The Pitfalls And Potential Of Marketing Green Power

Ever since the state of California led the nation in opening electric markets to competition, energy marketers have

searched for a way to differentiate their product. This proved difficult, however, since few commodities can claim to be more similar than flowing electrons. Before too long, though, it became apparent that green power would be a leading contender for establishing a market niche at a premium price.

What Is Green Power?

Green power, however, has proven a difficult concept to nail down. A number of parties at the state and federal level are currently attempting to establish a definition that will satisfy most, if not all, market participants and stakeholders. According to draft guidelines developed by the National Association of Attorneys General (NAAG), the use of the term green power should be substantiated by evidence that:

Although this is only one perspective on defining green power, it touches on many of the core issues that still must be resolved, such as whether it is appropriate to set a percentage threshold for the amount of renewable energy sources that make up a green power product. A critical step for green power to gain a foothold in the competitive energy market will be finding the balance between product standardization to ensure fairness on the one hand, and product flexibility to allow for effective marketing on the other. This article discusses the current status of green power marketing, the types of green power products that are available, and the issues that must be addressed in order to expand the market to additional states and types of consumers.

Hype Or New Market Paradigm?

Green power has been a high profile issue in the energy industry since regulatory blue books and statewide pilot programs began to give shape to the emerging competitive market. Early customer feedback from market surveys and pilot programs created high expectations for the share of the retail market that would be interested in paying a premium over market price for green power. In Ohio, twothirds of survey respondents said they would be willing to pay $5 more per month to reap the environmental benefits of green power. In one Massachusetts pilot program, 31% of residential customers picked the green power option (but only three percent of small commercial customers). Also, 40% of retail customers of the Sacramento Municipal Utility District claimed to be willing to pay a $10 per month premium for green power. No wonder dozens of green energy products have appeared on the California market since January 1998!

As is often the case, however, market reality has not quite lived up to what customers claimed in the survey responses. One indication of this is that out of 14,000 MW of generation under development in California, only 500 MW are dedicated to renewables. Green power's slow gains can be attributed in large part to the slow start for retail competition in general. Transition charges and other implementation costs borne by customers interested in switching to new energy service providers have slowed the migration to new market entrants. In California, for example, only one percent of the state's customers has switched even though the market has been "open" for over a year. Energy marketers are concluding that retail competition is going to be a five to 10year process, not a two to threeyear process as originally anticipated.

While the development of green power products is still in its infancy, there are some general patterns to the make-up of products now on the market.

What Do Green Power Products Look Like?

While the development of green power products is still in its infancy, there are some general patterns to the makeup of products now on the market. The main characteristic is the combination of existing renewables, new renewables and nonrenewables into products that offer a range of

prices and environmental benefits (compared to traditional fuel sources). The products offered in California by Green Mountain Energy Resources, probably the best established green power marketer nationally, include:

• "100% Renewable Power" comprising 95% existing renewables (smallscale hydro, biomass, geothermal) and five percent newly constructed geothermal and landfill gas.
• "Wind for the Future" comprising 75% existing renewables and 25% new wind turbines.

Green Mountain is currently offering green products in only one other state - Pennsylvania - and as an indication of how complex a national green power market may become, the products differ significantly from those in California:

• "Eco Smart" comprising only one percent new renewables and 99% natural gas and/or hydro.
• "Eco Blend" comprising 47% existing renewables, three percent new renewables, and 50% large scale hydro.
• "Nature's Choice" comprising 95% existing renewables and five percent new renewables.

Prices for these products range from five percent below market price to 30% above market price. Green Mountain, and other green power marketers, have been better able to compete on price in California because of a publiclyfunded subsidy that the California Energy Commission is passing through to green power providers during the transition to competitive markets. Approximately $540 million of a public goods fund has been earmarked to help green power make inroads into the price sensitive energy market. Similar funds have been established in other states.

What Issues Face This Emerging Market?

The ambiguity surrounding the definition of green power will impact the design and marketing of green products. Distinctions between large and small hydro generation and exclusion of energy generated from garbage are two examples where definitions may be driven more by public sentiment than by good science and public policy. This can pose a problem for developers of green power products who must support their offerings with both the right amount and the right type of green power purchases. If they prevent marketers from signing longterm deals, uncertainties about what constitutes green power could end up being the defining element in the relationship between green power marketers and generators.

Pricing will also be a challenge for green power marketers in the future. The subsidies that have benefited Green Mountain and others in California are currently scheduled to expire at the end of the transition period. While an effort is underway to extend the public goods fund beyond the transition period, it is questionable whether price subsidies can coexist with competition in the longterm. Opponents claim that artificially favoring one set of fuel sources over another is, in the end, inconsistent with a free market system.

Given the price confusion that will inevitably be experienced in the competitive market, establishing itself as a premiumpriced product will be a challenge for subsidyfree green power. The experience of retail access in telecommunications should serve as a warning that if the pricing structures of products are not digestible to consumers, confidence in the fairness of pricing will erode.

