Green marketing, however, is clearly not a substitute for a federal renewable portfolio standard obliging Americans to buy a proportion of their electricity from renewables. In fact, there are many who fear that voluntary "greenism" may never create more than a niche market for wind and other sustainable power technologies. Furthermore, the debacle of green marketing in California's competitive market has left little positive to say about the approach.
On the other hand advocates of green electricity markets in the US contend that it can help educate people about electricity and its link to the environment, a complex and abstract subject for those familiar only with a regulated monopoly market. Indeed there are signs in Europe, particularly the Netherlands, that people's willingness to go green in their use of electricity has been greatly underestimated. America's green market supporters also stress that it is far too early to condemn green marketing on the basis of California's rushed and poorly-constructed experience-started just 11 months ago. Only three other states of the country's several dozen-all of them states with high electricity prices-have started the transition to a fully deregulated market: Pennsylvania and the neighbouring New England states of Rhode Island and Massachusetts.
The concept, although new, is being watched closely. The competitive electricity market seems to be the wave of the future and a green spume could become a natural part of it. Free market legislation has already been adopted in Montana, Nevada, New Jersey, Arizona, Connecticut, Maine and New Hampshire, while Virginia is in the midst of adopting additional restructuring legislation and the citizens of New York are just starting to be able to choose their suppliers. In fact green electricity consultant Ed Holt estimates that as many as 60-70% of states in America will have adopted some sort of restructuring legislation within the next five years. Other states will try to remain regulated for time beyond that, unless federal legislation orders all the states to adopt retail competition.
Green marketing could lead to a higher level of renewables penetration in the supply mix than green pricing-which has had an adoption rate of about 1%. Regulated utilities with green pricing programs may not try so hard when selling a green product, as they are not in it for survival. Their sales pitch is also not likely to be as strong since they do not want to criticise their own electricity mix. Green marketing, rather than green pricing, is also more likely to lead to product innovation, says Holt, who has studied the issue for the National Wind Co-ordinating Committee, together with Jan Hamrin of the Centre for Resource Solutions, which oversees the private and voluntary "green-e" nationwide program, the best-known certification for green retail electricity (Windpower Monthly, April 1998).
As of last month in the competitive market scene, 20 green retail products, suppliers or upgrades and five green wholesale products were being marketed (table). And even though it has only been 11 months since California became the first state to open the sluice-gates to retail competition, startling differences in green power's popularity in the four states are already evident. There are significant lessons to be learned from the experiences of these nascent markets.
In California, only about 1.1% of the state's ten million eligible customers had switched provider as of the end of December, nine months after the competitive market started its four-year transition to full deregulation-a period that has been both confusing and controversial. This is far less than in the UK's newly free market on a similar time scale. Even so, these "pioneering" customers in California accounted for 11.6% of the state's electric load; more larger customers had chosen to change supplier-0.9% of homes had switched while 2.4% of small businesses, 4.7% of larger businesses and 18.1% of industrial customers had switched, according to the latest data from the state Public Utilities Commission (PUC).
Of significance for the wind industry is that of those 1% of customers who have switched so far to a new electricity supplier, about half are buying a green power product, estimates Ryan Wiser, a senior researcher at the Lawrence Berkeley National Laboratory in California and an expert on retail choice and electricity. Most of the state's almost 40,000 green electricity customers are residential. A similar penetration was reported by the PUC as long ago as last May, a little over one month into deregulation. The earlier PUC figures, however, reported requests for switches, not actual switches. The premiums charged for green power generally ranged from $0.011/kWh to $0.025/kWh for a customer using 500 kWh monthly. And it must be remembered that during the four year transition to a deregulated market, customers do get a $0.015/kWh credit for buying green power that is generated in-state.
In stark contrast to the slow movement of customers in California, in Pennsylvania the results of a newspaper poll in January revealed an estimated 9.5% of residential customers have chosen to change supplier, about ten times as many as many as in California. That is despite the fact that Pennsylvania's retail market started opening up more recently and is being done so at a more measured pace. It is not yet clear how many will go green, however, since the changes only became effective on January 1.
Pennsylvania launched a pilot retail program for a few months, starting in November 1997, and nearly one million customers wanted to enrol as "eligible to change electricity supplier." The pilot program could only take 230,000 enrolments, so more than three-quarters were turned away. Then last summer enrolment was broadened to include up to two-thirds of the state's customers who would be allowed to choose a new provider starting on January 1, 1999. Nearly two million customers enrolled-and about one quarter of them have already chosen to leave their old utility.
