MARKETING GREEN AND BANKING CARBON

Todd Davis, Steven Fine, and Phil Mihlmester ICF Consulting

Section 1: Introduction Green Power As A Product Differentiator Electric industr
y deregulation has fostered competition at the retail level in several markets,
with more states moving to open access. As electricity is fundamentally a commod
ity, enterprising retailers have sought ways to differentiate this basic product
. Capitalizing on strong environmental and “green” threads in the consuming markets,
several retailers have brought to market various blends of “green” power. This is e
lectric power that is typically generated from renewable resources, such as, sol
ar energy and wind energy (a form of solar energy). One hundred percent green po
wer can be quite expensive, so many retailers have offered “blends,” where part of t
he power is from renewable resources, and part is “system” power. Retailers have fou
nd that often, selected customer niches are willing to pay a price premium for t
his green energy. Thus, green power can be a differentiator in an otherwise comm
odity business. Target Customers Historically, green power was seen as a premium
product for a selected niche in the residential market. Typically, this niche w
as defined as affluent, highly educated customers with environmentalist leanings
. Some studies have projected this residential niche demand at up to 10% of the
market. More recently, target customers have been found in the commercial, insti
tutional, and industrial power markets. Green-oriented product companies, such a
s Columbia, have opted for green power for their facilities. Industrial companie
s, such as Toyota, opting for environmentally friendly images, have also been cu
stomers for green power. Finally, government facilities, reacting to recent exec
utive orders, are also in the market for green power. Overall, C/I demand is pro
jected at 1% to 3% of the market. Higher Margin Opportunities While green power
can and often does command a price premium, the question of margins is more comp
lex. Retail margins on green power products depend upon a variety of factors, in
cluding: • • • • • customer acquisition cost; resource availability; wholesale cost; magni
tude/concentration of customer base; competitive market rules.
Research indicates that green retail products can offer higher margins than conv
entional commodity products, even though wholesale costs are higher. Also, acqui
sition costs and churn rates can be lower if proper channels to market are utili
zed.
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Carbon Offset Credits The Kyoto Protocols, though not yet formally adopted by th
e United States, are already creating nascent markets for carbon credit trading.
For example, a recent trade of carbon credits was brokered between a Canadian e
nergy company and a German energy company, perhaps a harbinger of many such trad
e in the future. Green power intrinsically has carbon offsets embedded in it. Th
is is because the power displaces another source of carbon emissions, whether by
direct combustion or via other carbon sources, such as methane emissions from l
andfills. Much depends on the regulatory regimes for carbon and other air pollut
ants, which are ultimately enacted. Thus, there is a wide degree of uncertainty
regarding the ultimate value of carbon offsets produced by green power projects,
and as such, potentially a high degree of risk in project investment, if the ca
rbon credit potential is the key asset. Nevertheless, carbon credits from green
power – all else being equal – have minimal downside and very significant upside pot
ential. The value of these credits can produce an additional green power revenue
stream, if monetized, or can be “banked” against future upside potential. The key t
o unlocking this potential value is thorough measurement and verification (M&V)
and airtight contractual terms regarding rights to the carbon credits. Overview
of the Paper The balance of this paper explores these issues in greater detail.
Section 2 defines green power resources. Section 3 examines the growth and evolu
tion of green power markets. Section 4 explores green power margin potential. Se
ction 5 examines the carbon issue in detail. Finally, Section 6 provides a summa
ry and conclusions. Section 2: What Is Green Power? What Makes Power Green Withi
n the past five years, green power has taken on an increasingly prominent role w
ithin the electric power industry, particularly in those states that have or are
currently undergoing deregulation. As retail markets continue to open, and as c
ustomers become more aware of their power choices, the green power market, and t
he resources supporting this market, will mature into a major market force. Gree
n power is generally defined as electricity generated through the use of renewab
le resources, such as solar radiation, wind, geothermal, fuel cells, landfill ga
s, biomass, and low impact hydropower. More specifically, what makes power green
is the resulting minimal environmental impact due to its generation. Environmen
tal impacts are defined broadly by the environmental community and include land,
air, and water quality impacts. Each of these impacts is taken into account whe
n determining if a particular product should be considered green power. Many gre
en power electric providers voluntarily ask an independent third party to certif
y their products as being green in order to help make their products more market
able. Perhaps the most successful certification program was established by the C
enter for Resource Solutions, known as the Green-E
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Renewable Electricity Certification Programa. The Green-E program certifies and
verifies that green power products have met a predefined set of criteria, some o
f which include: • • • at least 50% of the electricity supply for the product comes fr
om renewable electricity resources; the product does not contain any nuclear pow
er other than what is contained in system power purchased for the eligible produ
ct's portfolio; and the company offering the product agrees to conduct an annual
third party process audit to ensure that they have purchased enough renewable p
ower to satisfy what they sold to customers.