Green power marketers have shown a fair amount of innovation in taking their products to market. For example, Green Mountain has focused on the Internet as a means of reaching environmentally conscious customers. In April, Green Mountain announced that it would post banner advertisements on the Internet browser Yahoo!, which would allow customers to click and buy green power. The company has also recently recreated itself as GreenMountain.com and entered partnerships with other Internetbased providers of green products, such as the Green Travel Network and SocialFunds.com. Partnerships have not been limited to a menu of green products, though. Green Mountain has also formed a partnership with Prudential California Realty to market green power to new homeowners.

One issue that may be critical to utility companies offering green power products to retail customers within and outside of their traditional service territory is branding. One energy service provider has remarked that they will need to retail energy the way Starbucks sells coffee and Nordstrom clothes. These crossindustry analogies should be expanded to include the way AT&T sells long distance service and the way Coors sells beer. Why? Because both AT&T and Coors have created new corporate brands to sell their products to niche markets AT&T in the form of Lucky Dog long distance service and Coors in the form of Killian's Irish Red.

Just as a microbrew enthusiast may not consider Coors to be an ideal source of a fullbodied ale, energy customers may not consider their investorowned utility with its years of adversarial relationships with consumer and environmental groups to be the most appealing source of green power products. Northeast Utilities may have come to a similar conclusion when it created subsidiary Northfield Mountain Energy to market green power.

Whether the green power marketer offers a product with two percent or 100% renewable content, verifying that the products meet these claims is proving to be a complex matter.

Whether the green power marketer offers a product with two percent or 100% renewable content, verifying that the products meet these claims is proving to be a complex matter. In California, two measures are currently in place to provide consumers with greater certainty regarding the source of their power purchases, and another measure is under development to provide verification that the marketers' power is as green as it seems.

First, California Senate Bill 1305, signed into law in late 1997, requires a "power content label" to be provided annually to consumers by all green power marketers. This label compares the fuel mix that was claimed in the original product offering to the actual fuel mix purchased over the course of the year. Green Mountain provides a fairly comprehensive breakdown of their proposed and actual fuel mix, with tables and footnotes sure to intimidate all but the heartiest of energy consumers.

Second, the nonprofit Center for Resource Solutions (CRS) has developed the "Greene" label which eligible companies can use to promote the authenticity of their green products. A voluntary program, it requires green products to contain 50% renewable fuel sources and allows for the CRS to conduct spot audits of label holders. Currently, on the retail level, there are seven green power marketers that meet the Greene requirements in California and two in Pennsylvania. On the wholesale level, four companies meet the Greene requirements, including the Automated Power Exchange (APX), an electronic trading floor for energy services that lists hourly prices for green power for trades up to one week in advance.

Finally, methodologies for afterthefact verification of the generation sources behind green power sales are beginning to take shape in California. State regulators are currently developing assurance protocols, monitoring plans, and auditing programs for energy service providers selling green products in the state. Given the fungible nature of electricity, however, energy source verification is no small task. Since both the physical flows and contractual flows of energy are difficult to track explicitly in many instances, the key issue becomes how to perform afterthefact verification at a reasonable cost. Various tracking methods are being explored.

When completed, the "assurance protocols" will spell out the role of the independent accountant for energy service providers in supporting the veracity of the information filed with the state regulator. Other sources of assurance including management or internal audit certifications, marketable energy source certificates, transmission tagging, and spot audit ing are also being considered.

At this stage in the evolution of green power, detailed implementation issues are being resolved on the state level while the national debate still continues over how to define the term. The gap in progress made at the state and national level has not been lost on some industry stakeholders. The Electric Power Supply Association (EPSA) has taken issue with what its members believe is an overly prescriptive approach adopted by NAAG in its development of guidelines for marketing and advertising green power. The Edison Electric Institute claims to welcome such a guidelines setting process, which would inform both advertisers and policymakers, because its members see it as a more flexible alternative to prescriptive mandates.

Others question whether an association of top state lawyers should be the body that creates one overarching definition to be applied to all local, state and regional energy markets. The fact that the Federal Energy Regulatory Commission and the US Congress (through electric restructuring legislation) will also be chiming in on this issue within the next few years may cloud the matter even further.

Regulators and legislators will continue to be challenged by the difficult balance between product standardization and market and regional flexibility. It is important that decisions made at the federal levels do not undermine the progress made in California and other states at the forefront of retail choice. Strong leadership at the state and federal levels is still necessary, however, to create a retail energy market that promotes fairness and choice. Only through the existence of such a market will green power gain the confidence of and capture a premium price from the retail energy consumer.

Regulators and legislators will continue to be challenged by the difficult balance between product standardization and market and regional flexibility.

PwC is actively working with state regulators in California to define and develop methodologies for afterthefact verification of green generation sources.

This article appeared in the Fall 1999 edition of Public Utility Topics

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