How to know what's green

• Sep 01, 2000

After decades of independent efforts to promote the use of renewable energy, many believed that the deregulation of the electrical industry would usher in an age where consumers would readily choose to power their homes or businesses with renewable energy. Now that several states have initiated deregulation and others have run through pilot programs, we can begin to assess whether deregulation will finally spark the use and development of renewable energy. While there are some promising trends, a lot of work remains to educate consumers as to how they can determine whether companies are actually producing and distributing renewable energy. States also need similar information to determine if suppliers are meeting legislated renewable energy requirements.

The most fundamental issue to address in any discussion about renewable energy, also referred to as green power, is determining exactly what "renewable energy" and "green power" are. Green power is generally characterized as energy generated in a manner that creates a lower impact on the environment than traditional utilities. Such a definition would include certain types of renewable energy, such as wind and solar power, but exclude others, such as hydropower.

There are two general approaches to tracking electricity: settlement-based and tagging.

Other sources characterize green power as low-emission energy production, including hydro and nuclear power. The definitions, questions and characterizations are endless: Is the burning of biomass, generally characterized as a renewable low impact resource, renewable only if fueled by sustainable crops, rather than municipal solid waste? Or does the fact that wind facilities may negatively impact land use and kill birds disqualify it from the definition of green power?

While hydro power is technically renewable, it is not always considered to be a "green," or environmentally friendly technology, and may be excluded from the definition of renewable energy in restructuring legislation, such as recently proposed federal deregulation legislation. The Federal Trade Commission (FTC) released a non-binding statement on Dec. 15, 1999 that the Nuclear Energy Institute's advertisements targeting policymakers were misleading because the advertisements stated that nuclear power generates electricity "without polluting air and water."

The U.S. government has made significant efforts over the years to jump start the renewable energy market. In addition to requiring utility monopolies to purchase power under certain conditions from certain renewable energy facilities under the Public Utilities Regulatory Policies Act of 1978 (PURPA), Congress legislated research goals in 1989 in the Renewable Energy and Energy Efficiency Technology Competitiveness Act. This act set federal funding levels for renewable technology and ultimately sought to achieve "as soon as practicable cost competitive use of renewable technologies without need of federal financial incentives." These federal efforts have, to a degree, helped to encourage the development of renewable energy. But despite progress in renewable energy development, the level of its availability in the future is still uncertain. There remains a great amount of debate about which policy approach will best encourage the development and use of renewable energy.

The greatest amount of discussion has focused on green marketing and renewable portfolio standards (RPS). These supporters of green marketing feel that consumer choice in the market will be sufficient to spark the use of renewables. Others feel that the market is not, in and of itself, enough to get the industry off the ground and would prefer to legislate goals for the use of renewable energy.

Green marketing and the public

Many states, most notably California, are heavily relying on "green marketing" mechanisms to promote renewable energy in the era of deregulation. Studies have consistently shown that many consumers are willing to pay a little extra on their monthly electricity bills to encourage the development of renewable resources. In 1996, the National Renewable Energy Laboratory (NREL) reviewed the available data on consumers' willingness to pay such a premium. It determined that at a national level, 40 percent to 70 percent of those polled would pay this premium. The study was careful to note that this number represented a "longstanding favorable predisposition toward renewables and a potential market that remains to be actualized."

A Massachusetts residential retail access pilot program was also encouraging, where 31 percent of participants chose an "environmentally sensitive" or "green" service option."

Actual green participation

Beyond surveys and pilot programs, however, the California experience shows that the percentage of customers that will actually switch to a renewable energy provider is less than that revealed in the national polls. The California restructuring bill went into effect in January of 1998. By the end of May of the same year, only 1.1 percent of the eligible customers asked to switch suppliers. While this figure seems low, those that switched "account for roughly 7 to 10 percent of all load eligible to switch, demonstrating significant early interest by customers in switching suppliers." The switchers account for such a large majority because they are mostly comprised of commercial, industrial and institutional customers. Also, after a year of competition in Rhode Island, only about 1,500 customers, or 0.3 percent of those customers of the state's three largest utilities, have switched their power providers. This low number may be attributed to the fact that as of May 1999, there was only one green power option available in New England.

