Vanishing Renewable Energy Premium in Texas's Retail Pricing PlansPosted to AESP
- Aug 25, 2020 3:38 pm GMTAug 25, 2020 3:48 pm GMT
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By Jay Zarnikau and C.K. Woo
It’s always been assumed that one needs to pay a premium. Traditionally, consumers who are environmentally conscious have paid a premium to enroll in voluntary “green pricing programs. These pricing plans have allowed customers the choice of paying a little more on their electricity bill in exchange for receiving electric energy with higher renewable energy content.
We recently analyzed 710 retail pricing plans offered in December 2018 by Texas’s competitive retailers to residents in Dallas, Houston, Corpus Christi, and Abilene and found something interesting: the renewable energy premium has disappeared, as we report in a recent article in the journal Energy Policy.
The Answer is Blowing in the Wind
Since January 2002, most Texans can purchase electricity from their pick of multiple “retail electric providers” (REPs) that offer a variety of pricing plans and services. REPs often differentiate their plans by renewable energy content, mostly clustering at the 10%, 15%, 50%, or 100% levels. For example, a recent review of the state’s PowerToChoose website shows that 17 REPs offer 35 different rate plans with 100% renewable energy to consumers in Houston.
Enabled by transmission infrastructure projects, federal tax credits, a favorable business environment, and a vast resource potential, wind energy has become a major share of the State’s generation mix. At the end of 2018, 28,638 MW of capacity was enrolled in the state’s Renewable Energy Credit Program -- far in excess of State’s 2025 target of 10,000 MW of renewable generation capacity. In 2018, wind farms provided 18.6% of the energy requirements in Texas’s wholesale electricity market (ERCOT), while solar energy contributed 1.3%. Thus, we might expect an average renewable energy content of around 20% for electricity sold in ERCOT.
Historically, voluntary retail pricing plans with higher renewable energy content generally had higher per kWh prices – i.e., carried a price premium – relative to electricity pricing plans with less renewable energy content.
Our Analysis of Pricing Plans
To examine Texas’s renewable energy premium, we performed a regression analysis of the residential pricing plans available in four cities at the end of 2018. This analysis estimated the effects of various attributes on a plan’s price, for example a plan’s renewable energy content, contract length, and minimum usage requirement. We also looked at other features that can affect price, like pre-payment, “free kWh” on weekends, time-varying pricing, and price certainty.
In the past, customers have paid more for plans that offered a greater mix of renewable energy sources. But in our analysis we found the following, based on data from late 2018:
1. There is no longer a significant price premium for the plans’ renewable energy content; and
2. A weak price discount was associated with higher renewable energy content for customers with
monthly consumption of 1,000 kWh.
The following scatter plot illustrates these conclusions. The plans are clustered at a few levels of renewable energy content. There is a wide range of prices associated with these plans, but no relationship between prices and renewable energy content.
Additionally, we found a price premium associated with pre-pay programs and time-of-use plans that contained a “free kWh feature,” such as free weekends or free evenings. Sometimes, “free” comes at a price! We found no clear relationship between the reputation of the retailer (as measured by complaints about the retailer reported to the Public Utility Commission of Texas) and the retailer’s level of prices, all other variables held constant. Due to the presence of fixed charges in retail pricing plans, average prices tend to decline with higher levels of monthly electricity consumption. Prices tend to be lower in the larger cities of Houston and Dallas, relative to the smaller markets of Abilene and Corpus Christi. Longer contract terms tended to have higher prices.
Have Renewables Reached “Grid Parity” with Fossil Fueled Generation?
Is Texas unique? Does electricity from renewable energy sources cost about the same as generation from fossil-fueled power plants?
Perhaps Texas is somewhat unique. It is the leading state in installed wind capacity and has an abundant solar and wind potential for further renewable energy development. And, its “energy-only” market differentiates it from other wholesale electricity markets in the U.S.
That said, renewable energy has become increasingly cost-competitive relative to natural-gas- and coal-fired generation in many markets throughout the world, implying that the renewable premium in these markets will likely vanish soon, similar to what we have found for Texas.
For AESP members involved in marketing green pricing programs, a vanishing price premium many be one less obstacle to increasing the participation in such programs. Rate design professionals may wish to re-examine the rates associated with these programs to determine whether premium prices remain justified.
Texas has reached a point where there is no longer a premium associated with renewable energy, and the cost of renewable energy development is expected to continue to decline.
Jay is a vice president at Frontier Energy. A former AESP Board member, Jay also teaches courses in economics and statistics at The University of Texas and has authored or co-authored over 80 articles appearing in academic and trade journals. C.K. Woo teaches microeconomics and regulation at The Education University of Hong Kong and has authored or co-authored over 150 refereed journal articles.