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Will Renewable Power Prosper in a Deregulated Industry?

By Eugene P. Coyle

California and some other states, mostly in the Northeast, are deregulating the power generation part of the electric utility business; other states and federal legislation may follow. Deregulation theoretically allows customers their choice of electric energy suppliers, though industrial and the largest commercial accounts will enjoy the option earlier than smaller customers. The delivery of power to all customers will continue to be over the poles and wires of the incumbent utility.

As states deregulate electric utilities, some environmental groups are telling consumers to exercise their choice by paying a premium to encourage the development of the market for renewables. But framing the issue as a matter of individual choice is profoundly harmful to the development of renewable energy because individual consumer behavior will not result in a viable renewable market.

We are offered choices, but the key choice is whether to be a green citizen or green consumer. Some environmental groups, including the Environmental Defense Fund (EDF) and the Natural Resources Defense Council (NRDC) believe that "the market" will deliver a renewable industry, as individual customers vote with their dollars. The premise is that dollar votes will be large enough to elicit new investment in renewable generating capacity, and that the new investment will, over time, advance technology and otherwise drive down costs of renewable energy. In that event, the scenario goes, more customers will choose green and drive down the price even further, in a virtuous circle.

Others of us believe that democratic control, expressed through the votes and organizing of citizens and implemented through regulation and local control, offers the only way for the renewable industry to develop. Green consumption not only won't promote, but also will actually harm, the renewable power industry. H. Patricia Hynes sees the choice clearly: "The sum of the parts — thousands of individual green consumers — will not be a whole — an organized, environmentally politicized citizenry — unless environmentalists shift from the shallow notion of green consumer to the substantive notion of green citizen."

Until recently, U.S. electricity consumers have purchased from a single monopoly supplier, their local electric utility. How the power was generated was decided by the utility, based on expectations about how to be most profitable. In some states, environmentalists, acting through the public utility commissions, fought to require that some cleaner power be included in the mix, with limited success.

Residential customers in California have been bombarded with television ads and direct mail campaigns asking them to "choose green." Vendors claiming to be green ask customers to pay a premium for clean power — to voluntarily pay extra, that is, for environmental benefits. Green power appears to be the only potentially profitable niche in the residential sector, for the cost of marketing to individuals is large and for the basic commodity of electricity, margins are small. Customers with environmental concerns considering the offers of premium priced green power should bear in mind that this same electricity has been delivered to the grid all along under regulation, at cost. Vendors are simply repackaging and marking up the price, not producing anything new.

The Size of the Likely Market: Some see the green market as large. Polls have shown that there is powerful public support for clean energy, produced from renewable sources like solar and wind. House Commerce Committee Chair Thomas Bliley (R-Va.) last year released results of a poll showing that two-thirds of consumers would be willing to pay higher prices for electricity produced from clean fuels.

People willing to spend extra on their own electric bill surely want all customers to be supplied with energy from clean sources. In a market setting, however, only residential customers are going to choose green power. The assertion that industrial and commercial customers are going to buy green for public relations purposes is simply not credible. The possible participation of the likes of a Ben & Jerry's, which has been touted to show that some non-residential users will donate for green power, should not lead us down the wrong policy road, for large users apart from a uniquely public-interested corporation have made very clear they want the cheapest (and, unfortunately, the dirtiest) electricity available.

Simple arithmetic shows that this is the critical moment to fight as citizens rather than to believe the promise of the market as the path to clean energy. Beyond arithmetic, moreover, good public policy leads to the rejection of green pricing/green marketing as the route to clean energy supplies.

The electricity market is divided into industrial, commercial, and residential segments. The industrial and commercial markets together use about two-thirds of our national electricity supply. So the arithmetic of green marketing starts not aimed at 100 percent of the market, but at only the residential 33 percent as the target.

The various predictions and surveys about what percent of residential customers will actually spend money on paying extra for green power are, of course, only speculation. A survey of the research for the National Renewable Energy Laboratory (NREL) asserts that "perhaps 10 percent of local area respondents say they will actually participate in a green pricing program, and, at a program's inception, perhaps only I percent will sign up."

To do a calculation, assume that a very optimistic 5 percent of residential customers choose to pay extra for green electricity. Then 33 percent of the load times percent of the customers, (or .33 times .05) equals .0165, or a little less than 2 percent of the total electric sales.

