TABLE OF CONTENTS

• Voluntary Green Energy Credits in Washington
• Mixed Results from Washington’s Green Energy Law
• Charting a Different Path in Oregon
• Recommendations:  Bringing Portland’s Success to Washington
• Objections to counting voluntary green energy use toward Initiative 937 quota
• >Conclusion:  The Advantages of Allowing a Profit on Sales of Green Energy

---

---

Subscribe to WPC's weekly newsletter	E-Mail:
Quick Find:

Energizing Washington's Market for Green Power
Augmenting Restrictive Green Energy Policies with a Progressive Market Approach

by Todd Myers, Director, Center for Environment
March 2007

---

Last year, Portland General Electric announced that it had achieved an important milestone in its efforts to sell green energy.  No utility in the nation had a larger percentage of its residential customers buying voluntary renewable energy credits – more than six percent.  More remarkable is that the percentage is four times the amount of customers signed up by Puget Sound Energy or Seattle City Light, and more than six times the percentage as have signed up with Avista.

Why is Portland so successful while Washington utilities struggle to sign people up for these programs?  The simple answer is profit.  While the Washington state legislature has taken the profit motive out of selling green energy, Oregon rewards companies that market green energy to the public.

The results are clearly good for the environment, and Oregon’s example provides a positive lesson for Washington policymakers.

While Washington’s state, county and local leaders are devising a variety of regulatory strategies to reduce carbon emissions, market incentives seem to have been forgotten.  For instance, voters last fall passed Initiative 937, which requires 15 percent of the energy provided by major utilities in Washington to be renewable by 2020.

As the example of Portland General Electric demonstrates, using market incentives can have a significant impact on the sales of green energy.  Augmenting other carbon reduction efforts with a profit incentive will not only help achieve green energy goals, but will allocate additional costs more progressively and can help utilities reach the mandated goals of Initiative 937 more easily.

If we are truly serious about reducing carbon emissions, there can be little reason for not including a profit incentive in the mix of strategies.

Voluntary Green Energy Credits in Washington

Passed in 2002, RCW 19.29A.090[1] requires Washington utilities to offer its customers the option of purchasing “renewable” energy from sources that do not emit carbon, like wind and solar power.  Customers pay an additional fee per kilowatt hour (kWh) for the green energy they use. The packages offered by the utilities vary, ranging from a low of 0.3 cents per kWh from Avista, to 27 cents per kWh from Chelan PUD.[2]  Customers who pay these additional costs can replace up to 100 percent of their energy usage with renewable sources.

Utilities are required to market these programs to a minimal extent.  The law requires, “Each electric utility must include with its retail electric customer's regular billing statements, at least quarterly, a voluntary option to purchase qualified alternative energy resources.”[3]  Beyond that, utilities are not required to provide any additional marketing.

Several utilities, however, make additional efforts, including hiring coordinators to negotiate purchases with large customers and engage in other marketing to residential customers.  The cost of these efforts, however, must be justified to the state Utilities and Trade Commission (UTC), which oversees the rates of utilities because they are regulated monopolies.

The law goes on to say that companies cannot make a profit on these programs in excess of what they would have received if the power was from non-renewable sources.  The law says that, “All costs and benefits associated with any option offered by an electric utility under this section must be allocated to the customers…”[4] In other words, no benefit (i.e. profit) can accrue to the utility.  This section also indicates that the cost of providing green energy credits cannot be spread across the customer base of the utility.  Only customers who make the voluntary choice to pay for green energy will pay more.

Two fundamental assumptions deserve attention.

First, the law assumes that renewable energy costs more than alternatives.  This is appropriate.  Washington state has some of the lowest electricity rates in the country, in part due to the predominance of low-cost hydroelectric power.[5]  Wind and other sources of renewable energy consistently cost more than hydro, coal and gas.  In the case of solar, the cost is much larger per kWh than for other sources.

Second, because the purchases are voluntary, the higher costs should be paid by customers who choose to pay the additional costs.  This is the most progressive way to allocate additional costs – allowing those who can afford additional costs to bear the burden of the higher costs for electricity from renewable sources.

Mixed Results from Washington’s Green Energy Law

The results of this law have been mixed.  From 2005 to 2006, Washington utilities saw a 67 percent increase in the amount of green energy (kWh) sold and a nine percent increase in the number of green energy customers.[6]  Since 2002 the amount of green energy purchased has increased more than 16-fold.[7]

The overall numbers, however, are still paltry.  Statewide, most utilities range from 0.1 percent green energy participation to 1.6 percent, with only the small Orcas PUD reaching 4.8 percent of customers participating.[8]  This represents anywhere from 0.01 percent of the energy sold by a utility to a high of 1.1 percent from Clallam PUD.[9]  While Orcas has the highest percentage of customers participating, only 0.69 percent of its energy is from voluntary purchases.[10]

One key reason these numbers are so low is that utilities have little incentive to promote green energy programs beyond what is required by law.  The profit a utility earns on a kWh of green energy is the same as on a kWh of hydroelectric power or coal. 

