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Why Renewable Energy Is Not Cheap and Not Green
The Case Against Green Pricing
The ability of consumers to pay a premium to purchase environmentally preferred electric generation in a restructured industry would seem to be the noncontroversial middle ground between free-market environmentalists and eco-energy planners. Yet on closer inspection, green-pricing philanthropy is flawed in theory and practice, so much so that political interference would be required for the "voluntary" program to work.
There are two fundamental problems with green pricing. One, it is not being offered as stand-alone philanthropy but rather only where ratepayers or taxpayers are already required to subsidize the same renewables. Green pricing, as it were, attempts to get uneconomic renewables "over the top" given upstream subsidies that alone might not be enough.
Second, green pricing makes the assumption for consumers that an objective environmental standard exists for competing energies where, in fact, very complicated and subjective tradeoffs exist. So beyond the natural barrier of a substantial price premium for such alternatives as wind and solar,266 which can be opportunistically weighted down by higher and higher percentages of cheaper traditional fuels, green pricing faces both a market and political problem. If consumers dissent from green-pricing offerings, and if legislators and regulators view such programs as incompatible with mandated subsidies for renewables, green pricing could quickly lose its luster in the new electric market.
History to Date. "Green pricing" was originally proposed by eco-energy planners as a new support program for favored renewable electric-generation sources. It was conceived as a supplement to, not substitute for, existing ratepayer and taxpayer subsidies for wind and solar in the integrated resource planning process.267 Under green pricing, ratepayers would voluntarily pay a surcharge to underwrite higher-cost renewables in deference to a better environment. This would allow utilities to increase their renewable commitment above what otherwise would be the case.268
In April 1992, Southern California Edison initiated a Green Pricing Pilot Project to test customer interest in and the regulatory mechanics of green pricing. A year later, the project was abandoned due to "customer confusion with the concept and resistance from consumer advocates and environmentalists, who said the plan would tar renewables as 'expensive.'"269
Early in the electric restructuring debate, green pricing reemerged as a primary means of providing renewables. The CPUC's "Blue Book" proposal of April 1994 advocated voluntary transactions to promote environmentally preferred generation.270 In response, eco-energy planners decried sole reliance on green pricing, noting that nonparticipants would benefit as much as participants and thus threaten the program. "Few less promising substitutes," complained Ralph Cavanagh of the Natural Resources Defense Council, "can be conceived for system-wide procurement of a diverse resource mix."271
With ten states having finalized or nearly finalized plans to allow end-users to directly purchase electricity, new-generation providers are working on green-pricing programs.272 Where renewables are not present, some programs will offer to direct the ratepayer contributions to a qualifying environmental group or to trade in "environmental currency" (retiring SO2 credits or procuring CO2 offsets).273
Trying to Objectify the Subjective. Architects of green-pricing programs must confront a variety of difficult, if not intractable, questions including:
Many of the above questions are different applications of the "how green is green?" problem. Given that different environmental values and tradeoffs exist between air emission and nonair-emission externalities, flexibility is required with green pricing programs in place of a monolithic national standard. Yet this very flexibility could prove to the undoing of green pricing altogether. That possibility has forced eco-energy planners to look for a national, objective, my-green-is-your-green standard. Edward Holt suggests the following:
Yet Holt's suggestion in the same study for different shades of green quickly leads to a slippery slope:
Shades of green could be joined by shades of brown for the different fossil fuels and shades in between for biomass, geothermal, and pumped storage. Nuclear might require a different color. Furthermore, the shading would need to be altered for other variables alluded to above.
Avoiding Cross-Subsidization. Green portfolios should not subsidize the "nongreen" basket, particularly in the transition period of electric restructuring where consumers are still subject to monopoly. Existing and new-source renewable energy should be priced against their true "opportunity cost." Whenever economy (surplus) energy is available, the premium should be based on spot electricity prices and not hypothetical new construction.283 For example, if spot electricity is available for 2 cents per kwh, and the total cost of the renewable alternative (including a penalty for intermittency284 and transmission) is 6 cents per kwh, then the full 4 cent per kwh difference should be allocated to the green pricing program. If new construction is necessary, the premium for renewables should be the cost of the cheapest nonrenewable alternative for new capacity. If a gas turbine can be built for 3 cents per kwh in the same example, then green pricing should account for the full 3 cent per kwh difference.
A second area of cross-subsidization concerns the location of green power versus the location of the purchasing consumers. If they are not in the same area, nonparticipants will reap the alleged benefits of less ozone and particulates (carbon dioxide is not location specific).
