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wind energy policy, transmission & regulation
Fundamental Requirements for an
Effective Green Market . . .
and Some Open Questions
Nancy Rader
Renewable Energy Consultant
and Policy Advisor to the American Wind Energy Association
Second Annual Conference on
Green Power Pricing
and Green Power Marketing
Corpus Christi, TX
May 13, 1997
So much is happening right now with electric industry restructuring that it is not only difficult to keep up on all fronts, it's virtually impossible for all but the most well- endowed players. With the green market in particular, events are taking place before we even have a chance to contemplate and resolve complex issues and put in place the kind of safeguards that will be needed to ensure that green marketing facilitates the market introduction of renewable energy. While "green" can be defined in many ways, the more that definition coincides with those renewable energy technologies which offer the most societal benefit and which need the most assistance in entering electric markets, the more real societal value green marketing will have. (Let me note that, in this talk, I will use the term "green marketing" to cover both green pricing programs and green marketing efforts, unless I make a particular distinction between the two.)
In my remarks today, I'd like to touch upon what I think are some of the prerequisites to an effective green market, and then get into a few of the difficult questions related to green marketing that I think many of us are still struggling with, including me. NREL's Renewables Power Marketing Initiative is serving as a valuable forum for discussing and hopefully resolving some of these issues, and I'm pleased to be involved in the RPMI on AWEA's behalf.
Fundamental Requirements for an Effective Green Market
A Truly Competitive Market
It is obvious that we cannot have an effective green market unless and until we have a truly competitive market in general. This will require all of the following:
!. Low Entry Barriers. The electricity industry has naturally high entry barriers because of its inherent capital- intensity, the long lead time that is required for new projects, the associated siting and permitting difficulties, and so forth. That is, there's no easy exit and entry to begin with in this market. So, every effort must be made to keep entry barriers as low as possible. For starters, this means that there need to be a large number of competitors in every local market to curb market power. But, with every merger that is approved, we will see less competition, not more. We must also have fair transmission access rules, truly independent system operators, and all the rest. It remains to be seen whether we will have a truly competitive market anytime soon.
This is particularly important to renewable energy because, if markets are competitive, we can expect to see entrepreneurs trying to break into the market using the environment, and renewables, as a marketing hook. But if entry is blocked, consumers will never even be presented with real choices.
2. Good information. A fundamental
precondition to an efficient market is that consumers must have complete information about
the choices that are available to them. To encourage a market in "green," consumer must have information that is good enough to allow them to comparison shop among suppliers on the basis of their costs and the environmental characteristics of their resource portfolio. This necessarily requires disclosure of fuel sources and emissions -- not just for those claiming "greenness," but for all suppliers.
Without uniform disclosure requirements, the burden will fall on green marketers to investigate their competitors' portfolios and educate consumers about them. This is a difficult and expensive task and, even if undertaken, consumers may not trust marketers' claims. Of those eligible to participate in the New Hampshire pilot program, for example, 33% of consumers who did not switch suppliers cited confusing or deceptive advertising as the reason. Verifying marketers' claims will be a task too formidable for most environmental groups, especially local ones, and many will be unwilling to spend their limited resources for this purpose. So, without uniform disclosure requirements, consumers may have no reliable source of information that gives them confidence in marketers' claims and the green market in general. If consumers are mistrustful of green claims, then the green market will be undermined. We've already seen tremendous controversy over claims that have been made, and how that can infuse the green market with suspicion. Any green marketer that has a worthy green product has an interest in disclosure requirements, because that is what will give legitimacy and value to its product.
