Winds of Change
Austin Energy Poised to Make Competitors Green With Envy
Renewable energy consultant Mike Sloan is a typically cheery soul who sees no reason to stop at one breakfast roll when two have caught his eye. But these days, he's positively beaming. Wind-powered generators, long shunned by Texas electric utilities, are primed to break into the state's energy market on a scale unthinkable since the Reagan era. By this time next year, 350 megawatts of new wind power are scheduled to come online; by 2003, Texas wind farms could be cranking out as much as 2,600 MW of electricity. That's but a slight jolt on the state's electric power grid, which can generate a total of around 70,000 MW, but it's triple-digit annual growth in an industry that five years ago was being sold mostly door-to-door to farmers and hobbyists. "It's inevitable -- wind is gonna be a winner," says Sloan, a 12-year veteran of the renewable power industry who remembers well the days when wind turbines harnessed mostly tax credits. Never before has Texas, a province of petroleum interests which ranks dead last nationally in its use of renewable fuels, created such a fertile environment for renewable power development, he says. Last year's landmark electric utility restructuring bill, Senate Bill 7, forces the state's privately-owned utilities to open their service areas to competition by 2002 -- and, in a surprising victory for environmentalists, requires that at least 2,000 additional MW of electricity come from renewable sources by 2009.
Utility boards have since been scrambling to buy renewables, and wind turbines, cheaper to build and operate than solar panels or landfill methane plants, are the preferred ticket. Sloan -- whose consulting firm, Virtus Energy Research Associates Inc., advised the Legislature during the 1999 session -- says that Texas is now the hottest renewable energy market in the U.S. "If we can't make it as an industry now," he says, "it's our fault."
In fact, however, the long-term viability of renewable energy may depend more upon the will of the Texas populace than on the industry's business acumen. European technology has drastically improved the efficiency of wind turbines over the past decade, but so far, the price of wind energy still hasn't dipped low enough to compete with natural gas or coal-fired power plants. Utilities and wind farm operators won't say exactly how much it costs to buy the wind in Texas, but will allow that the price is between 10 and 20% higher than the cost of electricity from natural gas.
While that extra cost would add only a few dollars per month to the average customer's electric bill, Texas utilities are standoffish about imposing that increase on the general population. Instead, "green power" marketing campaigns are springing up across the state to sell the electricity generated by wind and other renewable sources at a premium to voluntary subscribers.
It's a strategy that frustrates die-hard believers, who say premium pricing relegates renewable energy to the "health food" section of the utility supermarket, when -- from an environmental-cost perspective -- it's the biggest bargain.
"It's trying to get us to settle for a boutique store when we ought to be able to own the whole mall," says Michael Osborne, a wind energy consultant for Enron who serves on Austin's Resource Management Commission. "Why not have 'brown' rates instead?"
As skies over the state's metropolitan regions darken under clouds of smog, environmentalists will continue to preach about the true costs of burning fossil fuels, the No. 1 source of ground-level ozone. They'll continue pointing out that:
That's not to mention the local revenues that flow out of the state with the purchase of every trainload of Wyoming coal or tanker of oil from the Middle East. But are Texans ready to hear the Green gospel? Utilities aren't betting on it.
Renewable energy "will not replace fossil fuel," says Larry Jones, spokesman for Dallas-based Central and South West Corporation, the largest utility company in Texas. "It offers a lot of promise, but you have to be very careful not to create too much expectation." Central and South West was the first utility in the state to contract for a large-scale purchase of wind power, a year before the passage of SB7. In 1997, after polling its customers and finding that over 80% said they'd pay up to $1 a month more for renewable energy, CSW offered San Angelo customers a green pricing program.
Two years later, the company didn't renew the program. Jones says customers' lukewarm interest, price controls set by the state Public Utility Commission, and future fuel price fluctuations persuaded CSW not to invest in renewable energy beyond what SB7 requires. Other utilities have taken note of the indifference that greeted the CSW program.
"Everyone says [renewable energy] is great, and they love having the option, but when the bill shows up, participation levels are not equal to what people's stated interest has been," says Matt Haecker, head of new product development for City Public Services in San Antonio. CPS is set to launch its own green pricing program, but the price for subscription will be high because the utility refuses to subsidize any of the accompanying marketing costs or absorb the capital costs of new wind plant construction into its overhead.
