subscribing to a green marketing program. So wind gains from green markets, and wind gains from policies. The only way the wind industry loses is if policy opponents can convince people that The Market will be enough to make renewables happen. That might happen in the long, long run as the full force of global warming hits home, but in the meantime wind will go from boomtown to boutique.

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