Green designs: Corporate demand pushes new generation of utility green tariffs
Utilities are rolling out more sophisticated green tariffs to satisfy corporate sustainability goals. Can they prevent key accounts from defecting to independent suppliers?
Corporations are hungry for green energy — nearly half of Fortune 500 companies have climate or renewable power goals, according to a recent report.
Utilities know they must satisfy this growing demand or risk losing business to independent renewable energy developers. To do so, many are designing innovative rate designs — labeled green tariffs — to provide wind and solar power to corporations like Facebook, Yahoo and Amazon.
Green tariffs have come a long way in recent years as renewable energy costs decline and corporate demand intensifies. The first generation were relatively simple — typically involving utilities charging a premium price for the output of a renewable energy facility or purchase of renewable energy credits.
But now, as the cost of long-term PPAs with independent power developers drops, utilities are developing more sophisticated tariffs to satisfy a new generation of corporate goals and customers.
To date, 13 such green tariffs have popped up in seven states, with seven being added in 2016 alone. Since 2013, green tariffs have helped spurred 900 MW of new renewable energy capacity, and another 400 MW are currently under negotiation through long term power purchase agreements and contracts.
“Large corporate electricity customers have been driving the renewables market and the demand is growing,” said Roger Ballentine, a former Clinton White House climate and environment officer and current president of Green Strategies, a sustainability consulting group.
“New buyers with new load, especially data centers, are driving new attention to green tariffs by utilities in regulated markets,” Ballentine said. “But the early experience has been at best mixed and maybe even disappointing because regulated utilities have been slow, and in some cases, reluctant to respond to demand.”
That’s beginning to change as more corporations look beyond default utility service to satisfy sustainability demands. To keep these customers, Washington’s Puget Sound Energy and Nebraska’s Omaha Public Power District both broke ground on new green tariff designs last month that go beyond just providing contracts to corporate buyers.
If they prove successful, the tariffs could open a new chapter in utility service. But whether they will prevent key customers from defecting to the open market remains to be seen.
Puget Sound Energy – a new type of green tariff
Puget Sound Energy (PSE) rolled out a green tariff last month designed to meet demand from existing commercial customers and pave a pathway for bill savings.
Letha Tawney, director of utility innovation from the World Resources Institute, said the tariff stands out from other tariffs offered by companies Duke Energy, NV Energy or Rocky Mountain Power.
Unlike those, “it allows the aggregation of smaller commercial customers,” Tawney said.
PSE, Washington state’s biggest investor-owned utility, has contracted as the off-taker for a 130 MW wind project and will aggregate subscribers for its output. In that way, it will be similar to a community shared renewables installation, Tawney said, but on a much larger scale. However, the project does not rely on net metering—a popular compensation scheme for distributed generation owners sending excess energy to the grid — nor will it shift costs to other customers.
The new tariff is to meet the demand from mid-sized commercial and institutional customers, said Thomas Maclean, manager of customer renewable energy programs for PSE. They do not have a large enough load to contract for the output of an entire utility-scale renewables project, “but they want a renewables product with the key characteristics of the Buyers' Principles.”
The Buyers’ Principles are a group of six standards designed by a group of corporate customers to guide renewable energy purchases and utility green tariffs.
According to the guidelines, an ideal green tariff must offer a wide range of cost-competitive renewables options in long-term, fixed price contracts. Procurement of renewables must be “additional” to the utility’s portfolio and available to the customer through a simple, standardized power purchase agreement (PPA) or lease. And the tariff structure must include the renewables’ net costs and benefits without imposing costs on other customers.
The PSE green tariff is the first to meet all six principles and to allow aggregation of smaller customers, Tawney said.
Maclean said a central feature is PSE’s transparent billing arrangement, which was worked out by the rates department. Customers’ bills will show a charge for the delivery of the renewable energy and a credit for the utility energy they do not use.
In simplified terms, the charge for the wind generated electricity, based on PSE’s PPA, will be $0.052/kWh, with a 2% annual escalator. The credit for electricity not used would be $0.047/kWh.
That means the PSE green tariff would initially cost more than default service, but that could change as the price of PSE’s electricity fluctuates and the escalator is applied to the renewables charge. In effect, Maclean said, it offers customers a hedge against future increases in the power price.
“Will the price of electricity increase at 2%? 4%? 1%?” Maclean wondered out loud. "That’s the question that the customers have to decide.”
Subscriptions to the wind project’s output will allow 10- to 20-year fixed price commitments. Though PSE’s PPA with the wind project developer is for 20 years, the 10-year option has been the most commonly chosen, Maclean said.
The rate attracted strong early attention, with 75% of the wind farm’s output already finding subscribers since it was introduced last month. A second round for subscription began earlier this month, and already attracted more interest.
Omaha Public Power District – Facebook strikes again
Nebraska’s Omaha Public Power District (OPPD) is the first public power utility designing a green tariff, with Facebook expected as its first customer.
The social media powerhouse was instrumental in designing the new Rate 261-M tariff, according to Jamie Freeman, an OPPD pricing and market analysis consultant. It is an extension on an earlier rate structure that includes minimum size and demand requirements and includes greater flexibility for the customer, such as the ability to “wheel” power from a wind or solar facility directly to the customer.
