United States

United States

Competition and the green challenge, Like it or not green pricing of clean power in the United States has arrived. Customers willing to pay a premium for wind and other renewables now have the option

Customers willing to pay a premium for wind and other renewables now have the option to do so in many US utility districts. Among the pros and cons, the concept has opened the door for wind turbine sales in the US, but the wind lobby worries that green pricing is just a consumer fad. Although this market is possibly not as large as presumed--and wind is once again being labelled as expensive--the priority of the wind business would seem to be how to make the most of it.

The phenomenon of "green pricing" in electricity sales is relatively new, but already its popularity in the US appears to be growing faster than in any other country. It was only four years ago that America saw the first example of this marketing mechanism, whereby a traditional regionally based utility offers "green" power at a premium to its "captive" residential, industrial or commercial customers or to its franchise.

By the beginning of this year it was estimated that 12 utilities around the country were offering 15 different green pricing programmes, while another six schemes were expected to have been launched by the end of the year. At least another two dozen utilities at least were thought to be considering the idea. (Windpower Monthly, February 1997). By May those numbers had changed dramatically. A total of about 22 green pricing programmes at least had been launched by 16 or 17 utilities and a co-operative power distributor in Minnesota (selling to more than nine members), while another 20 utilities were actively reviewing the concept.

As the most advanced renewable energy technology, wind has figured strongly in the electricity industry's sudden dash to go green. The first green pricing programme to result in a wind plant, albeit a small one, is in Traverse City, Michigan. It has received widespread publicity in US newspapers since its installation a year ago. The idea is so popular, says the project's overseer, Steve Smiley, that it receives fan mail from across America. And just last month a green pricing workshop in Corpus Christi, Texas, organised by the Electric Power Research Institute (EPRI), drew 115 participants, about 50% more than a similar workshop a year ago. Indeed EPRI, in promoting the May 13-14 workshop, predicted that green pricing as well as green marketing programmes will become far more widespread.

The most urgent questions about green pricing have changed even in the few short years since the first scheme was launched by a US utility in 1992. In wind energy, perhaps the most debated issue now is whether green pricing is beneficial or not, not only for the renewables industry, but for consumers and for the environment at large.

Good or not so good?

A major criticism of green pricing is that it can too easily shift the burden of risk to the developers of renewables, whereas a more fundamental shift in energy policy -- say to a carbon tax -- would force the market to value clean fuel more accurately. Put another way, green pricing perpetuates an inaccurate perception of the cost of renewables as expensive, a perception which anyway lags behind reality. As one long term observer of renewables notes of electricity in a competitive world, "It's all to do with the price, cost and value."

Despite these serious reservations, the ball is already in the park. Almost two dozen green pricing schemes are getting off the ground (see table) and with deregulation of the electricity market ever closer, the wind industry's focus should be on how to make the best of green pricing, if only as a transitional market. Like it or not, green pricing currently offers some of the best opportunities for wind during an otherwise slow era. Regulatory options, such as a portfolio standard stipulating inclusion of renewables in the federal power mix, or a distribution wires charge to fund renewables, are still only being discussed. Green pricing, meantime, is among the most realistic, immediate and promising possibilities with a market undergoing deregulation. "We're seeing some pretty exciting opportunities out there," notes Randy Swisher of the American Wind Energy Association (AWEA), although he stresses that green pricing should not replace strong pro-renewables policy.

Nonetheless, once there is a free market, green pricing would also become, for the most part, transformed into what is known as green marketing -- sales pitches in which sellers of electricity use renewables to attract or retain customers at whatever price the market can bear.

The focus for the wind industry has thus become, in the nearer term and with a market in the throes of deregulation, what type of green pricing set-ups give wind developers enough up-front certainty to fund and build projects? Consumers can be fickle and a priority for utilities is to design their green pricing programmes to cater to consumer demand -- and not necessarily to cater to the needs of wind developers for long term fixed contracts. Utilities are preoccupied with capturing market share in anticipation of the deregulation of America's $200 billion a year electricity market. This often means shedding their old monopoly image and boosting their image as consumer-friendly efficient services. To do so they may have to seem ultra-responsive to consumers, sometimes to the detriment of the generators of clean power who need longer term certainty.

A murky shade of green

But the most pressing question about green power nowadays has become: how to ensure disclosure of electricity's "greenness," so that the truly environmentally friendly power sources have a foothold once the market becomes competitive -- and so that consumers' demands are properly met. America is notorious for consumer or marketing fads -- and sometimes misleading or even fraudulent marketing claims. The country's first two pilot programmes for testing a competitive retail market in electricity attracted numerous power marketers touting the greenness of their product. It is far from clear how valid their claims were.

