April 16, 2001The California energy debacle has been well publicized. Reasons for the failure of deregulation in the Golden State vary, but fail it did.
The deregulation experiment has played out for four years, and even before the summer of 2000 highlighted the fundamental flaws in AB 1890, it had become clear that deregulation in California had not resulted in vibrant competition. At the height of switching activity, a little over 2 percent of customers had chosen alternative providers.
The one bright spot in the California market was that the majority of that 2 percent were choosing green power. If nothing else, the deregulated market had created an arena in which renewable energy could compete with fossil fuel-based power generation.
California has always had a reputation for strict environmental regulations and a commitment to renewable energy. As early as 1993, customers in the Sacramento Municipal Utility District (SMUD) service area were able to commit to green power through the purchase of rooftop solar systems. Utility-sponsored renewable programs, called green pricing programs, emerged in many states as a response to customer demand and as a business strategy in preparation for newly competitive markets.
The Los Angeles Department of Water and Power (LADWP) opened its “Green Power for a Green L.A.” program in the middle of 1999. At the end of last year, the program boasted over 65,000 customers (about half of that total are low-income customers who receive green power at no extra cost).
The advent of deregulation meant that customers could go beyond their existing utility to purchase power, including shopping for cheaper or cleaner options. A customer credit of 1.5 cents/kWh was granted to consumers purchasing renewable power.
The initial opening of the California market brought over 200 registered energy service providers (ESP). After the initial shake-out, marketers offering power to residential customers were almost exclusively green power providers. As California’s precarious market began to fall apart, the relative success of green power marketers remained the bright spot. Now, even that achievement is gone.
California Green Power Marketers Are Virtually Obsolete
For the first few years of competition, the green power market did well, an almost unintended consequence of restructuring. Large commercial customers in California, driven either by internal or external eco-responsibilities, began pursuing green power (Toyota and Kinko’s are examples). Most power marketers found it unprofitable to market to residential customers, and soon the majority of options left to homeowners were green power products. Estimates vary, but roughly 85 percent of the customers who chose an alternative provider chose green power.
Starting last fall, there has been a steady exodus of green power suppliers from the state. The Center for Resource Solutions, the organization that administers the Green-e program, points to a number of reasons why green power marketers have left. They include the inability to acquire the credit necessary to purchase power at high supply prices and the fact that electricity transactions were linked to the California Power Exchange clearing price (the Power Exchange is now defunct).
Some suppliers structured their prices so that they charged a percentage discount off the PX price. When the price for power became too high, however, this discount became financially unsustainable. Currently, only Commonwealth Energy and Power Source are still open for business in California (Commonwealth, as of January 2001, has 57,000 customers).
If the previous deregulation legislation and market conditions created problems for green power marketers, new developments are only making it worse. New state legislation is in place that allows California to buy long-term power on behalf of the utilities. However, that same legislation also bars customers from switching providers. The government is currently securing deals at high prices and wants assurance that customers will continue to pay the high cost of electricity even if market prices fall.
While a number of green power marketers had left the state before the legislation was introduced, the new market rules virtually guarantee the end of competition. Sen. Debra Bowen is working on a supplemental bill to clarify how alternative providers can continue to operate, but there has been little agreement. Some providers continue to take on new accounts, in defiance of the new law. At the peak of competition, about 224,000 customers had signed up with alternate providers.
According to latest numbers available from the PUC (February 2001), close to 124,000 residential and business customers are still buying power from alternative providers. Go-Green.com, Utility.com, and Green Mountain Energy are the latest casualties of the California market.
Go-Green.com Suspends Operations
In April of 2000, the United States Postal Service made the largest federal purchase of green power in the country. The USPS partnered with Go-Green.com, a green power marketer in California, and contracted the purchase of green power for 1,100 of its California post offices. In 2001, the Postal Service planned to transfer an additional 1,000 offices to green power.
However, just six months after the contract was signed, Go-Green began having trouble acquiring enough credit to purchase green power from wholesalers. By December, the company had suspended its operations, and had returned not only the USPS, but also MCI Worldcom and 2,500 residential customers to their default utility.
Utility.com Pulls Out of All Markets
Utility.com, an online company based in California, offered electricity products in a number of states (but offered a green power product only in California). The business plan was fairly innovative – the company would manage volatile electricity prices by leveraging those costs with other services, such as DSL and telephone long distance. Utility.com’s originality came from being completely Internet-based. However, innovation and originality were not enough. The company recently announced that is was exiting its markets and the most noticeable dents have been in California and Pennsylvania.
The online company returned 10,000 customers in California and 30,000 in Pennsylvania. It also pulled out of the Massachusetts market. Utility.com claimed that it did not have enough capital to pay the high marketing costs of retail marketing and has attempted to redefine itself as an application service provider by renting out its technology to utilities and other online businesses. Most recently, sources say that the company is looking for a buyer. The company founder, Chris King, resigned as CEO in February.
Green Mountain Leaves California, But Shows Strength Elsewhere
Green Mountain Energy (GME) is typically perceived as the success story of green power providers. The company enjoys a high level of name brand recognition and successfully managed to market the invisible – electricity. Despite its successes elsewhere, Green Mountain was unable to remain in the California market. The company turned back nearly 50,000 California customers in February (it retained about 8,000 customers in San Diego via fixed-rate 8.6 cents/kWh wholesale contracts). On February 2, GME released a statement citing reasons for returning CA customers to their local utilities, including the fact that the PX credit, the index on which GME bases its customer prices, is now meaningless (since the PX has shut down).
