Environmental Futures Inc.
As robust competition begins to emerge in restructured electricity markets, the dissemination of electricity information to consumers and regulators will play an increasingly vital role. The need for reliable information, critical to building consumer confidence in nascent green power markets, underscores the importance of developing legitimate tracking systems to validate claims made by power marketers about their electricity products and supply portfolios.
Policies mandating electricity disclosure and labeling require that power marketers provide information to consumers about the attributes of electricity products. Information about electricity generation sources and emissions are most often included in disclosure and labeling requirements. Thus far, more than 20 states have enacted or recommended standards for disclosure and labeling.
Electricity certification is also increasingly used as a way to help consumers identify independently certified “green” or “environmentally friendly” products.
Tracking systems are needed to monitor compliance not only with disclosure and certification, but also with policies such as renewable fuel standards, which require retail power marketers to include renewable energy as a portion of their electricity sales.
Since it is physically impossible to track electrons, energy industry stakeholders have proposed tracking systems that follow the flow of dollars from customers to marketers to generation sources. Three primary tracking methods have been proposed: 1) settlement-based, or contract path method, 2) tagging, and 3) a hybrid of the two.
The settlement-based, or contract path, method is one tracking option currently being considered in New England. This approach would rely upon either an independent system operator`s financial settlement system for wholesale electricity transactions, or an audit of bilateral contracts to track environmental attributes. Under this method, if GreenCo made a wholesale purchase of 10 units of electricity from Acme Wind Plant, then GreenCo could sell 10 units of wind electricity to its retail customers. With this type of tracking, electricity and its attributes would be bought and sold together. In order to assign attributes to purchases where a specific source of generation is unknown, this method would need to establish certain protocols. For example, spot market purchases or transactions involving system power could be assigned attributes by either assigning them the system average or solving simultaneous equations.
Proponents of settlement-based tracking suggest that it reflects the reality of the electricity market by bundling energy transactions and energy attributes, and that it makes best use of existing centralized infrastructure, such as an independent system operator`s settlement system. Critics suggest that settlement-based tracking is complex and rigid. They also argue that its strict allocation of generation to suppliers based on a settlement system may not provide power marketers with the accounting flexibility to create green power products that are 100 percent renewable.
Another proposed tracking approach is tagging. Under this approach, a green power marketer could sell electricity and electricity attributes separately. For example, when Acme Wind Plant generates 10 units of electricity, it would receive wind tags for 10 units of electricity. Acme Wind Plant would then have two options. It could sell the electricity and the wind tags to the same buyer, or, it could sell 10 units of electricity to Energy Inc., and then sell the corresponding wind tags to another buyer, say GreenCo. GreenCo, in turn, could buy electricity from another power generator, VoltCo, and attach the wind tags purchased from Acme Wind Plant to those 10 units of electricity. The tagging approach, in effect, creates two wholesale markets, one for electricity and one for tags.
Advocates of the tagging approach highlight its simplicity and flexibility. They also suggest that tagging allows for the creation of a secondary market for attributes, or tags, that might ultimately accommodate credit trading associated with portfolio standards. Opponents of tagging, however, point to market research conducted by the National Council on Competition and the Electric Industry that suggests that consumers may find a settlement-based system to be more credible than tagging. A real life example of tagging is provided in California, where the Automated Power Exchange, a for-profit entity that administers a wholesale green power market in California, recently implemented a tagging system. According to California laws, only power marketers that wish to offer products different from the average system generation mix are required to support their claims. Other power marketers can simply disclose the average system mix.
The hybrid tracking approach, which has been proposed in New York electricity markets, would combine the settlement-based and tagging tracking methodologies. The proposed hybrid system would be administered by the independent system operator in New York. Under the hybrid approach, bilateral transactions made directly between a known source of generation and a supplier would use a settlement-based method to allocate environmental characteristics to products. Spot market transactions, however, would utilize a tagging system to determine the generation and emissions attributes assigned to products. Every so often (e.g., monthly), tags representative of spot market electricity attributes would be sold through an auction to spot market customers. Spot market customers could purchase green power tags for their electricity purchases. Spot market customers electing not to purchase any tags in the auction would be assigned the characteristics of residual tags that were not purchased in the auction.
The Federal Trade Commission asserts the settlement-based and tagging methods can “succeed in matching the premiums that consumers are willing to pay for green power to the generators who invest in and produce that power.” However, electric industry stakeholders are still trying to determine which system will pass the customer credibility test long-term and will provide the accuracy and coverage required to monitor compliance with portfolio standards.
Whichever tracking system is implemented, a central information clearinghouse such as an independent system operator will need to function as an administrator. Increasingly, the regional debate over tracking will surface as a national issue. Already, the neighboring electricity systems of New York and New England are considering separate tracking proposals.
For more information, call 617-443-1381 or email larry_alexander@ envfutures.com.