Just like for faddish fat-free foods, "green power" could well become the buzz phrase for those trying to grab a market share during one of the largest industrial deregulations ever. And just as the sleazy "tax shelter" image dogged wind for years because of a few well publicised cases of jerry-built wind plants, false claims about power's greenness could ruin the market for truly "green" renewables. Green pitches are already common for oil and chemical companies trying to clean up their overall image.

Facing competition, many utilities have also become preoccupied with cutting costs, merging with other large companies and hedging their bets by expanding overseas. Many billions of dollars hinge upon how electricity is valued, how its costs are determined and at what price it is sold and in what quantity. Although the impact of deregulation will be widespread, for most consumers electricity is a subject too abstract to excite much interest -- hence the frantic selling techniques increasingly being adopted by utilities to attract customers. It is no accident that, in a pilot programme last year in New Hampshire for retail competition, some 30 would-be electricity sellers inundated 17,000 residential, industrial and commercial consumers with a confusing barrage of advertising, free products or "freebies" and complicated offers. Green pitches were common in the frenzy of marketing.

Among those in the melee was Enron Corporation, now the owner of America's largest wind company, Zond. In an all out pitch to polish its green image, Enron set up an office in the tiny village of Peterborough with an astonishing 30 salespeople, a promise to spend $25,000 to help revitalise the downtown, and a village picnic. That, along with a promise of cheaper electricity, made Peterborough choose Enron from a field of 30 others. The victory was then beamed to 128.9 million viewers during the largest sports event of the year, the Super Bowl in late January. Enron now plans a $30 million campaign with the appreciative comments of the villagers -- and it was all from a pilot programme from before Enron went a green step further by signing up Zond.

Enron's behaviour underscores how much is at stake. Fully one-third of the 15 residential suppliers who rushed into the area participating in the pilot -- including Northfield Mountain Energy and Working Assets Green Power -- alluded to the environment in their marketing strategy, usually with direct claims about the greenness of their power. Others were more indirect. Green Mountain Energy Partners of Vermont sent potential customers tree seedlings along with their brochures and promised $10 in "Eco Credits" against future bills -- if they signed up by May 28. "Then, if you plant this tree, we'll give you $2 more in Eco Credits, plus an additional $1 Eco Credit if you send in a photo of your planted tree." Another company sent free birdhouses to customers.

Dubious and simplistic

No wonder the question of electricity's green credentials is looming ever larger. Ed Holt, who writes the Green Pricing Newsletter for the Regulatory Assistance Project of Gardiner, Maine, assesses the claims in a recent issue of his publication. Green Mountain said that it obtained its power predominantly from Hydro Quebec -- and that the power was an astonishing 97.5% free of green house gases. Northfield's pitch included a description of its pumped storage hydro in a beautiful recreational area: "Where you see a breathtaking vista, we see megawattsÉ Water is pumped up the mountain at night and flows down during the day to generate low-cost power." And Working Assets listed the resources it did not use -- nuclear, coal and Hydro Quebec.

Holt notes these claims ranged from dubious to simplistic. Hydro Quebec projects have been widely criticised for harming Native American lands. How Northfield's pumping is achieved in pumped storage is not disclosed. And Working Assets, which bought power from New England Power Company, did not say how it avoided New England Power's purchases from Hydro Quebec or its nuclear and coal resources. As a result of the New Hampshire experience, Holt advocates that green marketers should demand full disclosure from every power supplier they use. And he also believes that suppliers should support a nationally recognised credible standard much like the Green Seal endorsement on consumer goods or the certification of lumber from sustainably managed forests.

A similar pilot programme in Massachusetts also suggests that green will be hip amongst electricity marketers. "Choose green. It's good for the planet and great for business," was a campaign slogan that won over more than a quarter of residents for a two year test programme. Most businesses chose on the basis of price, while it was homes that opted for higher priced green schemes.

But again the credibility of the green claims is controversial. Enova Energy, which ran the slogan above, is part of San Diego Gas & Electric, which gets most of its power from nuclear. Enova promised free energy audits to customers and to donate money to local environmental groups, but consumers appear wise to such tricks. The scheme only managed to sign up 125 homes and small businesses, or 8% of customers. In contrast, Working Assets got a respectable 14% market share, or 781 green customers, by offering a no-coal, no-nuclear, no-Hydro-Quebec mix.

