Competitive retail markets: Tenuous ground for renewable energy

Electricity Journal

Volumn 11, Issue 3, 1998, Pages 72-80

  Rader, Nancy A ^a   Short III, William P ^a  

^a NONE

Author keywords

[No Author keywords available]

Indexed keywords

COMMERCE;

CUSTOMER CHOICE; MARKET SHARE; RENEWABLE ENERGIES; RENEWABLE ENERGY POLICY; RENEWABLES; RETAIL MARKET;

COMPETITION;

EID: 0032044318     PISSN: 10406190     EISSN: None     Source Type: Journal    
DOI: 10.1016/S1040-6190(98)00022-0     Document Type: Article

References (37)

1. PURPA, enacted in 1978, required electric utilities to purchase power from qualifying independent renewable and cogeneration facilities (QFs) at rates reflecting "avoided cost." Some states, including California and Maine, were more aggressive in requiring utilities to sign contracts at forecasted long-term avoided cost rates. During the early to mid-1980s, when most of these contracts were signed, long-term avoided costs reflected the high forecasted energy prices of the times. In view of today's low energy costs, these rates now appear high, but in many cases QFs displaced utility resources that would have cost as much or more. See, e.g., Calif. Energy Comm'n, Final Report to the Legislature on Joint CEC/CPUC Hearings on Excess Electrical Generating Capacity, P.150-87-002 (June 1988) and Richard Darling, Comparison of the Cost of QF Purchases with the Capacity Expansion Plan Recommended by Central Maine Power Co. (Feb. 1994) (cited in MAINEWATCH INSTITUTE, ENERGY CHOICES REVISITED: AN EXAMINATION OF THE COSTS AND BENEFITS OF MAINE'S ENERGY POLICY).
2. PURPA, enacted in 1978, required electric utilities to purchase power from qualifying independent renewable and cogeneration facilities (QFs) at rates reflecting "avoided cost." Some states, including California and Maine, were more aggressive in requiring utilities to sign contracts at forecasted long-term avoided cost rates. During the early to mid-1980s, when most of these contracts were signed, long-term avoided costs reflected the high forecasted energy prices of the times. In view of today's low energy costs, these rates now appear high, but in many cases QFs displaced utility resources that would have cost as much or more. See, e.g., Calif. Energy Comm'n, Final Report to the Legislature on Joint CEC/CPUC Hearings on Excess Electrical Generating Capacity, P.150-87-002 (June 1988) and Richard Darling, Comparison of the Cost of QF Purchases with the Capacity Expansion Plan Recommended by Central Maine Power Co. (Feb. 1994) (cited in MAINEWATCH INSTITUTE, ENERGY CHOICES REVISITED: AN EXAMINATION OF THE COSTS AND BENEFITS OF MAINE'S ENERGY POLICY).
3. In addition to state laws that implemented PURPA, important state policies include renewable energy purchase requirements in Minnesota and Iowa, which account for about 80 percent of the U.S. renewable energy development activity from 1994 to the present.
4. According to Calif. Energy Comm'n, Policy Report on AB 1890 Renewables Funding: Report to the Legislature (March 1997) (P500-97-002), biomass (including landfill gas but excluding municipal waste), geothermal, wind, and solar resources were estimated to account for some 5,141 MW of capacity in 1996 and generated 23 billion kWh in 1994. The EIA's Annual Energy Outlook, 1997, shows nationwide generation from these resources, plus biomass self-generation, as 69 billion kWh.
5. According to Calif. Energy Comm'n, Policy Report on AB 1890 Renewables Funding: Report to the Legislature (March 1997) (P500-97-002), biomass (including landfill gas but excluding municipal waste), geothermal, wind, and solar resources were estimated to account for some 5,141 MW of capacity in 1996 and generated 23 billion kWh in 1994. The EIA's Annual Energy Outlook, 1997, shows nationwide generation from these resources, plus biomass self-generation, as 69 billion kWh.
6. Future Resource Associates, The Environmental Costs and Benefits of Biomass Energy Use in California (May 1997) (prepared for Nat'l Renewable Energy Laboratory, NREL/SR-430-22765).
7. Similarly, in Maine, operational plant capacity has declined by 16 percent, according to the Maine State Planning Office. In the near-term, thanks to power shortages caused by nuclear plant outages and shutdowns, it appears that some of the closed plants will come back on line during peak periods. Some already have. The long-term outlook is less certain, given competition from 1,000 MW of planned gas plant capacity to be supplied with Canadian gas through new or enhanced pipeline capacity.
