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How California Is Advancing Green Power in the New Millennium
How California Is Advancing Green Power in the New Millennium
Michal Moore, an economist, is a member of the California Energy Commission, and as the presiding member of the commission’s Renewables Program Committee, was a prime architect of the state’s current renewable energy programs and policies. Prior to his appointment to the commission, Dr. Moore was a consulting economist. He has served on the Seismic Safety Commission and the State Board of Landscape Architects, and was a supervisor for the County of Monterey. He was also Deputy Director for local government for the California Governor’s Office of Planning and Research. Dr. Moore holds a B.S. in geology and natural resources from Humboldt State University, Arcata, CA; an M.S. in land economics from the Ecology Institute at the University of California at Davis; and a Ph.D. in land economics from Cambridge University, U.K.
72
Despite continuing problems building a green power market during the transition from a monopoly-based structure, an auction to increase supply and a customer rebate to boost demand are moving the renewable energy industry forward. Michal Moore
C
alifornia opened its huge, $23 billion electricity market to competition over two years ago. Though the jury is still out on whether state consumers will save much in the way of electric supply costs during the less than two years remaining in the transition to a fully competitive electricity market, one thing has become remarkably clear. Predictions by many experts that most of the state’s consumers would elect to buy dirtier and therefore cheaper electricity have proven to be false. To date, the vast majority of residential customers have stuck with the status quo. Those brave enough to venture out into the world of customer choice,
© 2000, Elsevier Science Inc., 1040-6190/00/$–see front matter PII S1040-6190(00)00129-9
however, have purchased “green” electricity generated by a variety of renewable energy resources. To date, roughly 2 percent of the ratepayers served by the investorowned utilities Pacific Gas & Electric, Southern California Edison, and San Diego Gas & Electric, which represent 75 percent of California consumers, have switched to a new energy service provider (ESP) since the market was opened on April 1, 1998. While this percentage may seem small, it is nonetheless comprised of roughly 200,000 residential consumers. Of these, nearly 100 percent have switched from their incumbent utility monopoly
The Electricity Journal
power suppliers to a “green” power product offered by ESPs. Trends in state consumer purchases of green power rose steadily throughout 1999. The green power market grew by 15 percent each quarter—with a 25 percent jump in the last quarter, according to the California Public Utilities Commission. In fact, demand for green power is actually surpassing expectations. Applications for customer rebates offered by the California Energy Commission—which reduce the cost of green electricity for endusers by as much as 1.5 cents/ kWh—have outstripped projections of available funds. Efforts are currently underway to pass legislation extending this wise use of public funds to continue support for a sustainable renewable energy market, the single most important element of state policies building demand for renewable energy resources. California has also garnered favorable recognition for its policies designed to increase the supply of renewable energy sources through an auction process involving small production payments aimed at lowering the cost of new renewable supply-side resources. The winners in this auction are building a variety of renewable energy projects throughout the state that not only reduce greenhouse gas emissions but deliver impressive economic development benefits—often in rural regions that have benefited the least from recent changes in the economy. A number of obstacles to building a robust green power market August/September 2000
remain. Still, the customer rebate and new renewable supply auction are currently being viewed as models for other states looking for cost-effective renewable energy development programs designed to operate within a competitive retail market. By stimulating both supply and demand, California is doing its part to assist the important renewable energy business in becoming the mature industry that we need to face the environmental
By stimulating both supply and demand, California is doing its part to assist the renewable energy business.
and economic challenges of the twenty-first century.