As more and more green power offerings find their way to market, green power cer
tification will become more important to help provide customers with a sense of
security that their purchases are in fact benefiting the environment. In respons
e to this concern, the National Association of Attorneys General (NAAG) recently
developed a document titled, Environmental Marketing Guidelines for Electricity
b. This document was developed to help establish well defined guidelines for com
panies marketing electricity such as green power, and to help protect customer’s b
est interests. Competitive Sources of Green Power Although there are several sou
rces of green power technologically available today, relatively few are economic
ally competitive with conventional wholesale electric prices. The two most compe
titive sources of green power are wind and landfill gas generated electricity. E
ach of these resource’s levelized costs are typically in the range of 3.3 to 6.0 ¢/k
Whc, offering providers enough room to charge a fair premium for their product w
hile earning a legitimate margin. Another potentially competitive green power re
source option used in many programs today is small or low-impact hydro; however,
levelized cost estimates are extremely variable due to site-specific characteri
stics and require evaluation on a case by case basis. Other renewable technologi
es such as solar photovoltaics, solar thermal and fuel cells can offer attractiv
e research and development and niche/showcase projects, but due to their high le
velized cost, are generally not an option for supplying green power programs at
this time. As technological advancements progress, the relative levelized cost o
f renewables, in general, is expected to decline in the long term; however, an o
pposing force, declining availability of preferred renewable development sites,
will also cause renewable costs to remain higher than conventional resources in
the near term. Section 3: Green Power Markets Are Growing and More Product Optio
ns Are Being Offered Many Factors Encourage Green and Clean Energy Choices With
concerns about global warming and the ever increasing physical signs of environm
ental degradation from growing electrical energy use brought on by a robust econ
omy and greater demands for electricity -- significant new business opportunitie
s in offering "green" energy products exist. In addition, more and more commerci
al businesses are seeking to communicate and effectively implement green program
s. Such firms as -- Toyota, BP Amoco, Shell, and PG&E have major green initiativ
es underway. More and more energy marketers are also taking advantage of this by
offering green energy pricing and marketing programs. In addition, a growing nu
mber of states are requiring green energy to
a
www.green-e.org/ The National Association of Attorneys General, Environmental Ma
rketing Guidelines for Electricity, December 1999, www.naag.org/legislation/Gree
n_Marketing_guidelines.pdf. c Based on ICF’s work experience.
b
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be used as part of the total electric portfolio. For example, in Pennsylvania, P
ECO, West Penn and PP&L service territories, 20% of residential customers served
by the competitive default provider will be served by 2% renewable resources by
2001 and increasing by additional amounts over time. Wisconsin requires 0.5% of
retail energy sales to customers to come from renewable resources in 2001 and i
ncreasing to 2.2% in 2011. For New Jersey, the minimum standard is 2.5% in 2000
and increases gradually to 6.5% in 2012. These requirements will no doubt stimul
ate investments into green energy supply and create a larger and more diverse ma
rket for green energy. ICF has estimated that normal annual market penetration o
f green energy can average about 1% to 2% per year for retail customers. The pen
etration can even be much higher with blended products, as in the State of Penns
ylvania. This can occur even with significant price premiums over the price to c
ompare or “shopping credit” rate. The pricing premiums in Pennsylvania ranged from 6
% to 98% over the conventional offer. Green-mountain.com captured between 10% an
d 17% of customers who switched in four regional electricity markets in Pennsylv
ania, receiving about a 2% overall average market share. It is assumed that high
er acceptance occurred where the price premium was smaller -- as in the PECO mar
ket where the premium was 26% and most customers were assumed to take the blende
d product offering. The green energy market penetration in California was even h
igher -- about 40% to 50% of those customers who switched, according to industry
observers. Yet, given the small overall percentages of customers who switched,
some energy marketers exited the green energy market because of the scale and vo
lume was not there. It is estimated that between 36,000 and 46,000 residential c
ustomer selected a green power product as of May 1999 in California. Examples of
Green Power Pricing Programs and Marketing Approaches To take advantage of thes
e marketing opportunities, a number of energy marketers are offering innovative
green energy products and marketing approaches. Throughout the United States the
re are many different creative green electricity products that exist. The pricin
g designs for green energy products vary depending upon the market environment.
