Having recently moved to Philadelphia and being unfamiliar with the region and Pennsylvania as a whole, I am still trying to learn my way around, both geographically and culturally. Growing up in the midwest and having spent most of my adult life west of the Mississippi (SF Bay Area and Denver, mostly), the East Coast is a very different world. As is true in any city, the challenges are different, the attitudes are different, and the demographics are different. The city itself is older than any other city in which I’ve ever resided, and in many ways the challenges the city is facing are different than in cities that have seen more recent substantial growth.
Having a keen interest in the power utilities space and after learning that Pennsylvania is an unregulated state, I was curious to learn more about the region’s general temperature with regard to renewable energy. PECO, a subsidiary of Exelon and the utility providing power to the region, offers net metering rates and the state has targeted 18% renewable energy by 2020 to 2021. Most interestingly though, Pennsylvania offers “Customer Choice,” meaning that customers have the option to choose their electricity provider, giving the customer the opportunity to comparison shop and select a supplier that aligns with their values. To some customers this could mean the cheapest rate, while to others it could mean the greenest power. There is some indication that PECO customers value renewable energy and would like to see more of it in the energy that they purchase from the established utility, however, after visiting PAPowerSwitch.com, I found that there are an incredible number of options for customers wanting to purchase green energy. There are ten different options for my zip code.
As I dug deeper into some of these options, I found that many offered 100% renewable products, some with fixed and some with variable $/kwh rates, and one with a subscription-type service with a set monthly fee regardless of usage. Reading even further into the concept opens up a new can of worms: How do these companies provide 100% renewable power to customers instantaneously, through the same wires PECO uses to provide not-as-renewable power? The answer is RECs.
What are RECs?
A Renewable Energy Certificate (REC) is created with each MWh of green energy generated (I dive into this topic in greater detail in my previous post. In many cases these RECs are bundled together with the MWh of energy and sold to a utility or customer, as is the case when utilities are fulfilling their RPS requirements. In cases where a wind farm or solar plant is selling energy to customers who do not need the green characteristic of the energy, the RECs can be separated (unbundled) and sold on the open voluntary REC market. The purchaser of the REC can then purchase power from anywhere, whether that be a coal plant, a solar plant, a geothermal plant, etc, and call it “green” energy. The REC revenue generated in this exchange acts as a secondary cash flow for the renewable energy plant operator.
The problem is that this market generates very little cash flow for the developers, far less than the energy itself. At these low rates, it is very difficult to believe that additionality comes into play: That the existence of the market and the relatively minor cash flow creates enough incentive to drive more development in the market. This is the crux of the argument many REC proponents make: Operating this voluntary REC market enables green energy producers to generate additional cash flows that could be used to fund projects that may otherwise have been uneconomic. I have spoken to several people in the industry, questioning the value of RECs, and have been given this argument, as well as the argument that this is simply the only means of procuring renewable energy in this region.
The issue has arisen because the value of an REC in this market has fallen dramatically since the market was first created, due to oversupply and/or low demand for the RECs. Since the market is not transparent, it is difficult to find information on the exact value of a voluntary, unbundled REC at any point in time. However, from information I have found, the value is probably well below $1/MWh, an amount that would be unlikely to provide sufficient income to drive forward a project on the brink of not being built. This is such a fraught issue that the California Public Utilities Commission (CPUC) has placed limits and requirements on the types of RECs that can be purchased by utilities to meet RPS requirements, and community choice aggregators (CCAs) in California are staunchly opposed to using unbundled RECs at all to meet renewable energy targets.
What do RECs mean for me and my power bill?
Ultimately, it is very difficult to find information on what to do about this contradiction as a consumer. (That said, two very thorough posts here and here were written for Vox several years ago and much of it still holds.) Many product options on the market today are presented simply as “100% Renewable Wind Power,” which is technically true but is indeed misleading. Do I purchase that “100% renewable power” from the non-PECO source and call it good, even if it might not actually be generating the additional renewable energy growth advocates say it does? Is it better than doing nothing? How do I value the total cost of the options? In another post I will evaluate what the REC price level might need to be in order to drive investment. It is also worth noting that solar specific RECs (SRECs) are much higher value, but are offered only in The Energy Co-op PA-specific product (99% wind, 1% solar).
In this comparison, I am evaluating six options, including the status quo, PECO. Inspire, a startup based in Santa Monica with an office in Philadelphia; WGL, a company based in Virginia; and The Energy Co-op, a nonprofit cooperative in Philadelphia. Both WGL and The Energy Co-op offer separate products that are national renewable energy and Pennsylvania-specific renewable energy. These two products may have different REC prices, since the supply/demand of RECs in Pennsylvania may differ from the national market. However, I found when looking for REC pricing, Pennsylvania RECs are likely within one order of magnitude of the national average. This seems to be corroborated when comparing each company’s national and Pennsylvania-specific products: The rates are not substantially different.