Green marketers' strategy thus far has been to offer a blend of electricity supply options. Green Mountain Energy Resources offers a "Water Power Blend" and "75 Percent Renewable Power Blend" to customers. Connectiv has signed up 10,000 Philadelphia area customers for its 50 percent or 100 percent blends of renewable energy power. Proponents claim that this marketing has directly resulted in the development of new renewable energy facilities. In August 1999, Green Mountain Energy built three new wind turbines in the San Gorgonio Pass in California, which were dubbed "the first new renewable energy plants built in the United States as a result of deregulation." A NREL report claims that facilities with 97 megawatts (MW) of renewables capacity "has been built expressly to supply competitive green power markets, both at the retail and wholesale levels." Wind technology has demonstrated itself as the fastest growing source of renewable power, with approximately 1,000 MW built from late 1998 to 1999.

The phase-in approach

Other states, however, are not convinced by these success stories, uncertain that market mechanisms alone will encourage a fast pace of renewable facilities development. Instead of sitting back and letting the market decide the pace of development, many states (and the federal deregulation proposals) have mandated a RPS as part of their deregulation legislation. A RPS establishes "an across-the-board minimum of electricity that must be generated from renewables." Most have a phased-in approach, where the minimum percentage of renewables increases over the years, with an eventual phase-out once renewables are price-competitive.

Proponents argue that a RPS is necessary because "customer choice does not fully address the institutional barriers and market failures that have historically helped thwart the use of renewable energy." Individual consumers are usually unwilling to pay extra where the public as a whole reaps the benefit of the individual's investment. A RPS would force all companies and consumers to internalize the research and development costs of renewables.

Its proponents also promote the RPS's market-based aspect in that many proposals include a tradable credit program that would resemble EPA's air emissions trading program. Companies could satisfy their RPS by either directly purchasing renewable energy from a generator or by purchasing credits from a renewable energy generator. A tradable credit program would help stimulate investment in renewables, because lenders could look to both revenue sources, credit sales and direct energy sales, to collect on their debt.

A false shade of green

Many feel that a RPS would stunt a company's efforts to market itself as an environmentally friendly electricity supplier because the RPS would "suck up all the green resources."¹ All suppliers within a RPS state would try to market themselves as environmentally friendly, which would hamper those companies that are dedicated to providing more renewable energy than required by the RPS.

A lack of renewable availability would undoubtedly result in an increase of electric costs, at least in the short run. These costs may be slight for a residential consumer, but for a large commercial or industrial consumer, these types of price increases may greatly impact a company's budget. A RPS may ultimately motivate large customers to produce their own energy, bypassing the renewables requirements and leaving the residential customers to bear the brunt of the RPS's cost increases.

Early experience with deregulation has shown, however, that large consumers will not uniformly be adverse to paying a premium for more environmentally friendly energy: "Several high-profile business and institutional customers, such as Toyota Motor Sales USA and Patagonia have chosen to buy green power. Santa Monica became the first city to switch all of its municipal facilities to 100 percent green power and dozens of other cities have followed suit," according to a report by NREL titled EMAA: Information Brief on Green Power Marketing, available online at www.nrel.gov/analysis/emaa/brief_4.html.

Marketing the unknown

Regardless of which policy approach will ultimately succeed in spurring the use and development of renewables, both approaches have a significant hurdle to overcome to ensure success — lack of information. Electricity is a unique product in that it is impossible to trace the creation of an electron to the use of an electron. For example, a household that pays a premium to receive 100 percent renewable energy may actually receive electrons produced by coal or nuclear power in their home. That household is instead paying for the renewable energy to enter the electric grid, rather than paying for particular electrons to enter into the home.

Second, the makeup of the power sold by a company is flexible because it is contingent on factors such as the load capacity of transmission lines and weather. Consumers and policymakers alike are concerned about how to determine whether an electricity supplier has actually caused renewable energy to enter the grid when the consumer pays a premium price to buy it. Consumers are concerned with more fundamental informational issues, including what constitutes a "green" or "renewable" source and whether a company's green marketing claims are true.

Green deception

State pilot programs have demonstrated how customers may be misled about the incremental benefit their purchase of green energy may have on the environment. In many cases, green marketing has merely been "window-dressing," where companies simply donate money to environmental groups, or give customers spruce seedlings, bird feeders or coupons for energy efficient light bulbs rather than actually developing or using renewable energy.