Green pricing programs are offered in traditionally regulated markets, while gre
en power marketers compete with other electric product offerings in markets wher
e retail deregulation has occurred. Some energy companies like WEPCO offer a gre
en pricing program as a rider to conventional rates. Variations of this approach
include custom products such as an incremental premium to buy green energy at a
rate per 100 Kilowatt (kWh) “blocks” like the City of San Antonio (TX). Their Windt
ricity™ green pricing product is sold in 100 kWh increments or "blocks" of energy.
Each 100 kWh "block" will cost $4.00 and will provide about 10% of the energy u
sed in the average San Antonio home. Customers may subscribe to any number of "b
locks" up their total electric use. In deregulated markets, green power marketer
s offer a variety of green power products. Greenmountain.com has three green pro
ducts for Pennsylvania s residential and commercial customers. The proportions o
f renewable energy are: 1%, 50% and 100% green energy. The first product is pric
ed at $.055/kWh and it includes 1% green and the balance natural gas or other cl
ean energy forms. The next product is priced at $.065/kWh, and it contains 50% g
reen energy and the balance clean energy (i.e., natural gas or solar). The balan
ce is 100% green, and it is the highest priced at $.071/kWh. This latter product
is priced about double the lowest residential commodity charge in Pennsylvania.
In addition, Green-mountain.com pledges that the green products will also have
sources that are new. Ranging from 1% to 5%. Also, the composition of green ener
gy sources is somewhat vague. In Pennsylvania, Greenmountain.com is offering sim
ilar products and prices to commercial businesses.
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Other firms have offered green energy as one of many retail products to offer cu
stomers. Over the past few years, wholesale green margins have averaged over 1/3
greater than brown or commodity margins for green energy. On the retail side, a
s in the case of Pennsylvania’s retail choice program, the premium retail price fo
r green energy has been as much as ($.07/kWh) versus $.036/kWh for regular commo
dity power. Additional premiums that exist are: $.09/kWh for IPALCO $.066/kWh fo
r Detroit Edison, $.02/kWh WEPCO, Madison Gas and Electric ($.03/kWh), to name a
few. New entrants in the California market, such as Commonwealth Energy and Uti
lity.com, are offering green power at 1% and 6% less than conventional power pri
ces. Also, in some cases this power comes from known indigenous sources. Thus, n
ew entrants can help drive down retail green energy prices. One has to question
how sustainable this business model is. The Green LA product offered by LADWP ru
ns about 6% more than conventional electricity and requires a one year commitmen
t. Other energy marketers are also starting offer similar blended rates for othe
r commercial and industrial markets in the Midwest and other regions. Some of th
ese products have not been announced yet. In fact, there are areas where offers
for new wholesale green energy are offered to retailers at substantially lower p
rices than in the past. This means that these savings over time should eventuall
y be transferred to retail customers with the right market conditions. The net v
alue from offering green electricity products, either wholesale or retail, are l
ikely to be influenced by a variety of factors -- the supply availability of gre
en sources, market demand, state rules and regulations on retail choice and how
close retail prices for the commodity reflect market prices, cross elasticity ef
fects of other energy prices (especially for larger C/I customer), and the avail
ability of new selling and buying exchanges. The APX and potential buyer exchang
es should serve to lower green energy prices further. This reduction stems from:
• • • • significant new green energy development projects underway; greater use of land
fill gas with some subsidized wholesale prices; greater use of "green tickets" a
nd power exchanges; possible creation of new buyer exchanges.