I. Background The fate of California’s renewable energy industry was anything but certain in 1996, the year that AB 1890, the landmark restructuring law, was unanimously passed by the state legislature. (Under AB 1890, solar, wind, geothermal, biomass—a category that includes landfill, digester gas, and municipal solid waste—and hydro facilities under 30 MW in size are all considered “renewable” and, if located within state borders, are eligible for
state subsidies.) California had in the past developed a series of public policies that encouraged the development of the most diverse set of renewable technologies in the world. However, renewable generation in California was declining because previous policies that helped develop and support the nearly 6,000 MW of existing renewable power plants in the state were ending, and the western power market was awash with surplus power, surpressing the going market prices for electricity. t the time of the passage of AB 1890, these renewable energy facilities developed by independent power producers generated roughly 11 percent of California’s electricity. Also, according to Commission figures, the state’s existing renewable energy power plants represent over $6 billion in private sector investment, well over $400 million in annual tax revenues, 126,562 construction jobs, and over 10,000 ongoing operations and maintenance jobs.1 Just how important are the state’s existing renewable energy facilities to the economy? Take a look at Imperial County, which as late as 1998 has suffered from the highest unemployment rates in the state. In a county dominated by agriculture, the geothermal industry provides the following: highpaying, stable jobs to more than 285 people, most of whom are local residents; over $18.5 million in annual salaries and benefits, and 25 percent of the county tax base, producing over $12 million in tax revenue for local government, schools, and special districts. Cal Energy,
A
© 2000, Elsevier Science Inc., 1040-6190/00/$–see front matter PII S1040-6190(00)00129-9
73
the largest of all geothermal companies in Imperial County, is the single largest county taxpayer. ll told, California’s existing renewable power plants also offer tremendous environmental benefits in the form of annual air emission reductions of 3 million tons of carbon dioxide, a major contributor to global climate change, as well as major reductions in other air pollutants contributing to urban smog and other air quality challenges. Despite these economic and environmental benefits, the future for California’s pioneering renewable energy industry looked extremely bleak as the restructuring legislation was signed into law: • A multi-year battle to secure contracts with utilities for approximately 300 MW of new renewable capacity through a highly contested regulatory order referred to as the Biennial Resource Plan Update (BRPU) had failed due to intervention from federal regulators after millions of dollars in bid development and litigation costs accumulated over more than five years. • Because the energy payments to many renewable energy independent power producers under their existing contract dropped by as much as 75 percent, many renewable facilities—particularly the biomass power plants that provided fire protection, waste management, and rural economic development benefits—were closing in already depressed regions of the state. • As a result of these market conditions, many of California’s pioneering companies in develop-
A
74
ing renewable energy were teetering on the edge of bankruptcy. Many, such as wind power developers Kenetech and FloWind and solar thermal developer LUZ, did go belly-up. This was the backdrop as we grappled with the best way to allocate the $540 million Renewable Energy Program established by AB 1890. The Commission divvied up this pot of money over a four-year period in the following ways.
The future for the renewable energy industry looked extremely bleak as restructuring legislation was signed.
• The biggest piece was $243 million, or 45 percent of the total, which was earmarked for existing power plants in the form of production incentives capped at 1.5 cents/kWh. • The next largest chunk, $162 million (30 percent), was earmarked to foster the development of new renewable projects in order for state consumers to benefit from the great advances in renewable energy technologies that have occurred over the last decade. • Some $75.6 million (14 percent) was earmarked for consumers in the form of customer credits to help lower the end-user cost of electric-
© 2000, Elsevier Science Inc., 1040-6190/00/$–see front matter PII S1040-6190(00)00129-9
ity generated from in-state registered renewable energy products. • The next category of funding was $54 million (10 percent) earmarked to buy down the cost of emerging technologies such as distributed solar photovoltaic and small wind turbines. • The remaining $5.4 million (1 percent) was dedicated toward educating consumers about the benefits of switching to or generating their own green power. As we tabulate the results of our efforts, a number of surprises are emerging after two years of customer choice. Some think the relatively low rate of switching among residential customers, the prime initial market targeted by ESPs, should raise eyebrows. I think one of the most notable and unexpected outcomes is the surprising number of larger-volume consumers—including private sector companies and local governments—that have elected to purchase electricity from renewable sources. These high-profile switches have been critical in lending credibility to the green power industry and, because of their electricity loads, help drive up the volume of renewable energy purchased, which lowers the transaction costs for ESPs pitching green power. ozens of companies—including Kinko’s, Working Assets, Patagonia, Fetzer Winery, Birkenstock, MCI/WorldCom, Toyota Motor Sales, Time Warner, Real Goods, and Lucky Brand Dungarees—have switched to a variety of green power products offered by a number of different firms. These private sector green
D
The Electricity Journal
power companies range from large to small businesses and include growing numbers of food service establishments that belong to the Green Restaurant Association, which promotes a 12-step program of becoming environmentally responsible. One of the 12 steps is the purchase of green power. Approximately 30 local governments have also switched to green power, including members of power purchase pools set up by the Association of Bay Area Governments and San Diego Association of Governments. The City of Santa Monica was the world’s largest all-renewable city, with a 5 MW electric load. In June of this year, however, Oakland announced it would soon be purchasing all of its 9 MW of municipal electricity load from green sources, making it the largest all-renewable city.
