PennFuture's E-cubed is a commentary biweekly email publication concerning the current themes and trends in the energy market.
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*Save the date!*
PennFuture In cooperation with EPA & the Center for Resource Solutions invites you to attend the Second Annual Green Power: Turn It On! Awards Luncheon.

November 15, 2001 - 12:00 to 2:00 p.m.
Omni William Penn Hotel 
530 William Penn Place - Pittsburgh

Join PennFuture and friends as we celebrate the people that are blazing the trail towards a cleaner and healthier Pennsylvania by purchasing green power, advancing policies that develop the renewable energy market, and taking the lead in creating new renewable supply!  
 
This event should be fun, informative, and inspiring. Look for more details in your mailbox soon.
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September 13, 2001
Vol. 3, No. 17

What's It Worth To You?

Nowadays people know the price of everything and the value of nothing.
- Oscar Wilde

Certainly too few consumers and policymakers understand the value of renewable energy products - products that avoid the acid rain, smog, global warming, and soot pollution caused by mainly coal-burning power plants. Perhaps with the removal of stranded cost charges from consumers' bills next year, the Duquesne Light service territory will be the first market where both price and value of renewable energy are understood and motivate large numbers of customers to buy (see case studies that follow).

Moreover, a new study published in the August 24, 2001 edition of Science, by Mark Z. Jacobson and Gilbert M. Masters of the Department of Civil and Environmental Engineering at Stanford University, shows that the "cost gap" between coal power and the cheapest forms of renewable energy is narrowing sharply, down to about 0.5 cents per kilowatt-hour (kWh). Most importantly, professors Jacobson and Masters document that the apparently slightly lower cost of coal generation is more illusion than reality, due to its real costs.

When coal generation's environmental and health costs like damage to air, water and forests, as well as human illness and death, are included in the calculation, coal generation's real price jumps to about 5.5 cents to 8.3 cents per kWh. By comparison, the 4.0 cents to 5.0 cents cost of wind energy makes it a bargain. 

"Wind energy is unequivocally less expensive than is coal energy," say Jacobson and Masters.

How Much Is That Kilowatt-Hour?
It's not surprising that few know the value of renewable energy products in electricity markets where many real pollution costs from burning fossil fuels are not included in the price of electricity and where many consumers still don't know the link between electricity generation and environmental and health damage. 

Yet lack of knowledge goes beyond value in electricity markets. Consumer inexperience with these markets and the complex transition to competition make electricity an exception to the rule that people know the price of everything. 

Even sophisticated observers don't know the price of comparative products, regardless of the added environmental and public health costs. Price transparency is a bad joke, because stranded cost charges make understanding price as easy as getting a clear view on a smoggy day in Houston.

In those states that allow customers to choose a generation supplier, few consumers and policymakers know what their local utility charged for generation prior to competition, including what are now called stranded costs. Perhaps even fewer know how prices alone, not including the stranded cost charges, of today's competitive products compare to their utilities' unbundled generation rates charged prior to competition. Or how today's renewable energy prices compare to utilities' pre-competition generation rates. 

And how many know how today's price to compare or default rate compares to the pre-competition, monopoly generation rate (which includes stranded costs)? Confusion on these basic questions is widespread and distorts perception and policy. 

It is vital for policymakers to know the answers in order to formulate wise policy (see for answers, "It's All in the Numbers," E3, Vol. 3 No. 12). But even that's only the foundation of what is perhaps a much tougher question about electricity: "What is it worth?" 

An important change that will affect the answer is on the horizon. Beginning in February, 2002, stranded cost charges will be eliminated from electric bills in the Pittsburgh area. These are payments made to Duquesne, primarily to cover its prior investments in uneconomic, nuclear generation, recovered from consumers through the Competitive Transition Charge (CTC).

The following examples of typical types of customer bills in the Duquesne Light territory illustrate comparative prices at pre-restructuring or present default rates, the new default rates that will take effect next year, and for various renewable energy products. 

These examples will hopefully clear away some of the haze surrounding the true price of renewable products.

Residential Customers
A typical residential customer (rate RS) using 600 kWh per month has been paying Duquesne Light about $75 per month since rates were capped in 1996. Of this monthly $75 bill, about $48 is for total generation costs and the rest is for distribution services.

In turn, more than $20 of the $48 total generation cost reflects stranded cost charges. Since customer choice began, all 600 kWh residential customers - including those choosing a competitive supplier - have had to pay Duquesne the same $20 for stranded costs. If customers were not required to pay Duquesne for its stranded costs, this typical customer's total bill would be less than $55, a whopping 27 percent less than it is now.

As a result of stranded cost charges, customers choosing a competitive supplier can only avoid paying Duquesne about $28 of its $48 generation rate, where the $28 reflects the "shopping credit" or price to compare that has been available. So, only if a customer could buy 600 kWh per month for less than $28, including transmission, would s/he save money by switching to a competitive supplier. 

As you can see, stranded cost charges and the weird economics and pricing they produce make it difficult to know the price of electricity, let alone the value of renewable generation. 

If our typical residential consumer purchased renewable generation today for 6.0 cents/kWh, the consumer would pay $36 for generation - $12 per month less than the historic regulated generation rate of $48. At a rate of 7.0 cents/kWh, the same consumer would pay $42 for renewable generation, or $6 per month less. The price for renewable generation must be over 8.0 cents/kWh for the consumer to pay more for it than what residential consumers paid their regulated utility for mostly coal and nuclear power. 

