Augment restrictive green energy policies with a progressive market approach
Todd Myers
is the director of the Center for Environmental Policy at the Washington Policy Center.
Ed. note: This is an EXCERPT from a legislative memo authored by the Washington Policy Center. To read more on the potential for Washington’s utility’s green energy programs and the advantages of allowing a profit on the sales of green energy, visit www.wpc.org.
Last year, Portland General Electric announced that it had achieved an important milestone in its efforts to sell green energy. No utility in the nation had a larger percentage of its residential customers buying voluntary renewable energy credits – more than six percent.
Why is Portland so successful while Washington utilities struggle to sign people up for these programs? While the Washington state legislature has taken the profit motive out of selling green energy, Oregon rewards companies that market green energy to the public.
Oregon’s example provides a positive lesson for Washington policymakers.
While Washington’s state, county and local leaders are devising a variety of regulatory strategies to reduce carbon emissions, market incentives seem to have been forgotten. Voters last fall passed Initiative 937, which requires 15 percent of the energy provided by major utilities in Washington to be renewable by 2020.
As the example of Portland General Electric demonstrates, using market incentives can have a significant impact on the sales of green energy. Augmenting other carbon reduction efforts with a profit incentive will not only help achieve green energy goals, but will allocate additional costs more progressively and can help utilities reach the mandated goals of Initiative 937 more easily.
Voluntary green energy credits in Washington
Passed in 2002, RCW 19.29A.090 requires Washington utilities to offer its customers the option of purchasing "renewable" energy from sources that do not emit carbon, like wind and solar power. Customers pay an additional fee per kilowatt hour (kWh) for the green energy they use. The packages offered by the utilities vary, less than a cent to more than quarter per kilowatt hour. Clark Public Utility District charges 1.5 cents, and sells renewable energy credits by the 100-hour block for $1.50.
Utilities are required to market these programs to a minimal extent, reminding customers quarterly in their bills. Several utilities, however, make additional efforts, including hiring coordinators to negotiate purchases with large customers and engage in other marketing to residential customers. The cost of these efforts, however, must be justified to the state Utilities and Trade Commission (UTC), which oversees the rates of utilities because they are regulated monopolies.
By law, companies cannot make a profit on these programs in excess of what they would have received if the power was from non-renewable sources. Also, the cost of providing green energy credits cannot be spread across the customer base of the utility. Only customers who make the voluntary choice to pay for green energy will pay more.
Two fundamental assumptions deserve attention.
First, the law assumes that renewable energy costs more than alternatives. This is appropriate. Washington state has some of the lowest electricity rates in the country, in part due to the predominance of low-cost hydroelectric power. Wind and other sources of renewable energy consistently cost more than hydro, coal and gas. In the case of solar, the cost is much larger per kWh than for other sources.
Second, because the purchases are voluntary, the higher costs should be paid by customers who choose to pay the additional costs. This is the most progressive way to allocate additional costs – allowing those who can afford additional costs to bear the burden of the higher costs for electricity from renewable sources.
Mixed results from Washington’s green energy law
The results of this law have been mixed. From 2005 to 2006, Washington utilities saw a 67 percent increase in the amount of green energy (kWh) sold and a nine percent increase in the number of green energy customers. Since 2002 the amount of green energy purchased has increased more than 16-fold.
The overall numbers, however, are still paltry. Statewide, most utilities range from 0.1 percent green energy participation to 1.6 percent, with only the small Orcas PUD reaching 4.8 percent of customers participating. Less than one percent of Clark PUD’s customers participate, the lion’s share go to businesses.
One key reason these numbers are so low is that utilities have little incentive to promote green energy programs beyond what is required by law. The profit a utility earns on a kWh of green energy is the same as on a kWh of hydroelectric power or coal.
Marketing and overhead costs, furthermore, must be approved by the UTC if the utility is going to recover them. The best that utilities can hope for is to recover the costs of the program. At worst, the UTC will refuse to cover some of the costs and the utility will lose money by selling green power.
Now, the passage of Washington ’s renewable energy portfolio, Initiative 937, reduces the incentive to sell green energy even further.
Initiative 937 requires that the energy offered by utilities be 15 percent "renewable," based on the initiative’s definition, by 2020. Many utilities have expressed concerns about finding that amount of non-hydro renewable power (likely wind power) in time to meet the targets. Moreover, Initiative 937 does not allow voluntary purchases to be counted toward the mandatory targets. There are two reasons for this.
First, utilities themselves say that few customers want to pay more voluntarily simply to help the utility meet its legal obligations.
Second, some supporters of Initiative 937 expressed the belief that since climate change is something we are all contributing to, we should all manditorily share in the costs.
The result is a serious reduction in the desire of utility officials to market green energy to their customers. If utilities sell a significant number of voluntary energy credits, it simply adds on to the demand created by the initiative.
Thus, if a utility engaged in an aggressive marketing effort and sold three percent of its total kWh in the form of voluntary credits, it would now have to procure 18 percent of its total energy from "renewable" sources. Utilities already concerned about meeting their mandatory targets are unlikely to incur new, potentially unrecoverable, costs to market green energy that only adds to the difficulty of meeting their legal obligations. No utility wants to be in the position of violating the law because its voluntary program was too successful.