8. Calif. Energy Comm'n, Wind Project Performance 1995 Summary (June 1997) (P500-97-003).
9. According to available data from the California Department of Conservation's Division of Oil, Gas and Geothermal Resources as well as industry sources, operating capacity at The Geysers has declined by about 700 MW, representing some 5 billion kWh of lost generation from peak production levels in 1988. Most of the reduction is due to a declining steam resource; some is due to curtailment of operations owing to the availability of lower-cost hydropower and the need to accommodate must-run facilities including QFs and the Diablo Canyon nuclear plant.
10. Policy Report, supra note 3.
11. Calif. Energy Comm'n, Order Adopting the Initial Net System Power Report for 1997 (Dec. 3, 1997) (Docket 97-SB-1305).
12. It is known from the ill-fated 1994 California bidding process known as the Biennial Resource Plan Update (BRPU) that there are over 1,000 MW of new, lower-cost renewable resources available at an average price of 5¢/kWh - and those bids were based on 1993 technologies that have since improved. The winning bids included primarily wind, but also geothermal and some biomass resources. Recent wind power bids in the Midwest and South-Central U.S. have come in at a levelized life cycle cost of under 4¢/kWh, with payments front-loaded to help with initial capital costs.
13. The renewable plant capacity that has already shut down or is very likely to (as described in the text) amounts to some 1,150 MW and 7 billion kWh annually. Lost production was estimated using the following capacity factors: 70 percent for the 200 MW of lost biomass capacity, 93 percent for the 90 MW of geothermal capacity likely to be lost, and 20 percent for 156 MW of lost wind capacity, for a total of 2.2 billion kWh, plus 5 billion kWh of reduced production at The Geysers (supra note 7). The AB 1890 fund for new development could support about 2.1 billion kWh annually at the maximum incentive rate of 1.5¢/kWh paid for five years (equivalent to a 0.9¢2/kWh incentive paid for ten years on a net present-value basis). This incentive must prove to be adequate to support the development of new renewable facilities.
14. Bill AB 1890 will provide price support payments to existing renewable energy projects from 1998 through 2001. The payments will start high and end low, with average payments of approximately 0.9¢/kWh for solid-fuel biomass and solar thermal resources, 0.7¢/kWh for wind resources, and 0.1¢/kWh for geothermal, landfill gas and small hydroelectric resources. The payments will be adjusted downward if electricity prices rise.
15. Supra note 4.
16. Merchant plants are those built without long-term power purchase agreements.
17. Fitch Takes First Crack at Rating Merchant Plants, ENERGY DAILY, Sept. 17, 1997.
18. While one cogeneration plant in Pasadena, Texas, being constructed by Calpine Corp., has some merchant plant features, approximately 40 percent of its electrical output will be sold to Phillips Petroleum; the balance will be available to sell on the market. Of the planned merchant plants, only a few have announced that they have completed their financing while numerous others expect to complete their financing by year-end 1998.
19. Edison Electric Inst., Power Purchase Agreement Buy-Out Experience and Merchant Power Projects: 1997 Status Report, Table 5 (July 1997 Update).
20. In balance-sheet financing, a company uses its own cash or borrows against its assets or income stream to finance a power plant. These investments are not subject to the same constraints as project-financed plants, in which funds are borrowed solely against the project's assets and income stream, since lenders will look to the company's overall credit-worthiness and not just to the project itself. Nevertheless, companies that finance on the balance sheet will seek to maximize the rate of return on their investments and to shield themselves from market risks. That is, they are likely to impose Fitch-type criteria on their own decisions.
21. See, e.g., Jeffrey P. Price, What's a Power Plant Worth?, PUB. UTIL. FORT., Sept. 15, 1997, at 38.
22. If ratepayer-supported resources are excluded, selling existing renewables is not a bad thing. As indicated earlier, many existing renewable projects need support to continue operations.
23. It appears that the California Energy Commission has closed the door to utility-owned, ratepayer-supported renewable resources receiving the marketing subsidy, despite intense pressure from green marketers. See testimony and transcripts in CEC Docket No. 96-REN-1890.