But it gets worse. Proponents of green marketing acknowledge that participating customers are not going to buy only green power. The monthly premium for buying all green power would be large, and marketers offer products that are a blend of more expensive renewable and regular grid power, which includes nuclear and coal. Blending keeps the total price down, but the mark-ups are still steep. One California vendor's price for its "cleanest" blend of 75 percent renewable is 16 percent higher than what a customer would pay the utility for the same amount of grid-delivered energy. Since this marketer's product has 25 percent regular power from the grid, the customer's premium for the "clean" kilowatts is actually 21 percent more than what regular grid power would cost. Market research shows that very few are willing to pay that sort of premium. Assume conservatively, then, that those buying green buy a blend covering half their needs, or 50 percent.

Adding the factor of the customer purchasing only 50 percent green rather than 100 percent, we get (0.33) times (0.05) times (0.5) equaling (0.00825), or eight-tenths of 1 percent. If the numbers assumed are reasonable, and they are probably optimistic, less than 1 percent the total electric demand will be bought green. Since national generating capacity from renewables already amounts to about 2 percent, not even all existing renewables will be purchased by green consumers at premium prices. The result is that buying green will not drive the construction of additional renewable capacity. The clear and unpleasant conclusion from the arithmetic is that consumers buying green will not lead to a growing market for renewable energy.

Alternative Paths to Clean Energy

Alternatives available to us as citizens (rather than as consumers) include acting at the local level and at the state and federal levels of government.

At the local level we can ask our municipal governments to act as our agents in purchasing the mix of power that we desire. Aggregating ourselves to buy electricity is touted as the way for small customers to benefit in the deregulated market. The most effective aggregation will be through local government, which can enter contracts with suppliers that specify the percentage of clean power to be supplied and which can also ensure delivery of energy efficiency measures to reduce consumption.

On Cape Cod, local governments, after study and town meetings, have already banded together under the Cape Light Compact to be the buying agent for all, business and residence alike. They will solicit contracts that specify a minimum level of clean energy. In Massachusetts the legislation deregulating the power market ensured a role for local governments as aggregators for the community. The California law, in sharp contrast, deliberately erected a barrier against effective municipal participation.

At the state level citizens can work for legislation like that in Massachusetts and work against the anti-democratic element of the California bill. At the local level, working with your mayor and city council can result in effective local action toward cleaner power. Help in these efforts can be obtained from the American Local Power Project which has a Web site at www.local.org and can be reached by phone at 510/451-1727.

At the federal level a number of bills are being considered in Congress and the Clinton administration is preparing its own. Citizens can work to support a policy at the federal and state level called the "Renewables Portfolio Standard." This would require each power marketer to have a minimum percentage of renewable power in the total mix of energy it puts into the electric grid. All customers then, not just residential, would be supporting the market for renewables. Proponents of this policy option aim to have the minimum percentage grow over time, so that renewables would gradually contribute to cleaner air and a reduction in greenhouse gases.

The Renewables Portfolio Standard is favored in several of the deregulation bills at the federal level. Public support is needed, though, because industrial customers and other big energy users oppose the Portfolio Standard for the obvious reason that it would make them purchase some of their power from facilities not supplying the very cheapest energy.

Why Not Do Both?

Why not be a green consumer, and purchase renewable power while also participating as a citizen? At first glance it seems obvious: If you want clean air, do both. Be a green consumer and also fight hard for a national policy that fosters renewable energy. But a closer look shows that trying to do both will result in the failure to get cleaner power. Congressman Bliley released the poll showing strong public support for renewable power not to push Congress to give the public what it wants. On the contrary, the Congressman's message is clear: "Let the market take care of this problem." The arithmetic shows, however, that renewables won't be developed through the market. Worse, the failure of the renewable market will not later result in regulation to deliver clean power. The response in Congress would, rather, be something like, "The people have spoken. They are not willing to pay for renewables in the market. We are not going to mandate renewables when the public, with its dollar votes, it is not willing to pay for them." The death of the green market will likely kill prospects for regulatory mandates as well. Citizens should act directly on government at all levels to get what the public clearly wants.

Eugene P. Coyle is an economist who worked with SRIC in the past on WIPP. He is a consultant on energy resource issues to environmental and consumer organizations.