Some providers who do sell renewable energy are simply "repackaging pre-existing renewable resources and pocketing the difference."² PURPA required utilities to enter into long-term contracts with renewable energy providers. These companies may then sell this electricity, which would have been delivered to customers without green marketing, at a premium to those customers seeking a "green" option, adding no net benefit to the environment. California deregulation legislation prevents such a resale of renewable power only through 2001.

Different states, as well as industry and political organizations, are trying to address the fundamental problem of characterizing renewable, or "green" energy, by tracking the use of renewable energy, developing disclosure requirements for energy providers so that the public is aware of their offerings and developing advertising standards for those promoting green products.

Selecting green energy

Those working on disclosure requirements recognize that labeling an energy source as "green" or "renewable" does not necessarily tell electric consumers what they need to know to make intelligent choices. In studying this problem, the National Council on Competition in the Electric Industry (NCCEI) conducted telephone surveys, focus groups and label testing to determine how disclosure would influence customers and determine customer behavior. For example, when presented with information in a uniform format, customers were able to choose the lowest price option 78 percent of the time, but without such uniform format, customers could only choose the lowest price option 56 percent of the time. Similarly, consumers were better able to identify the supplier with the higher renewable energy content when fuel mix formats were set forth in a uniform means. Clearly consumers want a uniform format to be set forth in a simple label, which would display the energy source's price, contract terms, fuel mix and emissions.

States and regional industry organizations have used the data collected by the NCCEI to draft model rules for disclosure. In turn, these groups have also worked on methods of conveying the required information to the general public through a label. The most notable effort is by the New England Conference of Public Utility Commissioners (NECPUC), which developed a model rule with the intention that each state would adopt the rule to achieve regional uniformity. Thus far, Maine and Massachusetts have adopted their own versions of the model rule and New Hampshire has an active work group that is investigating different resource mix and labeling proposals. Connecticut and Rhode Island also require disclosure but have yet to adopt specific disclosure regulations. Vermont has not yet adopted deregulation legislation.

Full disclosure pricing models

The NECPUC model rule sets forth standardized generation pricing information, based on four levels of use: 250, 500, 1,000 and 2,000 kilowatts per hour (kWh) per month. The label should, under the model rule, also contain the fuel and emissions characteristics of the electricity.

The label must also contain emissions characteristics for carbon dioxide, nitrogen oxides and sulfur dioxide, as conveyed in pounds per kilowatt hour. These emissions are to be calculated by annual emission rates identified by the state environmental agency.

Each electricity provider would be subject to complete company disclosure under NECPUC's model rule. This means that the supplier must show the resource portfolio for all of its price or product offerings within the New England region. This contrasts with the "claims-based" disclosure approach, where a company would only disclose its fuel and emissions characteristics if it is marketing green energy. The latter approach more closely resembles the FTC's present system for policing green product advertising. One report analogized the difference between the two systems to nutritional labels for food. If only healthy foods contained nutritional labels, consumers would have no comparison point to determine what constitutes unhealthy food. Full disclosure allows consumers to become more comfortable with labels and generally better educated as to how to differentiate between the contents of labels.

Electricity suppliers are also required to disclose the label to consumers at certain critical periods, such as prior to the initiation of its service, on a semi-annual basis to its customers, upon request by any person eligible to obtain the company's service and in print advertising. Where a provider advertises its offerings in non-print media, it must indicate that a label is available upon request.

As with most environmental regulation, there are periodic reporting requirements for the electricity providers under the model rule. On an annual basis, they must submit a report to the state public utility commission that substantiates their label claims, including the accuracy of their resource portfolio through market settlement data and the accuracy of the disaggregation of each resource portfolio into segments or products.

NECPUC's model rule does not mandate a label format, but rather recommends that each state's public utility commission determine its own format. A few states have already developed their labels, such as California. Its label lists every possible energy resource in the power supply, with a listing of the resource breakdown for the customer's particular product versus the resource breakdown for the "California Power Mix," or the standard resource mix in the state, as a comparison point.

