Financial Alternatives for Green House Projects

When greening a house, what comes to mind is mostly renewable energy installations, particularly solar and wind power. Yet, renewable energy equipment installations will meet most of the power need of the house, but not all of it. There will be some power need left that would be met by the conventional grid. The reason behind not fully meeting the power need by the renewable power is to prevent the waste of the excess power generated from such equipments. When the goal of the project “Greening the House” is to green the power consumed by the house 100%, the rest of the power should also be greened.

In order to green the power consumed by the households, there has long been initiatives at state and federal level to support the renewable energy installations. Renewable Energy Credits have been one of the tools to green the power. Another method came from the private sector in that the utility companies charged a premium to their customers’s bills when asked for green power from renewable energy. Along with the deregulation, the market has started to become competitive in terms of both power sales and green marketing.  Regarding these issues, there are 3 financial alternatives for a household to green its power consumed at home in the traditional marketplace.

1-    Green Pricing

Under this option, power companies provide charges customers a small premium in exchange for electricity generated from clean energy sources. The premium charge varies from one utility to another and the market is still niche and not yet competitive. The premium charge varies from 2 cents/kWh to 6.5 cents/kWh. Yet, along with the deregulation, since the customers have option of choosing their own utility provider, the power generator companies develops new marketing strategy to lock-in their customers by offering lower prices in exchange for a long-term contract. That is, this alternative lowers the risk but also removes the flexibility of the customer.

2-    Renewable Energy Credits (RECs)

Cap-and-trade system has put some pressure on the utility companies to meet national emission standards and the Renewable Energy Credits (RECs) generated by renewable energy generators and account for 1 REC/1MWh, such as solar and wind power, have been supplementary tools for such utilities to meet Renewable Portfolio Standards in various states. Each utility is required to hold some RECs at the end of the year in order to meet these standards so that they will have greened their traditional power generation. On the other hand, on residential sector, those households who want to green their power from the traditional grid can also by RECs in order both to support installation of renewable energy by Utility companies and to green their own power consumed at their houses.

3-    Competitive Pricing

Along with the deregulation in Energy sector, the households can choose their utility provider and thus the premium charged for green pricing. Such a deregulation creates a competition between utilities, and households have the flexibility of choosing the best alternatives in time. The difference between this option and the first option is that, this option provides free room for the households to be flexible but with a higher risk. Furthermore, this option is good for short-term solutions.

Assessment:

Now, we can compare all these 3 alternatives and give our recommendation to the sponsor to implement in the project:

Assumptions and facts:

-    There is no dynamic pricing
-    Seasonality affects green pricing premium charges
-    The utility companies to compare are:
   o    BGE – 13.2 cents/kWh – no green pricing
   o    Delaware Electric Cooperative – 11.22 cents/kWh – 4 cents/kWh premium
   o    Appalachian Power Co. – 10.36 cents/kWh – 5 cents/kWh premium
-    RECs are purchased after each 1 MWh of energy consumed
-    Households can choose utility company from another state if opting green pricing option
-    Households can choose utility provider only within the state if opting REC option
-    2010 energy consumption is 10011 kWh
-    REC prices used as base apply to every renewable energy generation, including Solar power

    1st Alternative:

    In Baltimore, according to the U.S. Department of Energy, there is not such a green pricing in Maryland. Therefore, the available option to the consumer is to choose utility provider from another state. When we applied this option to 2010 figures of our sponsor’s house, the result would look like this:
Delaware Electric Cooperative: (11.2 + 4) * 10011 * 0.01 = $1523.67
Appalachian Power Co. : (10.36 + 5) * 10011 * 0.01 = 1537.69

    2nd Alternative:

    The REC prices varies from state to state and therefore we choose average of them. The following $/MWh prices are the base for 2010. Also, depending on the assumption, the REC purchase months are also shown in the table:



Based on these figures and electricity prices charged by BGE, the result would look like this:
13.2 * 10011 * 0*01 + 183 = 1504.45

    3rd Alternative

    The 1st alternative brings the option of choosing the utility provider to minimize the cost, yet it mentions the long term contracts to bring down risk in exchange for lowered flexibility. If the household puts more stock on flexibility, then it can avoid long term contract at the expense of discounted green price premium. Depending on the assumptions of “no dynamic pricing” and “seasonality effect on green pricing premium charges”, the following table depicts the seasonal volatility on green pricing premium charges by Delaware and Appalachian Utilities.



Using the figures from energy consumption table of sponsor’s house, we can calculate the total cost of greening the house under competitive pricing;

Delaware Electric Cooperative: 0.01*(6*2509+3.5*2477+4*5025+11.22*10011) = 1561.47

AEP Appalachian Power: 0.01*(5.5*2509+4*2477+5*5025+10.36*10011) = 1525.46

Mixture to minimize Premium Charge Cost: 0.01*((10.36+5.5)*2509+(11.22+3.5)*2477+(11.22+4)*5025) = 1527.35

The Result:



Among all these alternatives, the lowest cost option seems to be the 2nd one, where the household will buy the power from traditional grid and buy RECs from the power generators in the market. However, this option would be the lowest desired one due to its high Risk and low Flexibility features. Our sponsor should not bear the cost of volatile REC market and lock-in problem by the utility provider. Furthermore, if we look at the market under current conditions where the REC prices spike to $40/MWh, this option has the risk of bringing unbearable costs in the future. On the other hand, the 1st option lowers the risk but it also lowers the flexibility. The thing to consider here is that, we are trying to green the house at minimum cost. The intonation here is not on minimum cost, rather is on the greening part. That is to say, if there would be a better option in the future to green the house, for instance due to grid parity of Solar Power generation, then we should have the Flexibility to do so. Therefore, the emphasis should be on the “Flexibility” to green the house in a reasonable way without getting locked-in and through estimating the future.