Marketing and overhead costs, furthermore, must be approved by the UTC if the utility is going to recover them.  The best that utilities can hope for is to recover the costs of the program.  At worst, the UTC will refuse to cover some of the costs and the utility will lose money by selling green power.

Interviews by the author with utility officials confirm this.[11]  While many utilities are committed to selling green energy, utility officials, especially those running investor-owned utilities, are cost conscious and want to ensure that they can cover expenditures. At this point, many utilities are willing to pay for limited additional marketing, but if the cost increases it will be more difficult to justify internally.

Now, the passage of Washington’s renewable energy portfolio, Initiative 937, reduces the incentive to sell green energy even further.

Initiative 937 requires that the energy offered by utilities be 15 percent “renewable,” based on the initiative’s definition, by 2020.  Many utilities have expressed concerns about finding that amount of non-hydro renewable power (likely wind power) in time to meet the targets.  Moreover, Initiative 937 does not allow voluntary purchases to be counted toward the mandatory targets.  There are two reasons for this.

First, utilities themselves say that few customers want to pay more voluntarily simply to help the utility meet its legal obligations.

Second, some supporters of Initiative 937 expressed the belief that since climate change is something we are all contributing to, we should all manditorily share in the costs.

The result is a serious reduction in the desire of utility officials to market green energy to their customers.  If utilities sell a significant number of voluntary energy credits, it simply adds on to the demand created by the Initiative. 

Thus, if a utility engaged in an aggressive marketing effort and sold three percent of its total kWh in the form of voluntary credits, it would now have to procure 18 percent of its total energy from “renewable” sources.  Utilities already concerned about meeting their mandatory targets are unlikely to incur new, potentially unrecoverable, costs to market green energy that only adds to the difficulty of meeting their legal obligations.  No utility wants to be in the position of violating the law because its voluntary program was too successful.

Charting a Different Path in Oregon

Recognizing that marketing is a key element of increasing green energy sales, Oregon legislators built that directly into their law.  Oregon’s law requires the largest utilities to offer green power options and mandates that they hire outside marketing firms to promote the programs.  Lisa Schwartz of the Oregon Public Utilities Commission noted that they support high marketing costs on the part of utilities because the primary issue “was our concern about consumer education.  We erred on the side of more consumer information."[12]

When contracting with their marketing firm, Portland General Electric officials structured the agreement to pay more as the number of customers increases.  As The Oregonian notes:

“The contracts funnel specified amounts of the premium revenue directly to the marketer, which uses the money for promotions, educational outreach, operational costs and renewable purchases.  The company folds in a profit margin, but neither the utilities nor the marketers would disclose the amount.  The greater the number of participants, the more money marketers make.”[13] 

While the utilities themselves cannot make additional profit, the system’s success is built on the profit motive provided to the marketing company in its contract.

The results of this incentive have been dramatic when compared to Washington. Portland General Electric (PGE) has the highest percentage of residential customers purchasing green energy credits in the nation, with 6.2 percent of customers buying some level of green energy.[14]  Including commercial customers, it is second in the country.

The head of PGE’s green energy program, Thor Hinckley, said he attributes the size of the customer base to the marketing program.[15]  Indeed, with the incentives provided to the marketing company, Green Mountain Energy, the marketing effort has been significant.  According to recent reports, more than 50 percent of the costs associated with the program are marketing related.[16]  This strong effort at promotion was funded by the voluntary purchases.  This is an important part of the program, because all of the additional costs are allocated to those who can afford to pay.

Interestingly, one Oregon environmental group, OSPIRG questioned the cost of the marketing efforts.  OSPIRG’s entire budget, donated voluntarily, is dedicated to promoting green energy.  It is ironic, therefore, that they criticize Portland General Electric for spending too much of their voluntary revenue on marketing green energy. 

Furthermore, if the goal is to increase the amount of green energy purchased, then PGE has done that better than any other utility in the country, or OSPIRG itself for that matter.  Groups that complain that the cost is too high (while, by the way, promoting other high-cost renewable energy portfolios like Initiative 937) appear to be more interested in opposing the profit motive than in supporting practical of efforts to reduce carbon emissions.

Recommendations:  Bringing Portland’s Success to Washington

Washington state has an opportunity to learn the lessons of Portland’s success in marketing green energy credits.  By allowing utilities to earn a profit on the sales of voluntary green energy credits, they can augment other efforts being made to reduce carbon emissions.

Prices for the credits would still be governed by the UTC.  While lawmakers could remove the prohibition on profits, the utilities would still be regulated monopolies. Even with the removal of the prohibition on profits, the total amount earned by utilities would still be regulated.