Third party green certification

Other groups want to move beyond consumer education through labels to a system where a third party interprets a company's information to determine for the consumers which product is environmentally friendly. The highest profile effort to certify a company's products is the Green-e program, which issues a green seal of approval for those products that meet its environmental criteria. Commercial customers who purchase these certified products may display the seal of approval to get the marketing benefit of showing their support for the environment. The program establishes minimum requirements, such as a five percent renewable component from "new" facilities within a year after the inception of a state's Green-e program, a general fifty percent renewable requirement (which includes small hydropower facilities) and resulting emissions from the sources that must be lower than the average regional system electricity mix. The present and proposed programs in different states will be customized to address individu al characteristics of their utility deregulation legislation and regulations. For example, Pennsylvania does not include municipal solid waste as an appropriate biomass fuel source.

The Pace Energy Project developed an internet-based tool to complement the Green-e project by allowing customers to compare different Green-e certified electricity products in their state. The Power Scorecard rates each product's source-specific environmental impacts according to "global climate change, smog, acid rain, air toxins, water consumption, water pollution, land impacts and solid waste."³

A host of other organizations offer criteria for green energy and principles for their promotion, including specific criteria for individual types of renewable resources. One notable principle from the American Wind Energy Association is its suggestion to avoid distinctions between new and existing renewable facilities, in part to avoid penalizing those who have invested significant resources into developing the facilities by insinuating that they are somehow inferior to new facilities and also because there is no clear distinction between new and old facilities.

The National Association of Attorneys Generals (NAAG) has joined the efforts to police green marketing claims. In December of 1999 it issued model marketing rules that it hopes will "diminish the potential for deceptive environmental marketing."⁴ The NAAG model rules offer a definition of deceptive advertising and require, among other things, the substantiation of claims, clear and prominent qualifications and disclosures and the proper linking of attributes and benefits to the product. It also offers guidelines for the use of environmental claims such as "renewable," "clean," "new facilities," fuel source, generation process and emission claims. Perhaps the most useful feature of the NAAG model rules is the comment section, which gives examples of whether an electricity supplier is acting within the guidelines.

For example, a company has properly substantiated its claim where a company runs an advertisement that claims, "Last year, one-quarter of our power came from the sun or the wind," if the company possesses an auditable record of contracts which shows that 25 percent of the electricity it purchased and put on the grid serving the area in question came from solar and wind generators and that that electricity was not sold to more than one consumer.⁵

An example where a company does not meet its green marketing claims would be a company that generates hydroelectric power in a region that allows for tradable tags, and sells to another facility tags representing the hydroelectric nature of the power generated. The company then markets the untagged energy under its brand name, thus implying that the electricity still has the attributes that were sold with the tag.

Here, the company would not meet the model rules' requirements for properly linking attributes and benefits to the product.

The NAAG proposal anticipates that suppliers will market themselves as green if they use tradable certificates, or tags, in lieu of directly purchasing renewable power. The model rules require that suppliers explain to customers that they expect the certificates to meet their reasonably anticipated present and future demand for the attributes they represent. The suppliers may also use only one certificate or tag per unit of power and must clearly explain to customers the use of a tagging system to establish this link. The FTC, in its comments to the NAAG's draft model rules, disagreed with this approach because NCCEI research determined that "consumers have less confidence in environmental claims about power when they are told that a tagging system is used to support them." In fact, the FTC suggested that suppliers need not fully substantiate claims to consumers, provided that they can do so to regulators. The NAAG, however, maintained this requirement in its final model rules.

Tracking electricity

In order for disclosure and certification policies to be effective, regulators and customers must be assured that the renewable energy is actually entering the grid. States and industry associations have initiated methods for tracking electricity information and California has already put its method into place. There are two general approaches to tracking electricity: settlement-based and tagging. Some promote a hybrid use of the two. The different methods complement the four different types of electrical purchases: unit, system, spot market and external (imports/exports) transactions. A unit transaction is based on a contract which specifies the unit generating source, i.e. purchases from a "known" resource. A system transaction does not specify the unit generating source but instead involves a contract that provides for the purchase of power from any or all of an entity's generating sources. Spot market transactions are distinct transactions between companies when one of the companies is not able to othe rwise match its load capacity. Imports or exports are transactions between companies that are not within the same power pool or control area.

The settlement-based method is based on the idea that credits for production of renewable energy and the energy itself are aggregated. Settlement is determined by an ISO's financial settlement system for wholesale electricity purchases and sales. Every time an electric supplier makes a purchase of a given unit of renewable electricity from an electrical generator, the supplier would then possess the same amount of renewable energy credits. The settlement-based method works well with unit transactions, where electricity attributes follow the flow of dollars.