Sloan argues, however, that utilities haven't tapped the true selling power of renewable energy because their marketing has been all wrong. In many cases, utilities have attempted to use renewable energy as a marketing gimmick, repackaging electricity they were already generating at hydroelectric dams as "green power" and asking subscribers to pay more for it. Other utilities, like San Antonio's, make subscribers pay for advertising and capital start-up costs by building those expenses into the rates. "You can always go in and find ways to screw the program up," Sloan says, "but there are a lot of marketing approaches, and we haven't tried all of them yet. One of these days, we're going to figure out how to make it work."
One green marketing effort that renewable energy advocates believe has not been screwed up was posted on billboards in Austin just last month: the Green Choice program from Austin Energy. As a municipally owned utility, Austin Energy doesn't have to open its market to competition under SB7; but, if it chooses to do so, the Green Choice program could be crucial to hanging on to environmentally conscious Austin customers. "We believe if people really understand our program," says Mark Kapner, AE's manager of conservation and renewable energy, "many, many people will sign up for it." The utility says renewable energy through Green Choice will cost the average residential customer about $4 per month -- price-wise, the best renewable energy deal in the nation.
But the truly unique feature of the AE program is that it locks subscribers into an unvarying rate that's not affected by the volatile price of natural gas, the fuel that powers about 30% of AE's generation. Over the past four years, natural gas prices have accelerated steeply during extreme summer and winter weather, driving up ratepayers' yearly electric costs. Kapner, a former solar energy entrepreneur whom the Austin utility hired last year for the express purpose of marketing Green Choice, says AE's program is the first he's ever seen that's designed to appeal to the general populace. "We certainly think we have a better shot at making it work than anyone else in the country," says Roger Duncan, AE's director of environmental programs.
To market such a good deal, however, Austin Energy has to pony up a sizable ante -- $78 million over the next 10 years. That's the total purchase price of the renewable energy the utility has contracted for. About half of that will finance the construction of a 20 MW wind farm in Upton County, south of Odessa. The rest will go to pay for six landfill methane plants. Kapner says that even though AE is spending about twice as much on renewable power as it would cost to produce the same amount of power using fossil fuels, subscribers to Green Choice won't have to pay double because the utility is selling it at roughly half price.
The power is relatively expensive, Kapner explains, because wind still costs a lot more than coal, which powers more than 40% of the utility's capacity. But Kapner says his employer is willing to commit to the subsidy because Austin Energy, which already purchases 10 MW of power from an existing wind plant and has installed solar generators at about a dozen locations across the city, wants to be a national leader in promoting clean energy. The utility is also under a mandate from the City Council to derive at least 5% of its power from renewable sources. To that end, he says, it's necessary to absorb some of the initial capital expenses of bringing new wind turbines online while the utility builds a customer base for renewables. "Austin Energy is becoming increasingly sensitive to what fossil fuel burning does to the environment," he says.
But even in ecologically minded Austin, AE is not about to force its concern, in the form of higher prices, on its customers. "We do think renewables are going to become less expensive," says Kapner, "but the issue of choice is going to be with us for a while."
Which means that, ultimately, the Green Choice program is a referendum on renewable energy in Austin: The number of customers who subscribe will determine how much Austin Energy provides in the future. If demand exceeds the current contract, Kapner says, the utility will buy more.
So far, Austin Energy has sold about 15% of its available renewable energy -- its list of subscribers includes about 1,000 residential customers, and 13 large commercial users such as IBM, Advanced Micro Devices, Samsung, the Heart Hospital of Austin, and several area hotels. Sloan says Green Choice is winning subscribers because people recognize that it can make a real difference. "Customers want to see new stuff on the ground that actually will displace the dirty stuff," he says. "And you're going to get so much more volume with a program that's priced right, where the customer really thinks they're getting a good value."
You certainly won't hear local wind farmer Walter Hornaday complaining about green energy programs like Austin's. Hornaday's company, the Texas Wind Power Corporation, holds the contract with Austin Energy to build and operate the new Upton County plant, which should start generating this fall. The deal with AE will nearly double the revenues of Texas Wind Power, a seven-employee company founded in 1991 that up to now had found Texas' renewable power market anemic at best.
Blowin' in the Wind
Hornaday is less optimistic than some renewable energy advocates that demand for green power will exceed what's mandated in SB7, but he says green programs at least bring a semblance of market forces to bear on the industry. The price of wind power will go down with heavier sales volume, Hornaday predicts -- probably as low as current fossil fuel prices. But the advent of higher-efficiency gas plants, more than a dozen of which are in the works across the state, have wind producers chasing a moving price target. And he thinks the renewable energy industry is going to have a difficult time persuading utility customers that spending even a few pennies extra on their bills is worthwhile. "It's expensive to take the average Joe Six-Pack and get him to care about the difference between power produced in a wind plant and power produced in a gas plant," says Hornaday.