ICF Consulting feels that average margins for green energy may be in the range o
f 15% for green power premiums over system power wholesale cost. Seller and buye
r exchanges for green energy can also help stimulate this market. These advantag
es include forward price discovery, automated and autonomous matching, schedulin
g of trades and credit management. Transaction costs can also be reduced. The su
ccess of green power programs has been found to vary significantly. This is due
to the variability of the marketing programs, the pricing strategy and local mar
ket conditions. It is hard to generalize across all the programs to find some ke
y factors that leads to overall program success. However, green marketing progra
m acceptance in California and Pennsylvania has been rather high, and for some n
ew entrants as well, like San Antonio City Public Service. On the other hand, pr
ogram acceptance has been quite low, such as Texas New Mexico Power (TNP) and Ce
ntral and Southwest (CSW). A key factor of success is the program design and how
the program is differentiated and marketed to customers. Green energy programs
are niche programs and they must be marketed to customers to gain acceptance.
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C/I Markets Also Offer Valuable Opportunities Green energy represents a signific
ant opportunity for the C/I market. Currently the Federal Government has issued
Executive Order No. 13123 that requires Federal agencies to reduce their greenho
use gas by 30% in 2010. Government facilities are encouraged to use technologies
with favorable life cycle costs and renewable energy to meet this requirement.
The GSA and EPA in procurements in New England, Pennsylvania, New Jersey and Col
orado have selected green energy providers to provide a portion of the electrici
ty from green energy resources. In some regions, blended green and conventional
power supplies are being selected by the Federal government. Now, there are more
innovative buying and selling mechanisms being considered by the Federal govern
ment to help reduce the transaction costs and markups for Federal green energy u
se, in order to improve the total value of the green energy offering to the Fede
ral Government. The Federal government energy market represents a huge opportuni
ty for selling green energy. Different preferences exist by agency and buyer lev
el in the Federal market as to how much a premium the Federal government is will
ing to pay. This may range from zero premium to as much as 4% to 5%. It is also
believed that major global corporations that recognize their impact on the envir
onment are also seeking additional ways to improve the environment. Toyota, BP A
moco, and Shell have strong environmental programs. Additional commercial firms
are expected to buy green and clean technologies. Toyota also entered into an ag
reement with Green-mountain.com to buy up to 40 million kWh of renewable energy.
This will be a blended green energy product which includes up to 5% of wind ene
rgy from known sources. The Green Mountain Energysm contract serves Toyota’s Unite
d States headquarters in Torrance; Toyota Logistic Services, Inc., Toyota’s port f
acility in Long Beach; the Toyota Los Angeles Regional Sales Office in Irvine, a
nd the North American Parts Center, California (NAPCC) located in Ontario. Green
-mountain.com has also been using this method in other states which offers very
good public relations value. On April 10 of this year, Green-Mountain.com introd
uced a new power blend called “Solar for the Futuresm,” the first 100% renewable pow
er blend in the nation that specifically supports the development of new solar f
acilities. This introduction coincided with the announcement of the planned deve
lopment of a new 100 kWh solar power system – the largest solar facility in the Sa
n Francisco Bay area. Some of the recent success of Green-mountain.com, led to B
P Amoco and Lycos to invest or partner with the green energy company. Green-moun
tain.com may also be marketer to BP Amoco s service stations in those markets wh
ere deregulation has occurred and where Greenmountain.com offers products. Addit
ional marketing opportunities exist to offer clean energy options for business a
nd industry as tied to the value chain of businesses. Offering low emitting ener
gy forms can be highly cost effective for industrial firms who need to meet envi
ronmental standards. However, care must be taken to insure that customers, regul
ators, and rating agencies agree with the metrics and the composition of the ene
rgy form. Otherwise, these initiatives can backfire. Market research completed b
y ICF identified how corporations will evaluate green electric product offerings
in light of other more traditional choices. The research indicated that once co
rporations achieve some minimum threshold of savings brought on by deregulation –
(about 8% to 10%) they would then consider green options and recognizing that so
me small take back from the energy marketer would occur for the price premium. T
he interviews also indicated that a blended green and conventional commodity rat
es were preferable. Premiums that would be acceptable to businesses would vary s
ignificantly -- depending on the loads, pricing and total cost of the energy bil
l. The mark-ups for the
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tariffs would vary significantly by firm. This would require a very unique sales
and marketing approach for business and industry. A flexible pricing and propos
al offer would also be required. Marketing and Sales Approaches The marketing ap
proaches for green energy products usually include the following: • • • • • • • • • geodemo
segmentation and nine-digit zip code target mailings; public relations using wi
nd and other renewable technology site development demonstrations; concerts and
community events; neighborhood marketing campaigns; mass media advertising; coop
erative marketing and event marketing; targeted marketing through affinity group
s; point of purchase displays; direct response marketing.