Yet another shock has been the interest among churches in switching their own facilities to green power and encouraging their parishioners to also switch under a program entitled Episcopal Power & Light. So far, over 30 churches, most of them located in the San Francisco Bay Area, have switched to green power. An Interfaith Task Force grew out of a meeting hosted by the Los Angeles Department of Water and Power in May. Catholic and Jewish institutions, as well as other denominations and faiths, pledged to get involved in building markets for green power.
II. The Synergy Between New Supply Auction and Customer Rebates One of the success stories emerging from the Commission’s
Renewable Energy Program is California’s first real new growth in renewable capacity in over a decade, which will increase the state’s renewable generation by 7 percent. Even more impressive, these new state-of-the-art electricity generators produce power much more cheaply than expected, according to the Natural Resources Defense Council (NRDC).2 The above-market “premium” averaged 1.2 cents/kWh. With a payment duration of only five years, the lifecycle costs of these modest incentives is, according to NRDC, less than 0.3 cents/kWh. ith a supply auction offering these production payments, private sector power plant developers are now moving forward to build 52 new renewable projects in California. These renewable projects—which will
W
Dozens of companies—including Fetzer Winery— have switched to green power products.
August/September 2000
© 2000, Elsevier Science Inc., 1040-6190/00/$–see front matter PII S1040-6190(00)00129-9
75
provide over 500 MW of new renewable capacity—represent the first significant investment in new renewable resources in California in over a decade. There has never been a renewable energy program as successful as the auction that led to the building of all of these new green power projects. The Department of Energy is now touting California’s auction process for new projects as a model to be emulated across the country because of its efficient use of public dollars. hese new state-of-the-art renewable energy projects, developed with just $162 million in public dollars, leverage over $700 million in total capital investment. The cost of providing this new clean power was significantly below predictions. And the mix of renewable project bids insures that Californians will benefit from a diversity of clean power projects strategically located throughout the state. Among the new project
T
proposals are 300 MW of wind farms in Kern and Riverside counties; 157 MW of new geothermal steam power plants in Siskiyou, Modoc, and Imperial counties; and 70 MW of landfill gas projects at a number of urban sites, including San Diego, Santa Barbara, Sunnyvale, and West Covina. Tax benefits for local governments from these projects include $42.5 million in revenues during construction and another $8 million annually over the life of the projects. These new renewable energy projects also deliver important air quality benefits. This new clean power generation will offset nearly 300,000 tons of carbon dioxide that would be emitted into the atmosphere every year if the same electricity was provided by the dirty, generic mix of power sources consumers buy if they don’t switch to a clean power provider. In addition, these new power plants avoid the annual release of about 1,300
There has been a remarkable response to the rebate plan.