If we look only at the cost of the RECs and assume that the REC price is $0.4/MWh, the price at the end of 2017, purchasing 100% renewable power would cost the average customer only $0.28 more per month (a 0.2% bill increase) than the standard non-renewable PECO product (based on 700 kWh monthly energy use, a conservative estimate for a household). That’s all. This gives a sense of the low value that RECs have today and suggests that the REC market is broken: There is too much supply and not enough demand to drive prices high enough to incentivize new development solely from this mechanism.
The misleading claim that renewable power is far more expensive than the status quo is propagated when our utility providers suggest through the higher rates (as you’ll see in a second) that renewable energy is coming at quite a premium, when the premium suggested by REC pricing is in reality so small that no consumer would ever notice. Below is a comparison of the total average monthly price of each of the products. The total costs include all customer charges: While the websites for each of the companies provide only generation rates, the customer still has to pay the utility transmission and distribution fees.
|Summary for 700kWh monthly average usage||PECO (Brown)||Inspire||WGL - PA||WGL - National||Energy Co-op - PA||Energy Co-op - National|
|Average Monthly Cost||$102.66||$131.28||$126.45||$123.65||$134.78||$127.78|
|Premium over PECO||$28.62||$23.79||$20.99||$32.12||$25.12|
|Premium over PECO||28%||23%||20%||31%||24%|
Note: PA indicates the product includes only renewable power produced within Pennsylvania, while National indicates the product includes renewable power from anywhere in the USA. The premium for the Pennsylvania product suggests that the regional RECs may be slightly more expensive than national ones
So if the cost of the RECs for the average consumer is only $0.28 per month, why are the differences in these bills versus PECO close to 100x that, increasing customer bill by 20-30%? The answer is likely overhead and transaction costs. If the bulk of the higher bill goes to the program administrators, is the program really going to achieve what it aims to do? Could the high premium be keeping some customers away? If we all were to decide to purchase RECs to make all of our non-renewable power renewable (increase demand), this could shift the REC price higher, reintroducing the incentive to developers. As more projects are developed over time, this may also shift the supply higher simultaneously.
Regardless, it is very difficult as an individual consumer to justify that purchasing my power at a 30% premium while only contributing $0.28/month to the renewable energy cause accomplishes much besides creating jobs for people at the firms offering these REC products. Signing up for one of these products and paying the premium might lead the consumer to use energy more efficiently so as to drive down their own bill back to where it had been, although that is more of a potential side effect and not really an argument for or against using one of these products in the first place.
But what are the alternatives?
Unfortunately, there really aren’t any easy ones, however there are changes that could be made to make the market more impactful. These suggestions are as follows:
- Lobby states for more aggressive RPS targets
- Pursue community solar projects or individual home solar installations
- Shift utility business models towards generating capital for investing in renewable projects
Since it would be very difficult to drive enough REC demand in the short term to increase REC prices enough to make much of a change on the renewable development front, other methods should be considered. The biggest change to demand would come from states increasing their Renewable Portfolio Standards (RPS), which would require more of the RECs to remain bundled and stay within the state or region where they were generated, and force utilities to purchase them. Lobbying our governments to increase RPS standards would drive increased renewable demand, especially in states that have lagged on implementing strong (or any) RPS requirements.
There are other alternatives for the average consumer to purchase renewable energy, but the barriers to entry are much higher. These options include community solar projects, where an individual buys into a group solar project that is built off-site, or solar projects on the customer’s own property. Both of these options might require owning your own property and would require a much longer time horizon, something that many may be too risk-averse to consider. This is why the simple sign-up-and-be-done-with-it business model of the companies analyzed here is so attractive.
One last solution would be to alter the business model of the companies offering the 100% renewable products via RECs. Shifting their missions towards investment in new renewable projects would make their additionality argument much stronger: By buying our renewable product, you are helping finance a new renewable project. It doesn’t necessarily even have to be within the local area either, if it is more economic to do elsewhere, although potential customers might take a shine to local projects.
But ultimately, should the average customer purchase one the 100% renewable options on offer in the market today? Given all the information I’ve outlined above, it is up to the consumer and what he/she values. Some may see the value in creating jobs in firms like The Energy Co-op, as they work to educate the city on renewable energy, and the potential impact down the road if investments are made in local renewables development. However, some may think that the extra dollars that they would have spent on that 100% renewable product would be better spent elsewhere, perhaps in making efficiency improvements to his or her own home. I am not here to suggest any one way; I am only attempting to present all of the information in hopefully a new and educational way.
In the end, it’s hard to believe that the average customer sending a few dimes to a wind farm operator would really make much of a difference in the firm’s bottom line, enough to change a firm’s decision on whether to invest in new capacity or not. But what REC price would lead a firm to decide to build a new project? I’ll be analyzing that in a follow-up post.
I am always trying to learn and improve. If you have any suggestions, corrections, ideas or other comments, please reach out to me at email@example.com