AWEA's Swisher is not that happy with many of the so called green options. "We have limited new renewables capacity on line in New England today that can serve such a market, so those who are interested in offering environmental packages end up selling something that looks far from ideal," he says. "There is much work to be done to ensure that customers who want to buy green in fact have the opportunity to do just that." Indeed, overall response to the programme was only about half of that expected. And the best showing was in Northampton, an unusually liberal and pro-environment community where as many as half the residents grabbed green options -- hardly representative of much the country.

Nonetheless, if the New England pilots are a glimpse of the future, greenness will clearly become a guiding force for utilities in the new electricity market. For then the attractions of green pricing are clear. It provides them with experience of unbundled pricing and services and a better understanding of customer response under such conditions. And it allows them to strengthen their image with customers and to build customer loyalty before they lose their advantageous position in a free market. In other words, within the framework of competition they can secure a market share stable enough to provide the means for research, development and demonstration projects.

The green market base

Customer interest in green electricity has been revealed in public opinion polls over the years. Much research indicates that 5-15% of consumers will pay a premium for green power, according to the Green Pricing Resource Guide, on the web-site of the Green Power Network of the US Department of Energy and compiled by Ed Holt. The guide also cites surveys by the Edison Electric Institute, which represents investor owned utilities, published in 1990 and 1994 that the percentage of Americans who considered themselves green increased by about half from 1989 to 1993, from 13% to 18-25%. Consumers, especially in the US, also like the idea of choice whether or not they exercise it.

Other research, such as a 1994 national survey by Cambridge Reports/Research International, indicates that as much as 60% of consumers say they would be willing to pay an extra $6 or more monthly for electricity from less harmful sources. Some regions of the country may be amenable to paying even more. In a September 1996 survey in California, the researchers Fairbank, Maslin, Maullin & Associates found that 30% of residents said they would be "very willing" to pay 10% more for clean electricity rather than nuclear or coal generated power.

Interest in the environment also came through strongly when the Dallas utility Central and South West Services (CSW), known in the wind industry for its small 6 MW plant of Zond turbines in West Texas, conducted "deliberative polls" of its 1.7 million customers in Texas, Louisiana and Oklahoma. The polls were akin to "town meetings," where groups of customers discussed the issues thoroughly -- and most still said they were willing to pay an extra $5-7 monthly for clean energy.

As a result, on Earth Day of this year, April 22, CSW launched a green pricing programme with advertisements in local newspapers in a huge region in the country's oil heartland -- from Tulsa, Oklahoma to the north, in two areas of Texas, Abilene to the west of Dallas and Corpus Christi to the south, and to the east in Shreveport, Louisiana -- as well as in the Wall Street Journal distributed in that region. "An Earth Day gift your mother would flip over" was the slogan that appeared above a graphic of the earth with a switch in her middle. The smaller print continued, "We're excited about Clear Choice because we believe it can improve the quality of our environment and the future course of energy development."

In Texas and Colorado

The details of the CSW green pricing programme, dubbed "Clear Choice," have yet to be pinned down, says its manager Ward Marshall. It first has to be approved by the Texas Public Utilities Commission, possibly as soon as this month. But it will most likely lead to 75 MW of renewables, of which up to two-thirds -- or 40-50 MW -- would probably be wind. Customers would be able to buy 25%, 50% or 100% of their electricity from renewables -- wind, landfill gas, solar, and new small hydro. The extra cost for such residential customers would be some $5, $10 or $20 monthly. And the programme would stand on its own feet through a surcharge, he says, making it "revenue neutral" or even profitable.

It is unclear yet how the risk in the programme will be meted out. But one thing is sure; customers would not be locked in to buying green electricity. "They can sign up and change their mind," says Marshall. But it also seems that CSW would not shift all the risk onto wind developers and will apparently be willing to sign longish-term contracts. Marshall says the request for proposals, probably this month, will most likely ask developers to give the price for ten, 15 or 20 year contracts. For CSW, he says, the dilemma is that renewables are cheaper for their customers if contracted for over a longer period. That might lock the utility into buying power that its consumers lose interest in -- or it might help the utility hedge its bets against increasingly high prices for dirty fuels.

Farther along is the Windsource green pricing programme, billed by Colorado's Public Service Co (PSC) to become the largest wind only green pricing programme in the country. Customers, whether residential or commercial, can sign up monthly for "blocks" of power from what will be the state's first wind farm, a 5 MW-10 MW plant to be built by Distributed Generation Systems using Zond 750 kW turbines. Electricity will not be generated until January 1998 from the Ponnequin Wind Facility, destined for a cattle ranch in Weld County near the Wyoming border. But customers are already being urged to sign up, although they will not pay until the wind farm is on line.