Allowing utilities to earn a profit also encourages utilities to keep prices for green energy credits reasonable.  While there is a certain number of customers who would be willing to pay high additional prices, many potential customers for the green energy credits would be price sensitive.  Pushing the prices too high, independent of regulatory oversight, would make it impossible to expand the sales of the credits.  Potential customers would simply decline to purchase green energy.  Utilities, therefore, would want to keep prices at a level that maximizes the potential market for green energy.

Policymakers should also review the current way voluntary credits are counted toward Washington’s new renewable energy portfolio, the Initiative 937 law.  As long as each additional voluntary green energy purchase simply adds to the burden of reaching the required quotas, utilities will find it difficult to justify additional marketing until they have met the legally mandated targets.  Allowing utilities to count voluntary green energy credits toward reaching the mandatory targets would remove an additional disincentive encouraging green energy use.

Objections to counting voluntary green energy use toward Initiative 937 quota

Opponents of allowing voluntary green energy credits to apply to these quotas offer three key objections.

First, some supporters of mandatory green energy targets feel that since everyone contributes to carbon emissions, everyone should pay their share.  Voluntary green energy credits, however, allow more of that cost to be allocated to those who can afford it.  If six percent of the additional cost of green energy can come from voluntary purchases, it reduces the amount assigned to low- and middle-income families.

Second, they argue that using voluntary credits to meet Initiative 937’s mandatory goals is “double counting.”  They say credits that people purchase, expecting new green energy, should not also be used to meet laws requiring new green energy, thus counting the same energy for two goals.[17]  This is only double counting, however, because opponents arbitrarily defined it as such.  For instance, Initiative 937 counts energy from renewable power plants made with union apprentices at 120 percent of the actual production.  If one type of energy can be counted at 120 percent, there is no reason they cannot count voluntary purchases as 100 percent.

One supporter of Initiative 937 cited a 1999 document from the National Association of Attorneys General outlining marketing guidelines for green products as a reason that voluntary credits could not be counted against mandated goals.[18]  The document outlines consumer protection guidelines to make sure claims about “green” electricity products match the reality. The key themes of these guidelines are that claims not be deceptive and that they be able to prove the claim.

For instance the guidelines note that, “A claim is deceptive, and therefore unlawful, if it contains an express or implied representation or omission of fact that is likely, or has a tendency, to mislead consumers.”[19]  If utilities claimed that voluntary purchases would create “new sources of green energy,” it would likely be deceptive under the guidelines if the voluntary purchases were not additional to the mandatory targets.

If, however, utility officials sold voluntary credits saying that the funding would reduce the costs for low-income families, and then the utility did actually lower the costs for the mandatory green energy, it would not be deceptive or double-counting. If they marketed the voluntary purchases as helping to “meet the targets years ahead of schedule,” their message would not deceptive and would not be double-counting.

In short, the “double counting” claim can be addressed quite easily and there is no reason that the rules could not be adjusted to remove this serious impediment to voluntary purchases.

Finally, opponents say there is a potential marketing problem of having customers pay extra for green energy that would be required by law anyway.  This type of purchase would essentially be a subsidy paid by residential or corporate customers to the utility.  It is unlikely, therefore, that many customers would buy the green credits.  This objection could be managed in a variety of ways, however.

Utilities would not be required to count voluntary green energy credits toward Initiative 937’s quota, so they could decide to sign up new customers with the promise that purchases would be additional to the mandatory targets.  Alternatively, they could choose to count the purchases as a subsidy for green energy costs for low-income families, since costs are likely to rise as the first green energy quota requirements come due in 2009.  This would shift the additional costs created by Initiative 937 from low-income families to those who can afford the extra expenditure.

Giving the utilities the choice of how to sell the credits would lead to a variety of solutions.  In any case, the profit motive would ensure that whatever solution utilities choose, they would find a strategy that allowed increased sales.

Conclusion:  The Advantages of Allowing a Profit on Sales of Green Energy

The profit motive alone may not allow Washington utilities to meet the 15 percent green energy targets by 2020.  However, this approach is preferable to a strictly top-down regulatory approach for several reasons.

• It allocates the higher costs to those who can most afford them.

• It provides an incentive to utilities to sell more green energy than required by Initiative 937 mandated levels.

• It is the least restrictive approach, which is preferable simply because it allows the maximum amount of consumer choice.

• Finally, it makes backlash against the mandatory targets by consumers less likely by limiting the higher costs that are passed on to the general public.  Public policy based on choice is more sustainable in the long term than policies that are imposed from above.

Augmenting restrictive approaches with market incentives can help Washington’s efforts to promote new sources of green energy achieve the same success as Portland General Electric.  If our priority is truly the promotion of renewable energy, then adding the profit motive to other approaches will help Washington encourage new sources of energy that reduce carbon emissions.

Copyright © Washington Policy Center