But some renewable energy players outside Texas are already pawing at the dirt, eager to get a piece of one of the biggest and fastest-growing utility markets in the nation. Under SB 7 restructuring, Texas has become one of the most equitable playing fields for renewable providers in the nation, says Julie Blunden, Western regional president for GreenMountain.com, a three-year-old company boasting 100,000 customers in California and the financial might of Texas multimillionaire Sam Wyly.
Deregulation and Private Industry
Blunden believes renewable energy will sell in Texas once it's marketed by a company that believes in it instead of grudgingly offered as a novelty by utilities. But advertising promises to be expensive, Blunden agrees, creating an uphill struggle for newcomers like GreenMountain.com. "We've got to peel customers away one by one," says the company's development manager in Texas, Gillan Taddune.
That's why providers like GreenMountain.com hope that new rules which the state Public Utility Commission are currently writing for the restructured market will give newcomers access to utilities' customer lists. "If we have to be creative [about marketing] we will be, but it sure would be less trouble if we had their phone numbers," says Taddune.
Staff at the PUC say green marketers will get the access they need when they join up with the larger retail electric providers that will be carved out of the current utility companies as part of SB7 restructuring. But they also say that the renewable energy industry shouldn't hope for too much welfare from the PUC commissioners, all Bush appointees. The commissioners' advocacy of the renewables mandate in SB7 was critical to getting it into the bill, but neither they nor the Legislature are likely to make switching customers over to green power a state policy directive. "The state's job is letting people know they have a choice," says Jeff Blaylock, the clerk of the State Affairs Committee under Rep. Steve Wolens (D-Dallas). "We don't know if [renewable energy] is better or not; that's up to consumers."
Renewable energy advocates say it's unrealistic to expect a fledgling industry to educate the public about the true costs of fossil fuel power, and it's in the state's best interest to tout green power as a low-cost strategy for cleaning up the skies of Houston, Dallas, and Austin. The costs of refitting coal plants to burn more cleanly, not to mention the inevitable commercial restrictions that are in the pipeline for cities with critically dirty air, promise to place a far heavier burden on taxpayers and business.
In the Dallas/Ft. Worth metroplex, which needs to cut ozone levels by nearly 80% to comply with EPA regulations, rules being considered by the Texas Natural Resource Conservation Commission could make it unlawful to operate diesel engines on construction sites in the morning. By contrast, in traffic-clogged Seattle, surrounded by states that derive 30-40% of their electricity from nonpolluting sources, ozone action days are nonexistent.
Hornaday expects, however, that utilities will choose to advertise their new natural gas plants as environmentally friendly rather than converting customers to new energy sources. Under the provisions of SB7, natural gas companies "can take a gas plant and put some flowers in front of it, and add some deer, and tell people it's clean-burning," Hornaday remarks. "Imagine us trying to go out and explain to our customers that our product is greener."
Wind producers struggle with a host of issues that prevent the playing field from being as level as it could be, Hornaday adds. Wind farms in Texas are typically built on remote, agricultural land in West Texas and the Panhandle, where property tax rates are among the highest in the state. And whereas under the current tax system oil producers can virtually write off the cost of a new gas well within a year, wind farms need several years to recover construction costs through depreciation. On the other hand, wind producers do benefit from the federal production tax credit, which virtually erases their income taxes.
In Texas, perhaps the biggest obstacle wind producers face are those listless August days, when shingles cook in the relentless heat while scarcely a breath of air moves. The state has an embarrassment of riches when it comes to wind, enough to power the state's electric grid several times over, according to some estimates. But utilities say they can't rely on wind turbines on the days when demand goes highest, and thus can't reduce their overall fossil fuel generating capacity even as they add wind power. That, too, drives the price of wind higher.
Then again, gas prices could shoot up in the near future. Or they may not. "We could have a serious fossil fuel increase in the short term," says Duncan. "On the other hand, it's amazing how world economics can suppress real pricing sometimes." Kapner, whose last job was with the New York Power Authority, says he doubts natural gas will get any cheaper, but the wind power industry still faces a long road to mainstream acceptance. "If renewable energy were actually no more costly than conventional, then we'd say, well, because of the environmental aspects, of course we should build more," he says. "We're not there yet."