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Fears for California green market

Starting December 1, California is reducing its customer credit for purchases of renewable energy by one-sixth to $0.0125/kWh. The expected cut-which effectively increases the price at which independent renewable energy generators can sell green power or shrinks their profit margin-could have a significant long term impact on the state's nascent green energy market. It is not yet clear if any marketers will pass the quarter-cent loss on to customers, or whether they will decide to absorb it themselves.

"It's clearly going to have an effect in the margins," says Ryan Wiser, of the Lawrence Berkeley Laboratory and the Center for Resource Solutions, which established the voluntary green-e certification program that is being used in the deregulated markets of California and Pennsylvania. "It certainly hurts the green power marketers." The discount for green power may be as low as $0.001/kWh, or even lower. The credit had been set at $0.015/kWh since the state became the first in America to open its electricity market to competition on April 1, 1998.

Wiser, who has studied restructuring extensively with the National Renewable Energy Laboratory (NREL), says he is not sure if the change is large enough to effect the pricing of green products. He predicts that green marketers are not likely to pass the reduced credit on to consumers. Wiser also notes that it is only since marketers started to offer discounted green electricity-cheaper than the option offered by the local utility-early in 1999 that sign-ups have rocketed.

Swallowing the loss

The immediate reaction of one marketer seems to be one of resignation. Rick Kohl, president of "cleen n'green" of San Jose, California, says it had become clear that the credit cut would have to be as high as a quarter-cent in the weeks leading up to the CPUC decision, even though a cut would have been unthinkable as recently as the start of 1999. But this was before marketers started offering discounted power and signing up thousands of new customers monthly. Kohl also says that cleen 'n' green will not pass the cost on to its nearly 8000 customers, at least not in the foreseeable future. The company offers its premium product, EcoSave, at a discount price that is $0.00025/kWh over the state's power exchange or utility price.

Renewable energy marketer GreenMountain.com, however, says it may well have to increase the price of its basic green product because of the change in the customer credit. The company was still reviewing the situation on November 22. But spokeswoman Karen Woodbury says the retailer will probably up the price of its 100% renewables product, although not the price of its Wind for the Future 2.0 premium package. The 100% renewables product, GreenMountain's cheapest and most popular green product, contains 5% new renewables, including wind power. It is currently offered at a discount of $0.00125/kWh over the power exchange price.

Another change in California deregulation, however, may help green retailers sign up new customers, says Woodbury. Starting on January 1, GreenMountain will be able to sign up new customers and have the change independently verified at the same time. This will speed up the business. Under the current system, state regulators have required separate independent verification of a customer's decision to change electricity retailer. GreenMountain, with more than 45,000 customers in California, has more than doubled its customer base since the end of last year. The company will be introducing a third green product in early 2000, Solar for the Future.

Out of cash

The decision by the California Energy Commission (CEC) on November 17 to cut the credit had been expected. The funds set aside under law for the credit were being depleted at a higher rate than anticipated (Windpower Monthly, November 1999). The financing for the credit, set up under the state's 1996 restructuring legislation, is set at $75.6 million over four years. Had the current sign-up rate continued, the funds set aside for the credit would have run out by February.

The amount of the decrease, from $0.015/kWh, was also exactly as had been proposed by CEC staff before the commission meeting in mid November. The new credit level, effective December 1, will be re-evaluated in May. If it needs to be changed again, that would then take effect from July through December 2001, says Marwan Masri, head of the CEC's renewable energy program. The cap of $1000 per customer was retained, as recommended by CEC staff. The method for calculating banked credits will also be changed by the CEC.

Financial margins in green marketing are extremely narrow, especially for start-ups. It is expensive to compete against established sellers and against of dirty fuels. In addition sellers of green electricity in California-as well as the state's consumers--face a market structure that does not encourage users to switch provider, such as a green power provider. The customer credit, available only until 2001, has thus been crucial for start-up green energy markets trying to get a real foothold in the newly deregulated market (Windpower Monthly, November 1999).

Well over 100,000 customers, most of them residential, have now signed up for green energy in California. Latest figures reveal that almost 14,000 residential customers switched to a new service provider in October. In all 16,600 requests, including those from businesses, were processed by the state Public Utilities Commission.

The impact of the change may not become clear for some months. Green marketers are apparently still digesting its effect as most are unwilling to comment as yet. Even if the credit reduction is passed on to consumers, that will not become apparent until official figures are released sometime in March, April or May. This is because marketers have banked credits at the old rate, says the CEC's Masri. "In all likelihood, I don't think there will be much impact," he says.

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