24. See Nancy A. Rader and Richard B. Norgaard, Efficiency and Sustainability in Restructured Electricity Markets: The Renewables Portfolio Standard, ELEC. J. July, 1996.
25. See, e.g., Pesticide Action Network, Rising Toxic Tide: Pesticide Use in California (San Francisco, 1997) (showing that 79 percent of Californians believe it is important to reduce pesticide use); and Survey Shows Americans Want Labels on Genetically Altered Foods, ENVIRONEWS SERVICE (Feb. 25, 1997) (reporting on a survey showing that 54 percent of the public prefer greater reliance on organic farming compared to 10 percent who prefer greater reliance on pesticides).
26. See, e.g., Pesticide Action Network, Rising Toxic Tide: Pesticide Use in California (San Francisco, 1997) (showing that 79 percent of Californians believe it is important to reduce pesticide use); and Survey Shows Americans Want Labels on Genetically Altered Foods, ENVIRONEWS SERVICE (Feb. 25, 1997) (reporting on a survey showing that 54 percent of the public prefer greater reliance on organic farming compared to 10 percent who prefer greater reliance on pesticides).
27. Statistics derived from various articles in the Natural Foods Merchandiser, New Hope Communications (June 1996).
28. Assumes that total food sales are increasing at the rate of 5 percent per year (in real dollars).
29. The USDA estimates that 1.1 million acres of land were devoted to organic farming in 1994, according to Widening Market Carries Organic Sales to $2.8 billion in 1995, NATURAL FOODS MERCHANDISER (New Hope Communications, June 1996). THE WORLD ALMANAC 1996 (World Almanac Books) contains data from the National Agricultural Statistics Service, U.S. Department of Agriculture, showing a total of 973 million acres of U.S. farmland.
30. The USDA estimates that 1.1 million acres of land were devoted to organic farming in 1994, according to Widening Market Carries Organic Sales to $2.8 billion in 1995, NATURAL FOODS MERCHANDISER (New Hope Communications, June 1996). THE WORLD ALMANAC 1996 (World Almanac Books) contains data from the National Agricultural Statistics Service, U.S. Department of Agriculture, showing a total of 973 million acres of U.S. farmland.
31. Quoting Phillip Nabors in Organics in the Mainstream, NATURAL FOODS MERCHANDISER (New Hope Communications, Sept. 1996).
32. See Edward A. Holt, Green Pricing Resource Guide (Regulatory Assistance Project, Feb. 1997).
33. According to Green Mountain Energy's (GME) website (www.choosewisely.com, on February 8, 1998), the company is charging a 1.2¢/kWh premium over the Power Exchange price for its 75 percent renewable power product, or a 1.6¢/ kWh premium on the renewable kilowatt-hours [(1.2¢/kWh) ÷ 0.75 = 1.6¢/ kWh]. The company's "Wind for the Future" (WFF) product is the 75 percent blend with a conditional promise that new wind will constitute 10 percent of the blend's mix by displacing an equal amount of the 75 percent renewable power blend. GME is charging a 2.1¢/ kWh overall premium for this product, or a 2.8¢/kWh premium for the renewable power [(2.1¢/kWh) ÷ 0.75 = 2.8¢/ kWh]. Assuming the existing renewables portion still costs 1.6¢/kWh extra as part of WFF product, the premium for the new wind power works out to 10.6¢/ kWh [((2.1¢/kWh) - (1.6¢/kWh × 0.65)) ÷ 0.10 = 10.6¢/kWh].
34. Many utility green-pricing programs have achieved results of 1 percent or less for products that were not 100 percent renewable. In the Massachusetts Electric retail pilot program, a statistic often repeated is that 30 percent of residential pilot participants chose a "green" product. The more important statistic is that only 1.2 percent of those eligible to select a new supplier chose a green product. Ninety-six percent of consumers chose not to choose. Of the 4 percent who switched, 30 percent chose a "green" product. Because these consumers were self-selected, this response rate cannot be extrapolated to the rest of the consumer base who might one day switch. Finally, the highest renewable energy content in any of the products offered was only 10 percent renewable energy. The rest of the products could be fairly classified as gimmicks.
35. Holt, supra note 28, at 50.
36. RPS policies have been adopted in four states: by the legislatures in Maine, Massachusetts, and Nevada and by the Arizona Corporation Commission.
37. Renewables are defined in these bills as they are discussed in this article -i.e., as wind, solar, biomass, and geothermal, excluding hydro and municipal waste.