Most recently, New York started to phase in competition though the year 2001, but there is no green product and the set-up is not a good one for clean electricity. About 66,000 customers of Con Edison have been able to enrol in the first phase of retail choice, which started in mid-98. In phase two of the pilot process, another 125,000 customers have been able to change their supplier through February 26 for electricity purchases effective April 1. Yet none of the 25 or so companies registered to supply electricity are offering a renewables product. Indeed only 11 of the suppliers were in the residential market, where green power is likely to be more popular, at least at first. Rules set up by the state's Independent Service Operator make it very difficult for green energy to compete, says Natural Resources Defence Council (NRDC), an environmental group. NRDC notes there is a $10 fee for each switch a customer makes, a disincentive to change again and again. NRDC is asking its supporters to speak up-and demand green electricity from suppliers.
The two New England states have had mixed success. Rhode Island was actually the first to jump into the fray of retail competition back at the beginning of last year. Massachusetts followed suit in March. The new market rules in Massachusetts, which will also start introducing a Renewable Portfolio Standard in 2003, as well as those in Rhode Island mean that it is virtually impossible for marketers to offer customers a better deal than they have from their existing utility. For example, in Massachusetts, the "default rate" at which customers can buy electricity has been set below the cost of wholesale generation. Policy makers apparently wanted to give customers an immediate rate reduction. But the negative impact was to thwart competition, at least initially, notes Wiser.
In April, an energy marketer, AllEnergy Marketing Company LLC, announced New England's first renewable product, the ReGen power upgrade. Customers continue to buy power from their existing supplier, but pay $8.99 monthly for a "block" of 2000 kWh of renewables each year. The premium for each additional 2000 kWh block is slightly lower. A customer's transaction with AllEnergy, a subsidiary of the public utility New England Electric System (NEES), is separate from billing by the existing supplier, in contrast with how green marketers are operating in California and Pennsylvania. The ReGen mix so far has been landfill gas and PV, says AllEnergy's Mike Tennis. But by September 1, he says 15% of the product mix will come from new wind projects in the region.
Slow IN NEW ENGLAND
So far, however, customers are not flocking to buy green. AllEnergy is not releasing sales figures, but its officials concede that progress has been slower than expected. "It's been rough-sledding for that company," agrees Ryan Wiser. "There's not much momentum in either Massachusetts or Rhode Island." Green pricing advocates in New England are responding to the stagnant state of the market by targeting groups of customers especially likely to be sympathetic. Several regional environmental groups are now trying to sell the concept to their members by distributing a newly produced leaflet. There is also a move to encourage municipalities to group together to buy green power more cheaply. Indeed the country's first green power aggregate has been established by the Boston Oil Consumers Alliance, a group of buyers of heating oil.
Another problem is simply that there is not yet much green power available in New England (Windpower Monthly, June 1997). To make up some of the shortfall, AllEnergy notes that a 7.5 MW wind project is planned this year by Distributed Generation Systems Inc, a company run by former Kenetech Wind president Dale Osborn. It is currently in permitting for the project in a ski area in the Brodie Mountains in Western Massachusetts. In addition, Endless Energy, a wind plant developer in Maine, has been retained by the state government of Rhode Island to do resource assessments in three towns for a utility-scale wind plant. If built, it would be a European style project consisting of two or three machines in an area that is both industrial and on the coast. In both states, market activity is expected to increase with time.
The differences in the proportions of customers switching supplier in different regions depend in large part on how emerging markets have been structured-and whether the set-up encourages or discourages competition and consumer awareness, experts agree. A market structure can make it more easy for customers to switch, or more difficult. "By most accounts, that is the major barrier," says Wiser. Information about deregulation can be muddled and confusing-as in California-or more helpful, as has been the case in Pennsylvania. Such information includes public education, advertising and political debate. In fact, Pennsylvania was the first state to commit to a huge public education program about choosing another provider.
Marketers have also tended, perhaps erroneously, to concentrate green marketing on residential customers, believing that larger commercial and industrial customers would be too price sensitive to buy green power and that residences should be targeted to build up demand from ground level. The businesses that have gone green, however, such as Patagonia outdoors clothing, have received widespread publicity about their choices, no doubt providing a positive spin-off effect for company sales.
Non-residential customers could in fact make up as much as 20-30% of green electricity demand, says Wiser. Some public agencies, such as the Californian city governments of Santa Monica and Chula Vista, are close to buying only green electricity. And in December, the Clinton Administration announced it was drafting an executive order to require all federal agencies to buy green. The order would specifically allow agencies to spend up to one-fifth more on renewables such as wind.