76
© 2000, Elsevier Science Inc., 1040-6190/00/$–see front matter PII S1040-6190(00)00129-9
tons of sulfur dioxide, 1,600 tons of nitrogen oxide, 260 tons of carbon monoxide, and 75 tons of small particulates.3 qually impressive is the role the customer rebates have had in building demand for 35 different renewable energy products being sold by 21 retail providers. During the first two years of the program, over three-quarters of the consumers receiving the credit were residential class consumers. In June 1999, 115,300 customers were receiving the credit; by the end of the year, the number of customers receiving the credit jumped by 54 percent to 177,820.4 The most noticeable trend in the recipients of the rebates was the growth in electric loads of larger customers. Sales by June 1999 totaled 477.4 million kWh; by the end of the year, sales were 909 million kWh. Purchases by these “nonresidential, nonsmallcommercial” customers rose by 170 percent in half a year. This compares to an 81 percent growth rate for residential customers and 54 percent growth rate for small commercial accounts. This remarkable response to the rebate plan—which allows marketers to sell green power at prices below the generic electricity sold through utility distribution companies—prompted the Commission to lower the customer subsidy from an initial level of 1.5 cents/ kWh to 1.25 cents/kWh beginning in December 1999. This level of bill credits to consumers was frozen until June 2000, at which time the Commission changed the funding level. As of publication the decision wasn’t in yet, but we expected
E
The Electricity Journal
the Commission to lower the incentive again, to 1.0 cents/kWh, to help extend the funding through the end of 2001. eothermal energy—primarily sold by Calpine from its power plants located at the Geysers—dominates the green retail market at this point. During the first half of 1999, 68 percent of sales eligible for the customer credit was geothermal, followed by biomass with 21 percent and small hydro at 8 percent. In the last half of the year, geothermal became even more popular, capturing 81 percent of the retail credits. Biomass provided 12 percent and new wind facilities added 2 percent. The remaining 5 percent of sales was a generic mix of eligible renewable resources.
G
III. Remaining Obstacles A report by Warren Byrne entitled Green Power in California: First Year Review from a Business Perspective, highlights some of the hurdles that still exist for ESPs to thrive in California’s restructured electricity market.5 The rapid growth enjoyed during 1999 has improved economies of scale for many ESPs, Byrne maintains. The more successful green ESPs may be positioned reasonably well for slower but continued growth as levels of customer rebate incentives decline. “The positive upswing in green power purchases are occurring despite the fact that California ESPs in general are severely hampered by unfavorable regulatory structures,” Byrne states in the report. These structural impediments are so problematic that efforts to serve
August/September 2000
small customers with generic commodity power have ceased altogether. Current competition in the green power market exists only because of additional revenues available from the CEC incentives and price premiums, Byrne notes. The comparatively strong performance of the retail choice market in Pennsylvania—both green and cheap commodity—underscores the problematic nature of California’s market structure.
Geothermal energy— primarily from Calpine—dominates the green retail market at this point.
lems with building a green power market during a transition from an industry shaped by a monopolybased regulatory structure, the auction to increase supply and the customer rebate to boost demand are moving the renewable energy industry forward during a time of transition and great uncertainty, making the Golden State once again a national leader in the support of renewable energy technologies. There is still much to do when it comes to transforming the electricity business into a model of sustainable business development. Over the last two years, however, we have learned much about markets and consumer preferences. Armed with this information, California—and the rest of the nation—has a clearer picture of where we need to go in the future in order to meet the energy and environmental challenges of the new millennium. j Endnotes:
“Experience in Pennsylvania’s direct access market, as well as results from other industries, indicates that competitive markets can be effective at delivering customer benefits in the form of reductions in end-user commodity prices and increased market responsiveness to customer preferences through innovation in products and services,” Byrne states. Our experience in California indicates that incentives can be effective in influencing the choices that consumers make within those competitive markets, achieving greater value for society. Despite the continuing prob-
1. California Energy Commission, Annual Project Activity Report to the Legislature: Renewable Energy Program (Sacramento, CA: March 2000), at 23. 2. Sheryl Carter, Investments in the Public Interest: California’s Public Benefit Programs under Assembly Bill 1890 (San Francisco: Natural Resources Defense Council, Jan. 2000), at v. 3. Steven Kelly, How Emerging Green Markets Help Respond to Global Climate Change (Sacramento, CA: Renewable Energy Marketing Board, Nov. 1998), at 6. 4. Supra note 1. 5. Warren Byrne, Green Power in California: First Year Review from a Business Perspective (Sacramento, CA: Center for Energy Efficiency and Renewable Technologies, Dec. 1999).