This is not the case for a system, spot market or external transaction. In a spot market purchase from the common pool, for example, the energy attributes will be the weighted average of the given hour's sales to the pool. Emissions data would come from existing databases such as EPA's emissions settlement-based system. Proponents of this method espouse the benefit of using existing infrastructure to track the energy attributes, but others are wary of its costs and the possibility that it may impede the liquidity of the energy market.

The tagging method is based on the concept that "tags," or credits, can be disaggregated from the energy with which they are associated. For example, if a wind energy facility generates ten units of electricity, it has earned ten wind tags. The generator could then sell both the electricity and the tags to a supplier, or it could choose to sell the electricity to one company and the tags to another company. In the latter example, the company that receives the tags can then "attach" them to non-renewable energy it has purchased in order to meet its renewable portfolio standard or to market itself as a green electric supplier.

Proponents of this method emphasize its simplicity and the fact that the tags can be attached to any type of electricity, a method that will not impede the liquidity of transactions. Also, this method would work well with a RPS that allows a trading program. As the FTC pointed out, however, customers tend to be wary of such a system.

California, the only state that actually has tracking mechanisms in place, differs from the settlement-based, tagging and hybrid methods described above. It assumes that all suppliers use the average system mix, unless the supplier represents that its mix is different. The California Energy Commission (CEC), rather than the state power exchange, monitors information from the latter type of company by collecting generation and fuel type data from these companies. The CEC, in turn, audits suppliers' disclosure claims and requires third parties to audit suppliers who claim purchases of generation from specific units.

Once green marketing moves beyond mere hype with the help of these tools, policy makers hope that a deregulated atmosphere will kick-start the competitive market. Customers, under deregulation, will pay their electric suppliers commodity price for electricity generation, which is separate from the overall rate charged by the utility distribution company.

This commodity price is a clearing price set at the power exchange, a "large, liquid, wholesale exchange without a retail markup."6 This overall rate will prove to be very high in many states whose legislation requires all suppliers to pay for generator's previous "bad" investments or over-investments that led to excess generating capacity. These costs, known as stranded costs, will be passed onto all consumers. This results in a low price margin for entry for new companies. An energy service provider can take advantage of this low margin by offering a "premium" product in exchange for its higher cost electricity.

If consumers aren't willing to pay for the premium product, many policymakers are counting on a renewable portfolio standard to stimulate the renewable market. Provided that an adequate tracking method is in place, the RPS should assist with the development and use of renewable energy. States haven't abandoned the subsidy route either. Many are hoping that subsidies, generated from a universal "systems benefit charge" from all suppliers, will stimulate the development, and in turn, use of renewable energy.

Whether policymakers support market mechanisms or a RPS, the next few years should prove to be an interesting experiment in the promotion of renewable energy, and a welcome one for those who have spent decades trying to increase its use. The success of either method is dependent on a clear, consistent informational system for both consumers and policymakers alike.

Endnotes

¹Lisa Prevost, Renewable Energy: Toward a Portfolio Standard? Pub. Util. Fort., Aug. 1998, (quoting Karen O'Neill, Vice President at Green Mountain Energy Resources).
²Jeff B. Slaton, "Searching for "Green" Electrons in a Deregulated Electricity Market: How Green is Green?", 22 Environs Envtl. L. & Pol'y J. 21, 30 (1998).
³The Center for Resource Solutions developed the Green-e label program. The group is a San Francisco-based non-profit organization dedicated to building human capacity for institutions for energy, economic and environmental sustainability.
⁴National Association of Attorneys General, Environmental Marketing Guidelines for Electricity (Dec. 1999).
⁵The National Associations of Attorneys General, Response to Comments on Revised Draft of Proposed Environmental Marketing Guidelines for Electricity, Section III (Aug. 12, 1999). § 2.b. Ex. 2. The qualifier "not sold to more than one consumer" relates to the problem of companies double-counting electricity sales to meet portfolio or similar requirements.
⁶Ryan Wiser, et al. "Renewable Energy and Restructuring: Policy Solutions for the Financing Dilemma," Electricity Journal, Dec. 1, 1997, at 65

This article appeared in Environmental Protection, Vol. 11, No. 9, September 2000, Page 58.

This article originally appeared in the 09/01/2000 issue of Environmental Protection.