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3. Corrected Market Failures. A market in which renewables get no credit for their public benefits -- environmental, energy security, and fuel price stability benefits -- is one that will seriously hinder the development of renewables. Even perfectly competitive markets only work well when consumers receive the benefits of the goods they pay for. They do not work well when the benefits go to people that aren't paying for them. This is the classic public goods problem that underlies virtually every environmental law in the country, even in markets with relatively low entry barriers. While there will be some people -- perhaps an appreciable number -- who will be altruistic enough to pay more to make everyone else's air cleaner, it is no more realistic to expect green marketing to substitute for renewable energy policy than it is to expect green marketing to substitute for the Clean Air Act, even though, if all consumers acted according to their values, that would be true. That's not doomsaying the green market, it's just a recognition of economic reality -- in particular, the "free rider" effect.
A Market Steered to Society's Goals
Another prerequisite to creating the conditions for an effective green market -- one that is distinct from, but related to, the issue of correcting market failures -- is that markets need to be directed to achieve, through policy, the minimum goals that society wishes to achieve. We are starting to hear the argument -- from interest groups and policymakers not generally supportive of renewable energy policy -- that, because consumers express a willingness to pay more for renewable energy in polls, policy is not necessary. It is highly ironic that some are using overwhelming public support for renewables as a reason not to adopt renewable energy policy. In every other instance, favorable poll results are used to support policy actions, not to defeat them.
Policy is often necessary to give consumers meaningful choices, especially when the environment is involved, as it is with renewables. Shopping for fuel efficient automobiles and airbags was slim pickins before CAFE standards and the airbag law, for example. And the examples go on and on. In order for consumers to have the choice of purchasing renewable energy, we must have strong renewable energy industries. Given the high entry barriers in the electric industry, we must ensure that a meaningful base of renewables is built into the system and paid for by all.
Critical Detail Questions for the Green Market
In AWEA's view, if we have all of the above fundamentals -- a truly competitive market, fuel source and emissions disclosure, and a baseline renewable energy policy -- we will have all the ingredients necessary for a vibrant green market. With disclosure, environmental groups and others will be in a far better position to endorse marketers whose resource portfolios have real environmental benefits. And education efforts by the environmental community and the public sector will be far more powerful. In a truly competitive market, we can then expect competitors to "bid up" the amount of renewables and other environmentally-attractive "products" to attract the educated consumers.
It's in the current period -- a few years at a minimum from a truly competitive environment, even in the states at the forefront of restructuring -- that we must pay much more attention to shaping green markets. If we don't pay adequate attention, the danger is that meaningless, even fraudulent, green marketing programs could do major damage to future green markets, by making consumers cynical about green claims. Without uniform, verified disclosure requirements, it will be difficult if not impossible to verify claims. It's this in-between time, before we have disclosure and real competition, that will be chaotic and difficult for green marketers and renewable energy generators.
Playing referee to the green market will not be easy. Folks in the wind industry, probably like most of you, are still trying to understand all the issues related to green marketing. The issues seem to fall into three categories: those things that are clearly elements of a good green marketing program, those elements that are clearly undesirable, and the tough questions that are difficult to resolve.
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Clearly Positive Aspects of Green Marketing Programs
1. First and foremost, a good green marketing program is one that either: adds renewables that would not already be added or supports renewable projects that might not otherwise continue to operate. If these things are already happening and being paid for by all, then the program doesn't meet the bottom-line test: green marketing programs must make a difference.
2. A sign of a good green marketing program
is one that has strong links to local environmental groups and that achieves broad support among regional and national groups with an interest in promoting renewable power. Public Service of Colorado, for example, has developed a close working partnership with the Land and Water Fund and other environmental groups in the state.
3. A green marketer that is seriously
interested in greening the electric system will have a program that is linked to a larger vision and a strategic plan for making renewables an increasingly larger part of the generation mix. A good example of this is Central and Southwest's recent decision to acquire a significant amount of renewables capacity, with the intent of ratebasing a good portion of it, and subscribing the rest through a green pricing program.
4. For green marketing programs to be
successful in the long run, they should both improve the environment and be fair to consumers. Prices should not be excessively higher than the actual cost of the resources in the portfolio. This is particularly true for green pricing programs, which are scrutinized by regulators, and in imperfectly competitive markets, because in these cases, there is no real competition in the green market. In markets that are vibrantly competitive and in which consumers have good information, this is less of a problem since lower-cost providers can compete to displace those providers charging excessive prices.