© 2000, Elsevier Science Inc., 1040-6190/00/$–see front matter PII S1040-6190(00)00129-9
77
Michal Moore, an economist, is a member of the California Energy Commission, and as the presiding member of the commission’s Renewables Program Committee, was a prime architect of the state’s current renewable energy programs and policies. Prior to his appointment to the commission, Dr. Moore was a consulting economist. He has served on the Seismic Safety Commission and the State Board of Landscape Architects, and was a supervisor for the County of Monterey. He was also Deputy Director for local government for the California Governor’s Office of Planning and Research. Dr. Moore holds a B.S. in geology and natural resources from Humboldt State University, Arcata, CA; an M.S. in land economics from the Ecology Institute at the University of California at Davis; and a Ph.D. in land economics from Cambridge University, U.K.
72
Despite continuing problems building a green power market during the transition from a monopoly-based structure, an auction to increase supply and a customer rebate to boost demand are moving the renewable energy industry forward. Michal Moore
C
alifornia opened its huge, $23 billion electricity market to competition over two years ago. Though the jury is still out on whether state consumers will save much in the way of electric supply costs during the less than two years remaining in the transition to a fully competitive electricity market, one thing has become remarkably clear. Predictions by many experts that most of the state’s consumers would elect to buy dirtier and therefore cheaper electricity have proven to be false. To date, the vast majority of residential customers have stuck with the status quo. Those brave enough to venture out into the world of customer choice,
© 2000, Elsevier Science Inc., 1040-6190/00/$–see front matter PII S1040-6190(00)00129-9
however, have purchased “green” electricity generated by a variety of renewable energy resources. To date, roughly 2 percent of the ratepayers served by the investorowned utilities Pacific Gas & Electric, Southern California Edison, and San Diego Gas & Electric, which represent 75 percent of California consumers, have switched to a new energy service provider (ESP) since the market was opened on April 1, 1998. While this percentage may seem small, it is nonetheless comprised of roughly 200,000 residential consumers. Of these, nearly 100 percent have switched from their incumbent utility monopoly
The Electricity Journal
power suppliers to a “green” power product offered by ESPs. Trends in state consumer purchases of green power rose steadily throughout 1999. The green power market grew by 15 percent each quarter—with a 25 percent jump in the last quarter, according to the California Public Utilities Commission. In fact, demand for green power is actually surpassing expectations. Applications for customer rebates offered by the California Energy Commission—which reduce the cost of green electricity for endusers by as much as 1.5 cents/ kWh—have outstripped projections of available funds. Efforts are currently underway to pass legislation extending this wise use of public funds to continue support for a sustainable renewable energy market, the single most important element of state policies building demand for renewable energy resources. California has also garnered favorable recognition for its policies designed to increase the supply of renewable energy sources through an auction process involving small production payments aimed at lowering the cost of new renewable supply-side resources. The winners in this auction are building a variety of renewable energy projects throughout the state that not only reduce greenhouse gas emissions but deliver impressive economic development benefits—often in rural regions that have benefited the least from recent changes in the economy. A number of obstacles to building a robust green power market August/September 2000
remain. Still, the customer rebate and new renewable supply auction are currently being viewed as models for other states looking for cost-effective renewable energy development programs designed to operate within a competitive retail market. By stimulating both supply and demand, California is doing its part to assist the important renewable energy business in becoming the mature industry that we need to face the environmental
By stimulating both supply and demand, California is doing its part to assist the renewable energy business.
and economic challenges of the twenty-first century.