The new rate was reportedly key in getting Facebook — a signatory of the Buyers’ Principles — to site a new data center in Nebraska, and it’s far from the first time the company has used its market power to design a new rate. Facebook was also instrumental in the design of Rocky Mountain Power’s Schedule 34 tariff and the Rider 47 tariff from Public Service of New Mexico.
The company made its role in the design of Rate 261-M and other green tariffs public in its announcement of its new Nebraska data center.
“We worked extensively with local utilities in the creation of several [tariffs],” Facebook Spokesperson Lindsay Amos told Utility Dive. The objective is to make them accessible to other companies “to grow the market for clean energy.”
OPPD’s Freeman said Rate 261-M came from three months of intense negotiations with policy specialists from Facebook and Yahoo, also a Principles signatory.
“The key was a balance between the needs of the data center customers and the need to maintain fair, reasonable, and non-discriminatory rates for our other customers,” Freeman said.
Green Strategies’ Ballentine said this concern with fairness to other customers can often be a stumbling block in tariff design.
“Utilities often have arguments that make it difficult to get to a product that corporate customers can use,” he said, “and the first is often a concern with the cost shift.”
Though it can be challenging for utilities, the solution is transparency of the utility’s costs and benefits from renewables, Ballentine said. “Corporates want to avoid shifting costs to other customers, too. They want as many customers to participate as possible because it can drive the economies of scale that can reduce costs.”
OPPD and its data center partners sidestepped this stumbling block in their strategy to protect other utility customers, according to Freeman. The difference between 261-M and existing rates is that a green tariff customer’s energy is priced on the bill at the regional market rate, while their fixed costs are bundled into a single demand charge on the bill.
“It was key because we’re willing to work with you, we're willing to be creative, we’re willing to push, but ultimately you have to pay your cost of service,” Freeman said.
An additional protection built into the rate limits customers with loads of 20 MW or less to smaller transmission lines and allows only customers with loads of 200 MW or more to access OPPD 345 kV lines.
The demand charge for existing commercial customers is now an estimated $12.66/kW while the charge for 261-M customers is $22.45/KW, Freeman said. But linking the energy charge to the Southwest Power Pool market rate allows data center operators to arbitrage lower cost renewables-generated power to offset the higher fixed costs, he added.
Facebook has not yet contracted under 261-M, but it has begun construction of its new data center and is reviewing renewable energy options, Freeman added. “Yahoo already has one of its biggest data centers here.”
Will green tariffs keep key accounts?
Facebook is far from the only tech company to push new utility green tariff designs.
Amazon Web Services was central in the design of Dominion Virginia’s unique Schedule MBR green tariff. It gives Amazon and other companies using the tariff “the ability to tap into PJM’s wholesale market pricing and enables a PPA, but allows the buyer to remain a Dominion customer,” Tawney said.
Microsoft Director of Energy Strategy Brian Janous told Utility Dive he worked closely with Wyoming’s Black Hills Energy on the design of its Large Power Contract Service. Though not actually a green tariff, Tawney called it “positive” because it could drive the utility’s decision to build new renewables.
More often than not, these new tariff designs are being welcomed by regulators and stakeholders.
In Nebraska, the OPPD Board of Governors approved the new 261-M tariff unanimously, Freeman said. “The Board saw this rate as an example of the kind of opportunity for sustainable growth we are looking for."
Maclean said PSE was also "pleasantly surprised" to encounter little hostility from intervenors at the Washington Utilities and Transportation Commission.
“Most were just raising the usual ‘is this going to cost me anything?’ or ‘how do I play?’ questions,” he said. “The commission was aware of this as a way for regulated utilities to meet customer demand for renewables and was very supportive.”
Others who have shepherded green tariffs through regulatory scrutiny report similar responses.
The increasing demand from big corporate electricity users for renewable electricity “is why the Utah commission quickly approved the new tariff,” Rocky Mountain Power COO Gary Hoogeveen told Utility Dive. “The commissioners are very aware of the market dynamics and our need to both protect our existing customers and be flexible enough to attract new load.”
Commissions are responding quickly and favorably because they are aware the tariffs bring economic development to the state, WRI’s Tawney said. They also now understand that properly structured tariffs won’t shift costs to other customers.
Though controversial, the Xcel Energy Minnesota green tariff won commission approval last year and recently opened the program to customers. Xcel Colorado's tariff, which will be the next "community renewables-like" green tariff program, is approved but not yet offered, Tawney added.
But even with utility green tariff innovation, customer defections are still a threat.
Microsoft, PSE’s biggest single customer, has asked for regulatory approval to terminate service with PSE and purchase its power directly from electricity markets. Wal-Mart, Sam’s Club, Kroger, and other industrial customers are reportedly considering a similar move.
Microsoft is a uniquely large and sophisticated company that may, unlike most utility customers, successfully engage directly with the markets, Tawney said. It can also take in stride the $23.6 million termination fee regulators would impose to allow PSE to cope with the revenue loss.
“Different corporate buyers have different strategies for meeting their renewable energy goals, based on their energy use,” Tawney said. “The emerging range of renewable energy products, offered by both utilities and third parties, points to a maturing and important market for clean energy in the U.S.”