Green-mountain.com has demonstrated the effectiveness of community public relati
ons in its marketing. Also, event marketing can be very effective. Using the Int
ernet and providing registration and program information is also very useful. C/
I marketing usually invokes integrating the green program with other marketing i
nitiatives and also making a few highly targeted contacts in order to get senior
executives with environmental policy and social commitments to sign on. Marketi
ng to the Federal sector is also a very different approach. This is likely to be
through a bid process. However, to be effective in this market requires advance
marketing before the RFP s are issued. For the residential market, acquiring cu
stomers for less than $50 per signup is a target number to reach. For larger acc
ounts, acquiring customers for less than $300 to $500 is a target for mid market
customers. Larger corporate accounts can have a very long sales cycle and cost
over $1,000 to attract. Green-mountain.com is probably the farthest along in cre
ating a good "green" brand and using public relations effectively. Greenmountain
.com has also won awards for its innovative marketing. This brand could also be
expanded to include distributed resource products and services when and if the c
ompany wants to expand its product line. Section 4: Carbon Credits and Green Pow
er In early December 1997, Parties to the UN Framework Convention on Climate Cha
nge met in Kyoto, Japan, and agreed to reduce greenhouse gas emissions according
to a schedule of emission targets and market-based incentives. Under the Kyoto
Protocol, 38 industrialized countries committed to reduce six greenhouse gases.
Their emissions of three gases, carbon dioxide, methane, and nitrous oxide, were
to be reduced below 1990 levels, while three other industrial gases were to be
reduced below a countryselected 1990 or 1995 baseline, all by the 2008 to 2012 t
imeframe. According to the treaty’s terms, the United States is responsible for a
7% reduction in emissions below these baseline levels. The United States signed
the agreement in November 1998; however, the agreement has not been submitted fo
r Senate ratification. The U.S. Department of Energy, through the Energy Informa
tion Administration, has encouraged the voluntary reporting of greenhouse gas em
issions through 1605(b) voluntary reporting program. This process, while establi
shing a paper trail, does not guarantee that the reductions reported under the 1
605(b) framework would be credited if a Kyoto-type carbon cap were to be impleme
nted. The U.S. Senate is currently considering legislation called the “Credit for
Voluntary Early Action Act.” This
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early-credit legislation was introduced as Senate Bill 2617 in 1998, and allows
the president to guarantee credit to organizations that have undertaken voluntar
y actions to reduce GHG emissions. This Bill has been reintroduced in 1999 as th
e “Credit for Voluntary Reductions Act.” C/I Customers, Carbon Credits and Green Pow
er United States industry is extremely concerned about the prospect of Kyoto and
the impact it will have of their relative cost competitiveness. As the vast maj
ority of greenhouse gas emissions are comprised of carbon dioxide, a company’s ene
rgy consumption is directly related to its potential greenhouse gas liability. d
The more energy intensive an industry or company is, the greater that potential
liability. While price estimates vary widely depending upon the modeling platfo
rm and the assumptions used, many forecast CO2 emissions prices of $15 to $48 pe
r ton.e Many of the same industries that are purchasing green power because they
are environmentally proactive, or want to be seen as such, are also very concer
ned about the prospect of carbon regulations – Kyoto or otherwise -- and how it wi
ll impact their business. This is illustrated by the fact that many of the compa
nies involved in the recently formed Green Power Market Development Group are al
so prominent in groups concerned about reducing greenhouse gas emissions in a co
st-effective manner. Companies such as DuPont, General Motors, IBM, Johnson & Jo
hnson, Pitney Bowes, Interface and Kinko’s which are member of the newly formed Gr
een Power Market Development Group are either also members of Pew Center Center
for Climate Change’s Environmental Leadership Council Group, or active on other en
vironmentally proactive programs or forums. Many of these companies are actively
pursuing greenhouse gas reduction projects in order hedge their potential expos
ure if carbon regulations are implemented. These companies are investing in a va
riety of projects from protecting rainforests in Central America to purchasing l
andfill gas emissions reductions. And, although their carbon emissions reduction
activities and their green power purchase activities are linked by their desire
to be environmentally proactive, few electric retailers have taken advantage of
this connection. The Connection between Green Power and Carbon Credits Green po
wer, by its very nature, contains embedded carbon reductions. For most renewable
sources of power, these reductions result from the emissions offset from the el
ectric grid. Many renewable entities report the CO2 emissions reductions resulti
ng from their renewable projects through the EIA’s 1605(b) voluntary reporting pro
gram. EPA has proposed a voluntary program under the SIP Call that would credit
grid displaced NOX emissions in a similar fashion. In addition, some renewable s
ources of power that utilize fugitive methane emissions like landfill gas genera
tion, contain additional carbon offsets that may be used to generate CO2 offsets
over and above those displaced from the electric grid.