In addition, as with utility-run green pricing programs, the "diffusion" of a totally new retail product can be very slow. It has taken 15 years for half of America's telephone customers to switch supplier. Ed Holt suggests demand will most likely follow a typical "S" shaped growth curve, but he notes that nobody can be sure how long it will take for the concept to be more widely accepted. In the first year after phone deregulation, AT&T's share of long-distance calls fell by less than 4% despite aggressive marketing by competitors. And in the case of green electricity, much depends, he says, upon broader factors such as public concern about global warming. "It will take a while for people to get excited about this one and they might not," agrees Wiser. "The potential is there to create modest levels of demand and to support modest amounts of power generation, although public policy will have to continue to play a pretty key role." He feels that 5% of customers, residential and non-residential, might eventually buy green power.
The California debate
So much for theory. In practice, California's plunge into customer choice for electricity purchases has proven both disappointing and controversial. Hopes were high, especially since its economy is the world's seventh or eighth largest and since the state was the cradle of much of America's early work on renewables. But California's market-place rules do not encourage competition or green energy, especially for homes, as much as they might. It is painfully clear that public officials in the Golden State were led into setting up restructuring for the benefit of the largest customers, not small businesses or homes. The state's public education information has also been strangely muddled from the start.
Although Californian customers have been given a 10% price break up-front, as have customers in New England, it is coupled with little incentive to shop around. The "default rate" price that Californians pay when they stay with their utility is linked to the state's Power Exchange price and is low-less than $0.03/kWh and as low as $0.025/kWh. That provides little incentive to look elsewhere. In California, one of the issues is that the public is bearing the burden of the utilities' "stranded costs" through the financing of public bonds. In contrast, the "default rate" in Pennsylvania-which varies from one utility's territory to another-is higher and far more likely to stimulate competition. In Philadelphia, for example, it is $0.056/kWh.
Adding to the confusion in California is that the much vaunted launch of the market was delayed at the 11th hour by four months. It hardly gave electricity buyers confidence. Then soon after the market did open, on April 1 last year, regulators uncovered a pyramid scheme operated by a little known company which threatened to destabilise the whole structure. And on the green power front, Enron Energy Services, part of the Texas giant Enron Corp and potentially the largest supplier of green electricity in the state, also pulled out of offering power to homes.
Then a fierce debate was fuelled by the release of a critique of the new market. "Green Buyers Beware: A critical review of Green Electricity Products" roundly slammed California's green products. The 54-page report, issued by Public Citizen, one of the non-profit groups founded by famed consumer advocate Ralph Nader, was authored by renewables consultant Nancy Rader. Its publication came just before the November election, when an unsuccessful Nader-backed proposition to over-turn restructuring was to be voted on (Windpower Monthly, December 1998).
Doing it better
In part, the report reiterates criticisms familiar to those within energy and environmental circles but which were not so known to the general public. Rader analyses the products of each of the seven major green marketers in California, concluding that they are over-hyped or are being marketed with information designed to mislead the public. The implication was that while some green products seemed to represent a true commitment to a cleaner environment, others were little more than a marketing gimmick. Sometimes what is being sold is future wind power that is not yet available, the report notes. As much as 75% of the premiums required for green power go to advertising and marketing.
The report also criticises the resale of green power controlled by utilities-power that is part of their rate base. Such resold power should not be green-e certified by the Centre for Resource Solutions, says the report. In fact "Green Buyers Beware" concludes that California's green electricity products are of such poor quality, they are threatening the future of renewables.
"People get the impression we are doing so well," says Rader, who formerly worked for the American Wind Energy Association (AWEA) and authored the group's green pricing principles, after the report was released. "Some Republicans are saying 'Look, we don't need green policy.'" In her report, she recommends the adoption of a renewable portfolio standard, a system for stringently policing false marketing claims-such as those that the group says it has documented-and a system for the regional tracking of fuels. The report also says that consumers should get more involved in scrutinising green products themselves and that they should demand the right to buy power collectively, through a purchasing agent or public aggregator.
Fury in the ranks
At the time of the report's release, the debate over the negative and positive aspects of green marketing had become so polarised that some of the concept's most prominent backers were furious with Rader. They said that not only was the report's timing meant to boost support for stopping California's deregulation in its tracks through a proposition on the state ballot, but that it was lambasting a marketing concept for renewables that holds the germs of success. "The green markets are, in fact, working and working well. Public Citizen is completely out of touch," said an angry Jan Smutny-Jones of the California-based Independent Energy Producers (IEP), which represents producers of both clean and brown power.
Julie Blunden, of Green Mountain Energy Resources, one of the green marketers active in the state, said the market is "unleashing consumer demand" for renewable energy and new plants. (Green Mountain is planning a small wind farm of two wind turbines in southern California). And Ralph Cavanagh, an energy specialist at the Natural Resources Defense Fund, pointed to hundreds of megawatts of wind projects planned in California, which he said show the success of deregulation. Many of the plans, however, were highly uncertain because the looming expiry of the federal Production Tax Credit.
