Mark Brandon is the Managing Partner of First Sustainable (http://www.firstsustainable.com), a registered investment advisory catering to socially responsible investors. In addition to Socially Responsible Investing (SRI), he may opine on social venturing, microfinance, community investing, clean technology commercialization, sustainability public policy, green products, and, on occasion, University of Texas Longhorn sports.

Saturday, January 14, 2006

Whole Foods and the Future of Green Power

Austin is a great town for the green-loving, tree-hugging, hybrid-driving crowd. We not only have the most successful green power program through Austin Energy. We also have the prototypical tree-hugging corporation in the organic grocer, Whole Foods Market. This week, Whole Foods became the largest private consumer of renewable energy in the nation with a 458-million kilowatt-hour purchase of wind energy credits. That is enough to offset the energy usage at all Whole Foods Stores. The way these deals work is that they buy the credits through a producer like Colorado-based Renewable Choice Energy. Although their stores may be hooked up to grids using non-renewable power, the renewable electricity is brought online to offset the use of another consumer who would otherwise be using non-renewable sources.

Back to Austin Energy. I have been a customer of Austin Energy's Green Choice program for three years now. Green Choice means that the equivalent kilowatt-hours we consume in our home is purchased from a wind or solar provider. For a couple of years, the rate I was paying to be green was about 35 percent higher than the typical Austin Energy customer who used the basic (non-renewable) service. Last year, as natural gas prices spiked, however, my bill remained the same while the basic customers saw a fifty percent increase. My bill is now cheaper AND greener. Green Choice customers lock in their kilowatt-hour price for 10 years.

Therein lies a great model for utility companies, who love nothing more than locking in rates of return. Every couple of years, Austin Energy puts out a bid to buy the electricity production of a renewable energy plan, or the "offtake". Wind always wins. Solar production is not quite there yet (although AE runs one of the largest solar plants in the nation, too). AE offers to buy the offtake for 10 years. The wind farm developer, whose costs are fixed in the up-front purchases of wind turbines, needs this kind of contract to get financing for the project. AE then signs up enough customers in the Green Choice program to consume that offtake. When they reach the number of new Green Choice customers, they freeze the program. If their Green Choice customers consume more electricity than the wind farm produces, AE has to buy renewable energy credits on the spot market, a more expensive proposition. But, the green choice customers get a locked in cost of energy. The utility gets a locked in wholesale rate. The wind farm gets their contract.

Everybody is happy, and able to project their income and costs years out into the future, which is what utility company shareholders want. However, there is room for improvement. While researching a paper in grad school (which I never actually finished), I discovered one hitch in AE's program and others like it. While utilities put out 10 year contracts to bid, financing institutions who lend money to build wind farms like to see 17 year contracts before they are willing to lend. Without the 17-year contracts, the developers need to put up more equity. More equity reduces the number and size of projects going forward. The seven year difference is holding wind and solar back!

Dealing with the fluctuating costs of their feedstock -- whether coal, oil, or natural gas -- has always been the curse of any electric utility. In most cases, regulators only allow the utilities to charge a politically-expedient amount and the rates of increases are usually reined in as well. If the commodity price spikes before regulators let their rates catch up, the utility just has to eat the difference. Wind and solar eliminate this problem. Green programs like AE's should be expanded.


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