d
According to the U.S. Energy Information Administration, CO2 accounted for 83 pe
rcent of 1998 U.S. greenhouse gas emissions. e This is comparable to a range of
$54 to $175 per metric ton Carbon for scenarios that include limited internation
al trading between Annex I countries. See Energy Information Administration, Imp
acts of the Kyoto Protocol on U.S. Energy Markets and Economic Activity, October
, 1998 Page 8
Potential for Packaging Green Power and Carbon Credits We believe that there exi
sts a market for C/I customers that are concerned with both promoting their envi
ronmental values and protecting themselves from potential carbon regulations. We
also believe that these customers will be willing to pay a premium for green po
wer that comes packaged with “legitimate” carbon offsets. In the current carbon emis
sions market, prices generally range from $0.50 to $2.00 per ton CO2. This can b
e translated to a kWh basis based on the emissions reductions resulting from the
green power being sold, and ranges up to approximately 2 mils/kWh. This represe
nts the greenhouse gas premium that would exist on top of the green premium. The
inclusion of greenhouse credits in a green electricity product presupposes seve
ral very important points. The first is that clear and unambiguous legal title o
f the greenhouse gas emissions reductions has been obtained. This is not a simpl
e issue, and can be expected to be a source of major contention as an increasing
number of companies start paying an greater level of attention to greenhouse ga
s emissions issues. Buyer Beware To illustrate the potential contentiousness of
the issue, take a typical landfill gas renewable energy project and the emission
s reduction claims that one often sees reported in EIA’s 1605(b) voluntary reporti
ng program. The emissions reductions from projects often are triple reported by
the three parties that are typically involved in such a project: the landfill ow
ner, the project developer, and the electric utility that is purchasing the elec
tricity. Under any type of real carbon crediting regime, these emissions reducti
ons could be counted only once. As there is no a-priori designation of emissions
reduction ownership, the determination of who the rightfully owns the emissions
reductions is assigned contractually. Without clear legal title to the emission
s reductions, it would clearly be spurious to sell them. While we believe that i
t is perfectly legitimate to package emissions credits with green power, energy
retailers need to be cautious about sellers of renewable power who attempt to “dou
ble dip” from the sales of green power to one party and emissions reduction credit
s to another. When a customer or enduser purchases green power for a premium, th
ey are doing so because they believe that power to be “legitimately” green. By disas
sociating the emissions reductions in the form of potential credits from the pow
er itself, one fundamentally strips the power of its green attribute. One could
certainly sell the emissions reductions from such projects, assuming legal title
is established, but then one would be left with commodity power to sell into th
e grid, not green power which would command a premium. Section 5: Summary and Co
nclusions This paper has defined green power resources and has offered a rationa
le for commodity differentiation via this resource. The growth and potential of
green power markets has been examined, with reference to experience in key open
market states. Potential for higher retail margins on green power products has b
een examined. Finally, the paper has presented an overview of the complex issue
of carbon credits associated with green power. Key conclusions are as follows: • • G
reen power can be a retail product differentiator in both residential and C/I ma
rkets. While a niche market, the market size and growth potential for green powe
r are significant. Demand exceeds supply.
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• • • •
Margins for green power can exceed those for conventional brown commodity, with
less churn. There are risks associated with a green power offering. The relation
ship between green power and carbon credits can offer significant upside value p
otential. Credits may provide the extra value added that C/I customers are looki
ng for. There are significant uncertainties regarding the value proposition of c
arbon credits from green power, which need to be fully accounted for.
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