Green Mountain, despite the loss of its California customers, is not hurting for work. The company has plenty of customers in Pennsylvania, just received its Texas retail license (it is the first exclusively green power provider in the state), and was recently awarded one of the country’s largest aggregation contracts – 400,000 customers in Ohio. However, if GME wants to return to the California market it will have to significantly invest (again) in marketing costs to regain customers.
Other States Show Mixed Green Power Success
California is certainly the worst off in terms of green power marketing opportunities, but other states are struggling as well. AES Power Direct will turn back more than 15,000 customers in New Jersey, and is no longer accepting customers in Pennsylvania. Likewise, Conectiv Energy recently ceased retail marketing efforts in Pennsylvania and New Jersey.
According to March figures from the Pennsylvania PUC, outside of the Peco Energy territory, two green power marketers are operating: Green Mountain Energy and Peoples Plus. Within the Peco territory, five companies are offering a renewable electricity product. Despite the recent departure of some “green” companies, success stories exist. Not surprisingly, one of the biggest is Green Mountain. The company serves about 60,000 customers in Pennsylvania and now up to 50,000 customers of Peco Energy will the option of buying Green Mountain electricity at no additional charge.
GME usually charges a premium, but will charge 5.438 cents/kWh for residential customers (the Peco rate is 5.570 cents/kWh). Earlier in the year, the New Power Company won a bid to serve about one-fifth of Peco’s 1.5 million electricity customers. In light of the customer confusion that surrounded that exchange, the PUC has ordered Peco and Green Mountain to launch a customer education campaign to explain the selection process and benefits of switching.
As mentioned earlier, Green Mountain will also supply power in Ohio and Texas. The Ohio market opened at the beginning of this year and there are currently 39 alternate suppliers/aggregators listed on Ohio’s electric choice website. Of the eight service territories, five currently have an alternate provider (in three areas, the provider is FirstEnergy Services; in the remaining two, it is The New Power Company). The three remaining territories have no active suppliers yet, and neither of the current suppliers offer a green power product. However, GME was recently selected to provide power to over 400,000 Ohio customers. A letter of understanding between GME and Northeast Ohio Public Energy Council provides for a six-year supply contract with service to begin in September 2001.
Window of Opportunity for Renewable Energy in California May Soon Close
California’s experience highlights the vulnerability of all power marketers, not just green ones, who rely on the short-term market. Although the success of green power in California, however brief, served to create greater visibility for renewable energy, it also emphasized the necessity of owning generation assets. Green power marketers in California, and in other parts of the nation, were at the mercy of wholesale generators because, in general, that was the only place they could buy power to support their products.
The demise of small green power companies amidst the current power crisis in California is disappointing, to say the least. Environmentalists are worried that the loss of green power marketers, and the current legislative feeling in California, will lead to poor environmental decisions.
In February, a group of renewable energy generators formed a creditor’s committee in light of Southern California Edison’s ongoing failure to pay for power. Later that month, State Sen. Jim Battin introduced a bill into the legislature to formalize an agreement reached by renewable energy suppliers. However, this bill is now stalled amidst accusations that Battin had provided special perks for companies in his district (a charge he has denied). By mid-March five green power generators had announced that they would be unable to make property tax payments.
It was only a matter of time before the whole mess ended up in court. Cal Energy Operating Corp sued Edison over the issue of non-payment. Cal Energy wants to break its contract with the utility and collect the more than $75 million it is owed. On March 22, a judge ruled that the generator can temporarily sell its electricity on the open market. Following on the heels of that announcement, Edison stated it will begin making partial payments to alternative energy producers for future power purchases.
According to the utility parent, past failure to pay is due to a desire to avoid giving preferential treatment to power producers over creditors (a move that could place the utility in bankruptcy court). However, three more power producers have now sued Edison and the California Assembly recently rejected a plan to rescue alternative power companies. There is a danger in ignoring the needs of California’s qualifying facilities. QFs (including small natural gas-fired facilities) currently generate more than 20 percent of California’s electricity. The simple truth of the matter is that alternative power producers have little incentive to produce power if they are not being paid. On March 19, a Stage 3 emergency was declared by the California ISO due, in large part, to a 1,300 MW shortfall in the grid caused by alternative generator shutdowns.
The irony of the current green power situation in California is that demand for renewable power appears to be surging. The California Energy Commission reported a 500 percent increase in grant applications for the state’s solar rebate program.
The renewed interest forced Governor Davis to pledge another $50 million to keep the program from running out of money. Residential wind turbine manufacturer, Bergey Windpower Co., sold 40 units in California in January alone, compared to just six in the state last year and only 12 in 1999.
SMUD had planned to add 100 participants to its solar program this year, but already has a waiting list of 500. Renewable energy demand exists, whether it stems from environmental concern or a desire to take control over rising electricity prices. However, one of the avenues for feeding that demand is almost gone. Customers no longer have many green power options and, even in those limited cases where they do, they are prohibited from exercising choice by the current law.
The state, after creating an arena in which green power could compete, did little to ensure its survival. California has basically re-regulated its electricity market and, in so doing, eliminated the one good thing that came from its botched legislation. The green lining around California’s energy crisis cloud is gone.