The Geographical Problem. The new era of electric power will find national marketing companies aggregating power from many sources to sell at many other locations. Electrons will flow in and out of a "black box." The problem of green pricing is that consumers buying the power may be in a different region from where it is produced; they won't "receive" the "cleaner" air. Unless the buyer is a general philanthropist, this could discourage participation in green-pricing programs.
New Construction and Potential Stranded Costs. The raison d'etre of green pricing is the construction of incremental renewable capacity. New construction typically requires long-term commitments, so sellers of green energy must either require congruent long-term contracts from customers or bear the risk of marketing "spec" green power that may not be price-competitive in the future. Since customers presumably will be skittish about signing "green" commitments for green power for longer than a year, much less for 10 or 20 or 30 years to match the contracts required by renewable developers,285 there is a question about whether green pricing alone can sustain new capacity that is not economic. General ratepayers, in any case, should not bear the risk by having to pay a renewables "wires charge" for transmission or an "exit fee"in the case of self-generation. The potential "stranded costs" of green power should be on the developer or utility, not the nonconsenting ratepayer.
Mandatory Labeling. Proposals have been made on both the state and federal levels to require product labeling of all electricity sold to consumers. The National Association of Regulatory Utility Commissioners passed a resolution in November 1996 for its 50 member states "urg[ing] states adopting retail direct access programs to include enforceable standards for disclosure and labeling that would allow retail consumers easily to compare price, price variability, resource mix, and environmental characteristics of their electricity purchases."286 Edward Holt adds, "Not only private certification organizations, but the federal government as well may have a role in certification."287
The problem of labeling is more than the problem of trying to objectify standards discussed above. It will be very complicated and expensive to require all participants in the electric market to track the origins of electrons throughout the chain with such specific information as generation sources and air-emission characteristics.288 This is particularly true for marketers who will assume the intermediary function of buying and reselling under open access. Their "black box" transactions are naturally generation-blind, the primary environmental standards presumably already internalizing the externalities associated with electric generation. Adding a new layer of complexity via electron labeling will introduce some of the certification issues and problems experienced under multitiered crude oil pricing in the 1973-81 era.289 What will be the balancing rules for each resource? For example, should a marketer always stay in balance or be allowed to balance positions each week, month, quarter, or longer? What will be the penalties for miscertification? Whether intended or not, labeling will only reduce rivalry in electricity marketing by artificially increasing the economies of scale required to profitably compete.290
Conclusion. "Green pricing" is a very subjective exercise for buyers and sellers that may prove to be a fad of the transition to retail wheeling, not a lasting feature of electricity retailing. The danger, however, is that eco-energy planners will refuse to retreat in the face of green pricing's inherent problems and will politicize electricity with a spiral of objective standards and regulatory requirements, with the shortcomings of each leading to the next.291
It is incumbent on regulators and "green energy" providers to establish open, stand-alone programs that do not contain hidden subsidies and risks that are involuntary placed on market participants. Green pricing programs must be voluntary or they should not exist at all. In a market discovery process, consumer opinions about what is "green" can be expected to evolve and mature. Green providers can be expected to replace "image environmentalism" with "smart environmentalism" as consumers become more sophisticated. The current lack of consumer sophistication toward "green pricing" -- "[consumers] don't care; they just pay the bill and say it's the right thing to do"292 -- is not necessarily good for the environment, much less the personal budget. That aside, "green" entrepreneurs or eco-energy planning groups (such as the Sierra Club and the NRDC) are free to sponsor green-power portfolios to the market. This effort can even be complemented by philanthropic support from private not-for-profit organizations such as the Energy Foundation, which has spent $25 million from 1993 and 1995 and has a $10 million annual budget to "change present patterns of energy consumption with their increasing costs to the environment, the economy and national security."293
Certification advocates (who mostly will be renewables and environmental advocates) should first develop a set of principles or criteria for certification. . . . Once a satisfactory draft has been articulated, they should be proposed and promoted to a wider audience, including electricity suppliers, the renewables industries, environmental organizations and consumer groups. This process will slow adoption of the principles but is critical for widespread recognition and acceptance.281
Perhaps a hierarchial system of certification would allow for market innovation. Green marketing that provides meaningful environmental improvement might merit one star (light green), green power from existing resources (built before a certain date) could receive two stars (medium green) and green power from new resources (built since that date) could earn a three-star rating (dark green).282