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Green Price Stability

New approaches account for the economic benefits of renewables.

Fortnightly Magazine - January 2009

(and capacity) resources: The renewable resource displaces electricity that the utility otherwise would have generated or purchased. The treatment of the cost of the displaced generation resources is the final consideration in determining the green pricing premium. However, defining exactly which generation resources are displaced frequently isn’t a straightforward exercise. While utilities typically don’t publicize the methodology for determining the price of their green power products, enough information is available to cite a number of methods. Some utilities have determined the green power rate using the embedded energy costs from all other generation sources, while others used avoided cost calculations. Generally, the term “energy costs” refers to the operating costs of the generation facilities, including fuel costs and any power purchases, and might or might not include the levelized capital costs that repay the utility for past construction of its existing generation facilities.

Therefore, the green power premium can be represented as: Green power premium = (1) + (2) + (3) – (4)

Adjusting the Green Premium

There are a number of circumstances that might lead a utility to adjust its green power premium. Several terms in the equation used to determine the premium may change over time, including the cost of the renewable energy sources, program implementation, ancillary services, or the cost of the utility’s nonrenewable generation sources. The methods of adjusting the premium can be characterized as either “static” or “dynamic.” A static adjustment reflects a one-time premium change, while a dynamic adjustment denotes use of a regular premium adjustment mechanism. A utility could employ both static and dynamic mechanisms ( i.e., exempting green power customers from fuel cost adjustments and making periodic adjustments to the premium).

Static Premium Adjustment: Although it is not common practice, a number of utilities have adjusted their green power premiums over time, almost always resulting in a premium reduction (see Table 1) . The reasons behind the adjustment fall into the following general categories:

1) Changes in the cost of the green power source: Renewable energy costs were lower than originally envisioned; the program was expanded, incorporating lower-cost renewable energy sources that lowered the overall blended renewable resource cost; the utility switched to the use of RECs at lower cost; and the actual cost of transmission of renewable energy was lower than projected.

2) Program implementation costs: Lower administrative or marketing costs; and increased customer participation, which enables the utility to spread the fixed costs of program administration over a larger base lowering the ¢/kWh cost burden.

3) The cost of displaced utility generation (and capacity) resources: Increase in the cost of conventional generation sources.

Dynamic Premium Adjustment: Although static premium adjustments help narrow the renewable energy price differential and encourage greater program participation among utility customers, they don’t capture the dynamic nature of energy price differentials. Both fuel and electricity prices fluctuate annually, seasonally, daily, and even hourly as they are impacted by electricity demand, changes in the market perception of domestic and global fossil fuel supply and demand, construction of new power plants, electricity transmission congestion, and other factors.