I. Background The fate of California’s renewable energy industry was anything but certain in 1996, the year that AB 1890, the landmark restructuring law, was unanimously passed by the state legislature. (Under AB 1890, solar, wind, geothermal, biomass—a category that includes landfill, digester gas, and municipal solid waste—and hydro facilities under 30 MW in size are all considered “renewable” and, if located within state borders, are eligible for
state subsidies.) California had in the past developed a series of public policies that encouraged the development of the most diverse set of renewable technologies in the world. However, renewable generation in California was declining because previous policies that helped develop and support the nearly 6,000 MW of existing renewable power plants in the state were ending, and the western power market was awash with surplus power, surpressing the going market prices for electricity. t the time of the passage of AB 1890, these renewable energy facilities developed by independent power producers generated roughly 11 percent of California’s electricity. Also, according to Commission figures, the state’s existing renewable energy power plants represent over $6 billion in private sector investment, well over $400 million in annual tax revenues, 126,562 construction jobs, and over 10,000 ongoing operations and maintenance jobs.1 Just how important are the state’s existing renewable energy facilities to the economy? Take a look at Imperial County, which as late as 1998 has suffered from the highest unemployment rates in the state. In a county dominated by agriculture, the geothermal industry provides the following: highpaying, stable jobs to more than 285 people, most of whom are local residents; over $18.5 million in annual salaries and benefits, and 25 percent of the county tax base, producing over $12 million in tax revenue for local government, schools, and special districts. Cal Energy,
A
© 2000, Elsevier Science Inc., 1040-6190/00/$–see front matter PII S1040-6190(00)00129-9
73
the largest of all geothermal companies in Imperial County, is the single largest county taxpayer. ll told, California’s existing renewable power plants also offer tremendous environmental benefits in the form of annual air emission reductions of 3 million tons of carbon dioxide, a major contributor to global climate change, as well as major reductions in other air pollutants contributing to urban smog and other air quality challenges. Despite these economic and environmental benefits, the future for California’s pioneering renewable energy industry looked extremely bleak as the restructuring legislation was signed into law: • A multi-year battle to secure contracts with utilities for approximately 300 MW of new renewable capacity through a highly contested regulatory order referred to as the Biennial Resource Plan Update (BRPU) had failed due to intervention from federal regulators after millions of dollars in bid development and litigation costs accumulated over more than five years. • Because the energy payments to many renewable energy independent power producers under their existing contract dropped by as much as 75 percent, many renewable facilities—particularly the biomass power plants that provided fire protection, waste management, and rural economic development benefits—were closing in already depressed regions of the state. • As a result of these market conditions, many of California’s pioneering companies in develop-
A
74
ing renewable energy were teetering on the edge of bankruptcy. Many, such as wind power developers Kenetech and FloWind and solar thermal developer LUZ, did go belly-up. This was the backdrop as we grappled with the best way to allocate the $540 million Renewable Energy Program established by AB 1890. The Commission divvied up this pot of money over a four-year period in the following ways.
The future for the renewable energy industry looked extremely bleak as restructuring legislation was signed.
• The biggest piece was $243 million, or 45 percent of the total, which was earmarked for existing power plants in the form of production incentives capped at 1.5 cents/kWh. • The next largest chunk, $162 million (30 percent), was earmarked to foster the development of new renewable projects in order for state consumers to benefit from the great advances in renewable energy technologies that have occurred over the last decade. • Some $75.6 million (14 percent) was earmarked for consumers in the form of customer credits to help lower the end-user cost of electric-
© 2000, Elsevier Science Inc., 1040-6190/00/$–see front matter PII S1040-6190(00)00129-9
ity generated from in-state registered renewable energy products. • The next category of funding was $54 million (10 percent) earmarked to buy down the cost of emerging technologies such as distributed solar photovoltaic and small wind turbines. • The remaining $5.4 million (1 percent) was dedicated toward educating consumers about the benefits of switching to or generating their own green power. As we tabulate the results of our efforts, a number of surprises are emerging after two years of customer choice. Some think the relatively low rate of switching among residential customers, the prime initial market targeted by ESPs, should raise eyebrows. I think one of the most notable and unexpected outcomes is the surprising number of larger-volume consumers—including private sector companies and local governments—that have elected to purchase electricity from renewable sources. These high-profile switches have been critical in lending credibility to the green power industry and, because of their electricity loads, help drive up the volume of renewable energy purchased, which lowers the transaction costs for ESPs pitching green power. ozens of companies—including Kinko’s, Working Assets, Patagonia, Fetzer Winery, Birkenstock, MCI/WorldCom, Toyota Motor Sales, Time Warner, Real Goods, and Lucky Brand Dungarees—have switched to a variety of green power products offered by a number of different firms. These private sector green
D
The Electricity Journal
power companies range from large to small businesses and include growing numbers of food service establishments that belong to the Green Restaurant Association, which promotes a 12-step program of becoming environmentally responsible. One of the 12 steps is the purchase of green power. Approximately 30 local governments have also switched to green power, including members of power purchase pools set up by the Association of Bay Area Governments and San Diego Association of Governments. The City of Santa Monica was the world’s largest all-renewable city, with a 5 MW electric load. In June of this year, however, Oakland announced it would soon be purchasing all of its 9 MW of municipal electricity load from green sources, making it the largest all-renewable city.