There are presently four competitive suppliers offering five renewable energy products in Duquesne's territory (three are Green-e certified), for prices ranging from 6.5 cents to 7.0 cents/kWh. Renewable generation today costs substantially less than coal and nuclear generation did prior to competition. Yet, the $20 stranded cost charge that a 600 kWh renewable energy residential customer must pay in the Duquesne service territory has concealed not just the value of renewable energy, but also its real price. 

Until February, a customer buying renewable generation for 7.0 cents/kWh - or $6 less than the pre-competition rate - will still have a total bill, including CTCs and distribution charges, that is $12 more than their current bill. While many might find that $12 more per month for cleaner energy and its associated benefits is still reasonable, many more who are motivated by their wallets alone probably would not. But a great opportunity is about to open up for renewable products as CTCs in the Duquesne Light territory are about to be eliminated. 

While the Public Utility Commission still hasn't established what the new regulated rates will be, it appears that a typical 600 kWh per month customer who buys generation from Duquesne/Orion will receive a rate reduction of about 16 percent, saving about $12 per month. However, customers won't receive the full savings from the elimination of CTCs because a portion will cover the costs of Duquesne's integration into the PJM-West Independent System Operator.

But as soon as the stranded cost charges are removed, a typical residential consumer could buy renewable energy products and pay less than what s/he paid for electricity under default rates, and less than s/he paid in 1996. Both the price and value will then be motivating factors for buying renewable energy.

When the CTC is removed, the residential customer using 600 kWh per month will soon be able to use the savings to buy wind energy to serve one-third of his/her load - for a total of $68, or a savings of $7 compared to today's default rate. Even if the customer were to buy all of his/her electricity from one of the new wind farms being built in southwestern Pennsylvania, the customer would pay less than $3 more per month than s/he is currently paying for default generation.

If the customer chooses a blended product with both renewable and non-renewable content for 6.0 cents/kWh, the monthly bill would be $5 less than what it is today. Even at a price of 7.0 cents/kWh, the monthly bill for a blended product would be less than $1 per month more, or only about $8 more per year, than the price currently paid for default service of mostly nuclear and dirty coal-generated power.

The end of CTCs in Duquesne's territory will allow a residential customer to switch from traditional, dirty generation to renewable generation and still save money, or pay only pennies more.

Business and Institutional Customers
The dollar impact for larger customers is somewhat higher, but equally small in the context of total electricity bills or company budgets. For example, a small commercial customer on rate GS/M, such as a restaurant or convenience store, using 10,000 kWh per month and with a demand of 23 kW, has been paying $808.52 per month for regulated or default service. 

With elimination of the CTC and the PJM-West integration costs, their bills will likely decrease about 11 percent, for a total monthly bill of about $720, a savings of about $88 per month. A small commercial customer could use the savings to buy enough wind energy to meet 25 percent of its load - saving about $26 per month compared to present bills, and still paying less for electricity than in 1996.

A large commercial/industrial customer on rate GL, such as a large hotel, hospital or a small college or manufacturer, using 1.168 million kWh/month and a demand of 2,000 kW has been paying about $69,440 per month for regulated or default service. With elimination of the CTC, the bill will likely decrease about 8 percent beginning around September, 2002, for a total monthly bill of around $63,900; a savings of about $5,540 per month. 

Those substantial savings could then be invested in purchasing renewable energy without increasing electricity bills above either current or 1996 levels. For example, a hospital could serve 30 percent of its load with a blended product for 5.5 cents/kWh and still save about $1,225 per month compared to its current default bill. Two hospitals could purchase the entire output of one of the new wind turbines in southwestern Pennsylvania to supply over 15 percent of their total electricity requirements and still save about $5,200 per month compared to their present bills. Even if a single hospital purchased the output of an entire wind turbine, enough to serve 31.4 percent of its load, the total additional cost of $3,209 per month would be only about $3,840 more per year than their current default bill.

For hospitals, which must fight the devastating health effects of dirty coal-generated power every day, how much is that worth?

Municipal consumers on rate SM for street lighting, using 110,000 kWh per month, have been paying $33,130 per month for regulated and default electricity. With elimination of the CTC, the bill would decrease to $27,220, but with the PJM-West transition costs the bill may decrease about 14.5 percent, for a total monthly bill of $28,320; a savings of about $4,810 per month.  About three municipal customers with that consumption level could join together to purchase the output of one of the new wind turbines in southwestern Pennsylvania to meet their entire electricity load and still save about $2,850 per month each, compared to their current default costs. A single municipal customer could still save about $880 per month compared to their current bill if they purchased a blended product at 6.0 cents per kWh. 

What *is* it worth?
What will renewable energy be worth to Pittsburgh's families, businesses, institutions and governments? Buying renewable is the single best thing any consumer can do to protect our environment and public health. Its value is great and its price in Pittsburgh will become less distorted with the removal of stranded cost charges from consumers' bills next year. The savings of $20 per month for a typical residential customer and much more for typical commercial, industrial, and municipal accounts, gives Pittsburgh a great opportunity to become America's first green-powered city. The price of that opportunity will cost less than what consumers paid for dirty power in 1996 or even what many are paying now. 

The value of that opportunity is priceless. 

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E-cubed is available for reprint in newspapers and other publications. Authors are available for print or broadcast.

PennFuture (www.pennfuture.org), with offices in Harrisburg, Philadelphia and Pittsburgh, is a statewide public interest membership organization, which advances policies to protect and improve the state's environment and economy. PennFuture's activities include litigating cases before regulatory bodies and in local, state and federal courts, advocating and advancing legislative action on a state and federal level, public education and assisting citizens in public advocacy.

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