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Green power is defined most broadly as power from renewable energy. That broad definition often is narrowed to exclude large hydroelectric power projects. Although the flowing water that is the source of hydroelectric power is a renewable energy source, large hydro projects may create environmental problems. In addition, the green power definition commonly is used to support emerging energy technologies, whereas large hydro is a well-established source of power. This paper assumes that green power includes all renewable energy sources other than large hydro: wind, sun, the Earth’s internal heat (geothermal energy), agricultural and other wastes (including methane from landfills), and crops raised for the purpose of generating energy (energy crops). The definition of green power is to be distinguished from the question of what kind of products can be marketed to consumers as green power products. For retail sales, the Center for Resource Solutions has developed what it calls the Green-e standards for certifying green power products. To qualify, at least 50% of the power must be from renewable energy sources, and air emissions from the nonrenewable share must be no greater than the local average. |
THE PROBLEM: RAPIDLY DECLINING COSTS AND STAGNANT MARKET SHARE
The cost of green power has declined dramatically. The decline has been greatest for wind and solar, but there also have been significant reductions in the cost of other renewable energy technologies. Worldwide, the cost decline has been matched by a rapid increase in green generating capacity. Similar growth has not occurred in the United States. Between 1990 and 1996, United States green generating capacity grew by only 1% annually. Wind and solar grew more rapidly, but from a tiny base. In 1996 they accounted for less than 0.3 % of generating capacity in the United States.3
For the United States, under existing policies, the future is projected to be a continuation of the recent past: declining costs but only slowly expanding capacity. Despite much lower costs, the market share of green power is expected to be about the same in 2010 as it was in 1990.
THE EXPLANATION: PRICE AND RISK
Part of the explanation for green power’s failure — and for expectations of continuing failure — to expand its domestic market share is its continuing price disadvantage. If the price of conventional power had followed the upward course predicted in 1980, renewable energy today would be the cheapest source of power over a broad range of markets. Instead, the price of conventional power also has declined, albeit not as dramatically as that of green power. Conventional power’s price advantage has been narrowed. Nevertheless, a buyer choosing power today solely on the basis of price would choose conventional power in most cases.
Where the choice between green and conventional power has actually been offered, however, many consumers have not viewed it solely as a matter of price. Since 1993, a number of electric utilities have offered customers a choice between power produced by their conventional generating facilities and power generated by a renewable technology. Forty to 50 utilities now offer this choice, and 1–3% of their customers participate in the programs.4
In most states, these utility programs may offer the principal opportunity for consumer choice between green and conventional power over the next decade.5 Within the past year, however, several states have offered consumers a broader choice of green and conventional power sources by unbundling their retail electric markets. California, Massachusetts, and Rhode Island unbundled their markets during 1998; Pennsylvania followed in early 1999.6 Consumers in these states can purchase power from marketers rather than their traditional utility supplier.
The products offered by marketers include power generated entirely from conventional sources but also power generated partly or entirely from renewable energy and sold under brand names such as EarthSource 50 and Clean Choice 100.7 California consumers have been slow to abandon their traditional utility suppliers, but about 40,000 — roughly half of those choosing to switch — chose green power during the first nine months of the program. In Pennsylvania, that number was exceeded in the program’s first month, in part because the rules there, in comparison to those in place in California, make switching in general more attractive to electricity consumers.8
Experience with green power products offered by utilities and marketers has demonstrated that many consumers (compared with the currently very small green power market) are willing to pay a premium price for green power and that this green premium is greater than the cost disadvantage of some renewable energy technologies.9 The basic elements for a growing market in green power thus now exist. There is a product that some consumers want and that can be produced at a price that some of those consumers are willing to pay. The potential market for the product will grow as additional states unbundle their retail electric markets.
Without institutional change, however, the green power market is likely to develop slowly. The market now is supplied principally by generating facilities that were built with the assurance that utilities would purchase their power. For the green power market to grow, new generating facilities must be built. In an unbundled market, utilities cannot provide an assured outlet for the facilities’ power, and under existing institutions, that assurance also cannot be provided by the marketers that have replaced the utilities. The short-term contracts under which marketers sell green power to consumers cannot support the long-term financing that green power developers need in order to raise capital on reasonable terms.
There is, therefore, a very real possibility that the construction of new generating facilities will fail to meet consumers’ demand for green power — not because consumers are unwilling to pay the price needed to make green power profitable today, but because their short-tern commitments cannot support the long-term financing needed to obtain capital on reasonable terms.10
This paper evaluates a proposal to bridge the gap between short-term consumer commitments and long-term financing. The means used would be insurance that would reduce the price risk borne by green power marketers.11 The purpose of the insurance would be to give lenders the security that they require if they are to provide financing on terms that will make green power available at a reasonable cost.
At a conceptual level, the case for the proposal is straightforward. The risk borne immediately by green power marketers, and ultimately by green power developers and their lenders, would be reduced by shifting part of the risk to insurance companies in return for payment of a fixed insurance premium. The question is whether the several sides of this bargain fit together.
These are not conceptual questions but practical questions concerning the price and risk that parties are likely to accept.
In addressing these questions, I have benefited from discussions with Department of Energy personnel who have worked for more than year with representatives of interested companies in shaping the proposal reviewed here. The paper also is based partly on information provided directly by representatives of those companies. (See Appendix B for a list of persons who have directly provided information.)
At the heart of the proposal is a bargain between participating insurance companies on one side and the federal government and several states on the other. The insurance companies would offer price insurance on an agreed amount of green generating capacity. In return, the federal and state governments would contribute to the cost of developing the insurance and would share in the underwriting risk. (See Box 2 for the proposal’s underlying assumptions.)
For the insurance companies, the proposal offers the opportunity to develop a potentially profitable new product. For green power developers and marketers, it offers the prospect of an expanded market. For the federal and state governments, it offers a cost-effective way to promote renewable energy.
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