In a more measured tone, Joe Costello of Global Green Group, which is helping the city of Santa Monica in its plans to buy green power, says it is too early to condemn the market. Renewables do not have enough political backing, he says, and green marketing is a way of educating people about power. "It's not either policy, or marketing," he says. "You can have them both, and we don't have the former."
As the debate raged on, an announcement was made that was said to indicate yet again the smooth working of the green market. The privately run Automated Power Exchange (APX) announced that green power is worth more than brown power, based on its average prices on its green power exchange since July. Sellers in the APX Green Power Market had received a daily average market premium ranging from $0.030/kWh to $0.096/kWh. In December, the premium ranged from $0.032/kWh to $0.040/kWh.
Improving the concept
It is not known, however, what volume of green power is being sold by the APX, a week ahead forward market that matches renewables with retail providers, recently described in the San Francisco Chronicle as a "boutique" for green electricity. Jan Pepper, APX marketing director, will only describe the volume as "good." She says a "significant" portion of California's green power is going through the exchange-and that the APX hopes to release data on it soon. Wiser does not agree with her call on volume. "It is surprisingly low," he says. "It seems unsustainable. The price has obviously been bid down to a relatively low premium." On the other hand, he adds cautiously, if the power being sold into the APX is from existing facilities, and if their operating costs are low enough, a small premium is good enough-it is still profit. "I'm not sure what we should have expected on the APX," he says.
California's green marketing debate has died down, for the moment at least. Some improvements have been made in how green electricity products are now certified and in what marketers disclose about the product's content. The green-e certification program and some marketers have started to distinguish between large and small hydro-the former is not eligible for funding from the state's Renewable Resource Trust Fund-and between new and existing renewable. Both issues had been hotly debated when AWEA released green marketing principles a year ago that called for such a distinction.
In December, eight months after the transition to a competitive market was launched, the California Energy Commission unveiled a standardised "power content label"--stating how the power is generated-that suppliers must include on mailings and in their quarterly updates provided to customers. An announcement was also made that customers of Los Angeles Department of Water and Power would be able to choose to get a portion of their power from green sources starting in the first quarter of this year. The program will be called "Green Power for a Green LA." Previously, only customers of the state's three large investor owned utilities, as well as customers of Sacramento Municipal Utility District, had been able to go green.
In recent weeks, suppliers have also been making clear efforts to boost customer participation. Keystone Energy Services Inc of Los Angeles in mid-January announced it would spend $1 million on a radio advertising campaign to boost its EarthChoice 100 Green product. The campaign, which includes a free phone number for ease of sign-up, is designed to help the company gather more residential and small commercial customers. And Commonwealth Energy Corporation, based in Tustin south of Los Angeles, announced on February 1 that it would switch its 38,000 customers-mostly small businesses and homes-to green electricity. Commonwealth's customers are guaranteed an additional 5% savings on their bill, says marketing manager Brian Gale.
Meantime, Pennsylvania continues to show California the way. Its market rules are dramatically different and were specifically intended to encourage switching, says John Hanger, a former commissioner on the Pennsylvania Public Utilities Commission and one of the main people behind the state's restructuring. The incentive to change is high because what he describes as the "shopping credit" is also high-which is the price that the local utility charges for unbundled generation service and which competitors have to beat.
In Pennsylvania, customers can save by shopping around. In California, most individual small customers cannot. Pennsylvania customers might even be able to save money by buying a somewhat green product. Green Mountain Power's EcoSmart blend would save a Philadelphia customer $2.00 monthly, whereas the marketer's two green-e certified blends, Enviro Blend and Nature's Choice, would cost $5 or $9 more monthly than the default price of local utility PECO. "We realised you had to keep the shopping credit high or you'd kill the market," says Hanger, who will talk on the issue at the Mid-Atlantic Power Forum in Philadelphia next month. "In terms of green power, that makes an enormous difference."
The state's two step procedure for switching also seems to have made a difference. A customer enrols in the "Electric Choice Program" to be eligible to switch, and then receives a "How to Shop Guide" that includes not only information about each marketer, but also about the customer's own usage rates and own utility's prices. For homes, it makes switching seem less scary and more like a positive decision. "Pennsylvania has clearly created a better market for renewable energy," says Hanger, who now heads an environmental group named Citizens for Pennsylvania's Future. "And it's as if the worst case is California-it's what you want to avoid." With California in mind, Ed Holt agrees. "It's not green power that's not working, it's the market," he comments.