Buying electricity from renewable sources can be complicated

June 18, 2012

Utilities deregulation has advanced across much of the country, with nearly half of the states allowing consumers to choose their retail electricity supplier. Shopping for electricity is a bit of a strange proposition, though. How are you supposed to choose? Unlike computers or clothing or bread, all electrons look and behave the same.

Utilities have to find a way to distinguish themselves from competitors. In Maryland’s and the District’s deregulated utility markets, residents are receiving offers from utilities that guarantee 100 percent green energy.

Getting all of your electricity from windmills, solar panels and the like may sound good, but what does it mean?

Our electricity comes from a grid. Suppliers put energy in and consumers take energy out. Since the grid mixes all of that energy together, regardless of source — solar, wind, coal, nuclear and natural gas, among others — there’s really no way to purchase electricity from a particular source.

“You can’t color electrons,” says Frank Wolak, who studies the effects of competition on energy and other commodities at Stanford University. “Consumers get the same electrons from the system regardless of supplier. The rest is simply financial transactions.”


Fairly new and unknown form of retail conjures questions - choosing the right electricity supplier. (Thinkstock/WWW.JUPITERIMAGES.COM)
Green revenue streams

These transactions are important to the environment, and they’re also complicated. Let’s first look at the system from the supply side.

Green energy suppliers have three sources of revenue. First, they sell the energy itself, just as coal plants do. Second, they receive a direct subsidy from the government, known as a production tax credit. Third, they sell renewable energy certificates, or RECs, to less-green utilities.

In a sense, RECs are creations of the government. They have value because many states mandate that a percentage of the electricity that utilities sell come from renewable sources. The requirement is known as the renewable portfolio standard.

In Maryland, for example, around 7.5 percent of the energy that a utility sells must be green, a figure that is set to rise to 20 percent by 2022. If a utility produces little or no green energy on its own, it can buy RECs to satisfy the quota. The RECs are a significant revenue source for windmills and other suppliers of renewable energy.

If you choose to purchase from a green energy retailer, it’s helpful to keep these revenue streams in mind. Consider Clean Currents, a Rockville company selling wind power via two options.

In one, when a customer orders a kilowatt-hour of energy, Clean Currents buys that energy from local wind farms and from solar farms, along with the corresponding RECs that the producer earned for generating it. In other words, you’re paying into two of the green energy producer’s revenue streams.

In the second program, Clean Currents buys energy from the same suppliers that provide electricity to your regular power company — which means it’s generated by a combination of coal, natural gas, nuclear and some renewables — along with RECs from a wind producer. In this case, you’re paying into only one of the windmills’ revenue streams, the RECs. While this is cheaper for customers than the local program, it also means that less of your money goes to green producers.

The big question is whether programs like these actually increase the production of renewable energy. In the most immediate sense, the answer is no.

Driving up demand

The wind keeps blowing and the sun continues to shine, so renewable-energy facilities typically pump electricity into the grid no matter how much green energy Americans purchase directly. The idea behind green energy retailing is to drive up demand for renewable energy over the long term. When customers buy all of their energy from green sources, the supply of that energy and the market for RECs will tighten. This should increase both the price and profitability of green energy. And that will make it more attractive to invest in renewable energy facilities.

The visible hand

Demand increases, so supply increases. Sounds like a free-marketeer’s dream right? Not exactly.

“There’s quite a bit of distortion in the market,” says Daniel Kirschen, a professor of engineering at the University of Washington and an expert on the electrical grid. “Green energy is heavily subsidized by the government, and manufacturers rely on those subsidies for profits.”

At this point, renewable energies aren’t even close to being price-competitive without those state and federal government supports. According to Stanford’s Wolak, both wind and solar energy cost several times as much to produce as energy from fossil fuels.

If investors are going to buy into wind farms, they will want the government to prove to them that both the direct subsidies and the renewable portfolio standards will remain in place for years to come, even if public enthusiasm wanes.

“Utilities and consumers don’t mind paying extra for renewable energy when it represents a small fraction of total supply,” says Wolak. “But they might not be as enthusiastic when they have to pay above-market prices for one-fifth of their energy.”

It’s also not clear how much green energy production can expand in the next decade. Available real estate for wind farms will eventually dwindle. Unless engineering advances dramatically increase productivity per acre, the price of green energy could rise. Even more significant, fossil fuel energy is getting cheaper. Fracking has made available large amounts of natural gas — enough to depress the cost of fossil fuels for decades.

In the end, committing to buy renewable energy is an investment in green infrastructure, but it’s also a political act. At current prices, it’s a political act with little or no costs to individual pocketbooks. Some of the programs are slightly cheaper than standard utility rates, due to the government support.

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