The price offered to residential customers is low, $2.50 monthly for every 100 kWh block. Business customers will be charged $25 monthly for every MWh block. But the prices are only possible because the state Governor's Office of Energy Conservation is working with the utility to obtain a $3 million grant from the US Department of Energy. Residences must commit for one year and businesses for three years, although apparently there are no consequences for customers who drop out early. Marketing is being conducted via membership of organisations such as the Sierra Club, an environmental group. The programme is also backed by ten groups who have promised to buy the green power.

An early failure

Not all attempts to persuade the consumer to pay more for green power have succeeded. In an early attempt at a green pricing programme for large industrial users, only one customer has so far signed up. Portland General Electric (PGE) tested the water for green products as long ago as 1995 with its pilot "Share The Wind" programme in conjunction with US Bank (Windpower Monthly, March 1995). A wind-linked credit card, debit card and Certificate of Deposit were offered to customers. Also in a test, households were permitted to round up their bills to contribute to wind, or to pay into a fund via a "penny jar." But the ideas, tested through leaflet distribution (right) were not popular enough for the utility to go ahead. Just recently, however, PGE launched a test programme named Earth Smart Power. Large commercial and industrial customers, with at least 1 MW at a single site, can take either a minimum of 3% of their total annual load in renewables -- wind, solar or geothermal -- or a minimum monthly allowance of 20,000 kWh.

The surcharge on the electricity is expected to be about $0.01/kWh, but PGE has until 2001 to provide green power, most likely in part from a 25 MW wind farm, the Vansycle project proposed for northeast Oregon. PGE has admittedly been busy with its planned mega-merger with Enron Corporation of Houston, but only the City of Portland has signed up and agreed to take 5% of its load in green power, says Doug Boleyn, PGE marketing specialist.

Although the programme was initiated after strong interest came from a local electronics company, that firm later dropped out. "We're looking for a market indicator of market pull for renewable power," says Boleyn. Customers must sign up for at least a year. PGE also hopes eventually to be able to sign up 5 average MW of green power. Even so, it appears that the risk will be borne by whoever sells the green power -- the developer or marketer. "We're more customer oriented than developer oriented," he concedes. "There is no assurance [that we'll keep buying renewables]É that's right."

Status today

Despite PGE's less than encouraging example, it can still be argued that over time, green pricing could dramatically increase the volume of wind power generation. But how much wind capacity could result?

One scenario is detailed in the Green Pricing Resource Guide. In the unlikely event that green pricing were an option for all of the 101.1 million residential customers, 12.7 million commercial and 500,000 industrial consumers in the US, demand for wind could lead to 1929 MW of new plant (nameplate capacity) within five years, out of a total of 5058 MW in added renewables. This is only about half the amount installed in Europe today. The scenario assumes that 0.3-3% choose the option in the first year, based on experience with green pricing so far, and that wind costs $0.045/kWh. Given that this is a projection for the entire country, including areas without a substantial wind resource, the gains for wind would most likely be far more modest.

If this scenario is correct in its suppositions, the wind industry would be wise not to put all its eggs in this one fickle basket -- not unless some form of long term contract certainty is built into green pricing programmes.

Still, with the dismal outlook in the US at the moment, even a niche market looks better than no market. Thus the immediate issue for wind seems to be how to make green pricing programmes work. Lessons can be learned from the failures of some programmes -- such as PGE's complicated "Share the Wind" programme or the attempts of Enova in Massachusetts to lure customers with donations and promises of green audits -- and the success of others, such as PSC's in Colorado and that of CSW in Texas.

One key to success would seem to lie in the presentation of a programme. The environmental benefit for customers should be concrete and tangible, says Green Pricing Newsletter's Ed Holt, such as the building of a specific and prominent wind plant. A good programme might include also such specific benefits as insurance for renewables buying customers against fuel price escalation. Significantly, this aspect of wind turbine ownership has been one of the driving forces behind the successful private development of wind power on the north European continent.

The PSC programme, a good example of having a tangible renewables plant, offers a detailed fact sheet on the actual wind farm that customers will be buying power from and a "project timeline," detailing a schedule for the wind plant's development. More than 100 people signed up on the first day. In stark contrast, PGE's programme does not require the utility to have wind on line until next century, and it is not definite what will be built even then.

Also notable in the PSC effort, notes AWEA's Randy Swisher, is that the utility is using green pricing as a way of attempting real partnerships with grass roots environmental groups. Several such groups are backing the scheme, which is also being marketed through the membership lists of organisations such as the Sierra Club. In the past, those groups have almost always been adversaries of the utilities. And if green pricing is the transitional market before direct access becomes the norm, such alliances will become increasingly crucial.

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