Many of the above traits can be found in existing green pricing programs, such as those being run or being contemplated by Traverse City, Ft. Collins, SMUD and Central & Southwest.
Things that should be Avoided in Green Marketing Programs
1. Selling green power at a mark-up that would have been produced anyway with the cost shared by all. An example of this would be renewable power that is already included or would be included in a utility's ratebase without the green program. These types of programs sell nothing as if it is something, which is worse than doing no green marketing at all, because these programs are fundamentally unfair and breed consumer cynicism. If we permit these types of programs to occur, they will undermine the market for those marketers who are actually making a difference.
2. Programs that do not in some way
directly benefit the renewable generator. An example of this would be a utility that has
an existing power purchase contract with a renewable generator, but does not flow any
benefit through to the generator.
3. Programs that make false claims and do
not adequately inform consumers about the nature of their product. For example, selling
"nuclear and coal free" power when consumer dollars are sent to a nuclear- and coal-owning utility. This is a recipe for creating cynicism, once the anti-nuclear consumers find out their dollars have been channeled to the owners of plants they dislike. Electrons and dollars are fungible, so, in these kinds cases, unless the marketer can prove to the public that the consumer dollars they are collecting do not in any way support the nuclear and coal plants, and support only the resources claimed as "green," such claims should not be made. This is not to say that portfolios necessarily need to be nuclear- and coal-free for marketers to make green claims, but marketers should not misrepresent their portfolio.
4. Collecting premiums in exchange for
vague promises to build renewables in the future. Consumers should not be asked to pay for
someone else's investment when they get nothing in return, and when no tangible benefit to
society results.
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"Tough questions" that require more thought by everyone in the community
Unless there is a broad consensus among all parties on the following issues, and we can find meaningful ways of enforcing this consensus either formally or informally, then we risk programs being publicly criticized, confusing consumers, and turning them off of the green market.
Under what circumstances, if any, is it okay to resell as green the small amount of renewable resources owned or under contract to a utility that is otherwise not-so-green? What contracting and accounting functions can demonstrate that greener resources are in fact being supported, and what claims may be made about such portfolios? What must the public know about the details of these arrangements in order to confirm that there is actually some advancement of green resources?
How should existing renewable resources be handled? This is a complicated issue because, on the one hand, many existing renewable resource projects, including many in California, need additional support to maintain operations. On the other hand, as I noted earlier, it is unfair if programs charge consumers more for existing renewable resources that are already included in the ratebase, or would've been built anyway, and whose costs would otherwise be shared by all consumers.
Sorting out and controlling for these different circumstances is possible with a regulated green pricing program, but is not so easy with green marketing. With green marketing, it will be impossible, and I think undesirable, to try to distinguish between the green resources that need additional revenue to survive and those that do not. After all, markets are all about rewarding the lowest-cost producers, and if those are existing renewables plants, then so be it. In a competitive market, the best we can do is hope that the demand for green power exceeds the supply, so that anyone who chooses green will be helping to change the next investment decision made in the power industry in favor of a green resource.
How should "green" be defined? While there undoubtedly are many definitions, AWEA hopes that "green seals of approval" will be reserved for those portfolios that include a substantial fraction of those renewable resources that are not well established and that will be most vulnerable in competitive markets. We cannot assume that the market will be large enough to subscribe all of the emerging renewable resources, let alone virtually unlimited quantities of large hydro and natural gas. Unless the definition of "green" is limited to wind, solar, biomass, geothermal, and perhaps small hydro, those resources will have little added value in the market. If we spread our environmental kudos too far, suppliers will have no reason to invest in higher cost resources that most would agree are the "greenest."