Yet another shock has been the interest among churches in switching their own facilities to green power and encouraging their parishioners to also switch under a program entitled Episcopal Power & Light. So far, over 30 churches, most of them located in the San Francisco Bay Area, have switched to green power. An Interfaith Task Force grew out of a meeting hosted by the Los Angeles Department of Water and Power in May. Catholic and Jewish institutions, as well as other denominations and faiths, pledged to get involved in building markets for green power.
II. The Synergy Between New Supply Auction and Customer Rebates One of the success stories emerging from the Commission’s
Renewable Energy Program is California’s first real new growth in renewable capacity in over a decade, which will increase the state’s renewable generation by 7 percent. Even more impressive, these new state-of-the-art electricity generators produce power much more cheaply than expected, according to the Natural Resources Defense Council (NRDC).2 The above-market “premium” averaged 1.2 cents/kWh. With a payment duration of only five years, the lifecycle costs of these modest incentives is, according to NRDC, less than 0.3 cents/kWh. ith a supply auction offering these production payments, private sector power plant developers are now moving forward to build 52 new renewable projects in California. These renewable projects—which will
W
Dozens of companies—including Fetzer Winery— have switched to green power products.
August/September 2000
© 2000, Elsevier Science Inc., 1040-6190/00/$–see front matter PII S1040-6190(00)00129-9
75
provide over 500 MW of new renewable capacity—represent the first significant investment in new renewable resources in California in over a decade. There has never been a renewable energy program as successful as the auction that led to the building of all of these new green power projects. The Department of Energy is now touting California’s auction process for new projects as a model to be emulated across the country because of its efficient use of public dollars. hese new state-of-the-art renewable energy projects, developed with just $162 million in public dollars, leverage over $700 million in total capital investment. The cost of providing this new clean power was significantly below predictions. And the mix of renewable project bids insures that Californians will benefit from a diversity of clean power projects strategically located throughout the state. Among the new project
T
proposals are 300 MW of wind farms in Kern and Riverside counties; 157 MW of new geothermal steam power plants in Siskiyou, Modoc, and Imperial counties; and 70 MW of landfill gas projects at a number of urban sites, including San Diego, Santa Barbara, Sunnyvale, and West Covina. Tax benefits for local governments from these projects include $42.5 million in revenues during construction and another $8 million annually over the life of the projects. These new renewable energy projects also deliver important air quality benefits. This new clean power generation will offset nearly 300,000 tons of carbon dioxide that would be emitted into the atmosphere every year if the same electricity was provided by the dirty, generic mix of power sources consumers buy if they don’t switch to a clean power provider. In addition, these new power plants avoid the annual release of about 1,300
There has been a remarkable response to the rebate plan.