This is certainly the case in California, where over 10% of our power is already from non-large-hydro renewable resources. In order to subscribe all of this power, every single household in the state would have to purchase 30% of its power from non- hydro renewables (or 30% would have to purchase 100% of their power from renewables). I suspect that we're a long way from the supply/demand equilibrium point no matter how green is defined, but if the Grand Coulee dam is blessed as a green resource, then we're really in trouble.
I fear, though, that achieving a consensus will be difficult. As one example, consider the issue of whether the hydropower derived from water flows that enhance river habitats (referred to by another speaker as "fish flush") should be blessed as "green" power:
- Many environmental groups adamantly oppose giving any type of credit to large hydro, where some of the biggest environmental battles of the century have been fought.
- Others would see some legitimacy in programs that sell hydropower derived from flows that are improved from what is required by law, thereby enhancing fish habitats from what they would otherwise be.
- I understand that few environmentalists in the Northwest support EDF's new alliance with BPA to sell as "green" power the hydropower that is generated from water flows that are required under existing regulations.
Similar debates ensue over low-emission gas technologies, including but not limited to fuel cells. While it is certainly true that there are many ways to ease the impact of electricity production on the environment, it is important to ask which technologies, fuels, and industries most need the market boost conferred by the endorsement of public interest groups. Large hydro operators and the natural gas industry simply do not require the help that renewables do to overcome the entry barriers that are associated with the electric industry. The next question is: How much renewable energy should be in a marketer's portfolio before it deserves anyone's endorsement? In California, as I said earlier, every single household would have to purchase 30% of its power from non-large- hydro renewables to support the existing level of renewables that we have. Let's also assume, and I think it's the case, that this amount of renewables could be included in a portfolio within the premiums that people tell pollsters they are willing to pay for renewable energy. Then, it would seem to make sense that, to deserve a "green stamp of approval," a marketer's portfolio should -- at an absolute minimum -- be 30% renewable. Otherwise, it would be impossible to maintain the current level of diversity through green marketing programs, and push the demand for additional renewables. In states where there are few or no renewables, endorsements should be reserved for doing what is technologically and economically possible within the premiums that people are willing to pay and, if necessary, endorsements should wait for meaningful amounts of renewables to be developed.
Tradable renewables. Many of you have probably heard about Enron's "Green Tags" proposal, which would essentially allow the "greenness" of a resource to be sold separately from the power itself. The concept is essentially the Renewables Portfolio Standard without the requirement attached. In fact, AWEA and the other renewables industries recently made an almost identical proposal in California as a way to track and verify renewable energy claims in the absence of disclosure requirements, and as a way to add flexibility to the green market. So, my guess would be that most of the renewables industries would support the Green Tags concept. However, there are some in the environmental and renewable community who fundamentally oppose the notion of trading environmental "bads" and "goods." They think that if you want to market renewables, you should do business with them directly. Even those who agree on the concept may disagree about which resources deserve "green tags" and then we get into all of the issues I went over a moment ago. But I think it's a concept that deserves our serious attention, with the caveat that it would be an interim solution to a problem that is best solved through industry-wide disclosure requirements and a national renewables portfolio standard.
Will it be possible for private groups to track and verify portfolios in order to make endorsements without a built- in industry-wide tracking and disclosure system? Many people, including me, have yet to be convinced that it is possible, particularly absent a significant investment of time and resources.
Conclusion
If we are to develop a consensus about all of these issues, it will only be through a lot of communication among all of the parties involved, a lot of hard work, and a lot of dedication. Even assuming our best efforts, however, it's not at all clear to me that we are going to sort all the issues out and agree in time for the market that will be wide open in California eight months from now, and for the other markets that will soon open up. It is even less clear whether and when we will have a truly competitive market with the credible information that consumers need to make informed choices, and whether we will have a renewable energy policy that will lay the foundation for a healthy renewables industry. Ultimately, all of this will be required for a meaningful green market to materialize anytime soon.
Nancy Rader
1198 Keith Avenue
Berkeley CA 94708
Phone: 510/845-5077
Fax: 510/548-4815
E-mail: nrader@igc.apc.org
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