76
© 2000, Elsevier Science Inc., 1040-6190/00/$–see front matter PII S1040-6190(00)00129-9
tons of sulfur dioxide, 1,600 tons of nitrogen oxide, 260 tons of carbon monoxide, and 75 tons of small particulates.3 qually impressive is the role the customer rebates have had in building demand for 35 different renewable energy products being sold by 21 retail providers. During the first two years of the program, over three-quarters of the consumers receiving the credit were residential class consumers. In June 1999, 115,300 customers were receiving the credit; by the end of the year, the number of customers receiving the credit jumped by 54 percent to 177,820.4 The most noticeable trend in the recipients of the rebates was the growth in electric loads of larger customers. Sales by June 1999 totaled 477.4 million kWh; by the end of the year, sales were 909 million kWh. Purchases by these “nonresidential, nonsmallcommercial” customers rose by 170 percent in half a year. This compares to an 81 percent growth rate for residential customers and 54 percent growth rate for small commercial accounts. This remarkable response to the rebate plan—which allows marketers to sell green power at prices below the generic electricity sold through utility distribution companies—prompted the Commission to lower the customer subsidy from an initial level of 1.5 cents/ kWh to 1.25 cents/kWh beginning in December 1999. This level of bill credits to consumers was frozen until June 2000, at which time the Commission changed the funding level. As of publication the decision wasn’t in yet, but we expected
E
The Electricity Journal
the Commission to lower the incentive again, to 1.0 cents/kWh, to help extend the funding through the end of 2001. eothermal energy—primarily sold by Calpine from its power plants located at the Geysers—dominates the green retail market at this point. During the first half of 1999, 68 percent of sales eligible for the customer credit was geothermal, followed by biomass with 21 percent and small hydro at 8 percent. In the last half of the year, geothermal became even more popular, capturing 81 percent of the retail credits. Biomass provided 12 percent and new wind facilities added 2 percent. The remaining 5 percent of sales was a generic mix of eligible renewable resources.
G
III. Remaining Obstacles A report by Warren Byrne entitled Green Power in California: First Year Review from a Business Perspective, highlights some of the hurdles that still exist for ESPs to thrive in California’s restructured electricity market.5 The rapid growth enjoyed during 1999 has improved economies of scale for many ESPs, Byrne maintains. The more successful green ESPs may be positioned reasonably well for slower but continued growth as levels of customer rebate incentives decline. “The positive upswing in green power purchases are occurring despite the fact that California ESPs in general are severely hampered by unfavorable regulatory structures,” Byrne states in the report. These structural impediments are so problematic that efforts to serve
August/September 2000
small customers with generic commodity power have ceased altogether. Current competition in the green power market exists only because of additional revenues available from the CEC incentives and price premiums, Byrne notes. The comparatively strong performance of the retail choice market in Pennsylvania—both green and cheap commodity—underscores the problematic nature of California’s market structure.
Geothermal energy— primarily from Calpine—dominates the green retail market at this point.
lems with building a green power market during a transition from an industry shaped by a monopolybased regulatory structure, the auction to increase supply and the customer rebate to boost demand are moving the renewable energy industry forward during a time of transition and great uncertainty, making the Golden State once again a national leader in the support of renewable energy technologies. There is still much to do when it comes to transforming the electricity business into a model of sustainable business development. Over the last two years, however, we have learned much about markets and consumer preferences. Armed with this information, California—and the rest of the nation—has a clearer picture of where we need to go in the future in order to meet the energy and environmental challenges of the new millennium. j Endnotes:
“Experience in Pennsylvania’s direct access market, as well as results from other industries, indicates that competitive markets can be effective at delivering customer benefits in the form of reductions in end-user commodity prices and increased market responsiveness to customer preferences through innovation in products and services,” Byrne states. Our experience in California indicates that incentives can be effective in influencing the choices that consumers make within those competitive markets, achieving greater value for society. Despite the continuing prob-
1. California Energy Commission, Annual Project Activity Report to the Legislature: Renewable Energy Program (Sacramento, CA: March 2000), at 23. 2. Sheryl Carter, Investments in the Public Interest: California’s Public Benefit Programs under Assembly Bill 1890 (San Francisco: Natural Resources Defense Council, Jan. 2000), at v. 3. Steven Kelly, How Emerging Green Markets Help Respond to Global Climate Change (Sacramento, CA: Renewable Energy Marketing Board, Nov. 1998), at 6. 4. Supra note 1. 5. Warren Byrne, Green Power in California: First Year Review from a Business Perspective (Sacramento, CA: Center for Energy Efficiency and Renewable Technologies, Dec. 1999).
© 2000, Elsevier Science Inc., 1040-6190/00/$–see front matter PII S1040-6190(00)00129-9
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