Whether compelled by mandate or good intentions, buyers might find the shelves empty.

For a variety of reasons, many large energy users have been voluntarily purchasing renewable power and/or renewable energy credits (RECs), which support development of that resource. The premium for doing so, however, may soon rise significantly as demand for such green power begins to overwhelm the supply. Smart firms wishing to continue (or initiate) such purchasing may wish to plan ahead to avoid big price bumps.

Runnin' Out Of The Green Stuff

Induced by both government and private agencies, many corporations, institutions, and others are spending an extra 10% to 25% (or more) on their electric bills to buy green power. Whether to satisfy a mission statement, polish a corporate image, or simply to help save the world, such purchasing is growing rapidly.

Those buying green power have found pricing to be increasingly volatile and varied, depending on a variety of factors. The major source of new renewable power supply has been wind, with half of all new U.S. power capacity coming from wind projects. Prices are affected as new plants come on-line. In a few cases, we are even seeing different shades of green: some RECs are going for a higher price because they originate from projects or organizations having a positive cachet (e.g., university, research institute) with which some corporations or product vendors would like to be associated.

At the same time, half the states have enacted renewable portfolio standards (RPS) that require (or soon will) utilities in those states to buy a percentage (2% to 30%) of their power from green sources (usually originating in that state or region). As that new demand for renewable power ramps up, it w ill dwarf present purchasing, and may overwhelm the supply.

As we all recall from Economics 101, when demand approaches or exceeds supply, price rises. Green power is no exception. The chairman of Northeast Utilities, a major New England utility, recently warned that region may be short several thousand megawatts of renewables during the next eight years as local RPS and some emissions rules come into effect. In Massachusetts, this shortage is already pushing up REC prices to the state’s cap.

Feds Focus On The Problem

A recently (October 2007) released study by the National Renewable Energy Laboratory (NREL) attempts to quantify how and when this crunch may occur. In “A Preliminary Examination of the Supply and Demand Balance for Renewable Electricity” (NREL/TP-670-42266, available for free atwww.eere.energy.gov/greenpower/resources/featured.shtml), the report found that total renewable demand was already close to or exceeding existing supply, and that demand will rise faster than new supply for several years before possibly balancing out in 2010. If, however, new supply begins to falter, as occurred several years ago when federal wind power subsidies expired for a time, the crunch could become severe and sustained as some wind projects come to a halt. Those credits are presently scheduled to expire at the end of 2008.

The NREL study made an especially interesting point: “If a significant number of electric utilities and other electricity suppliers choose to bank RECs for future RPS compliance, excess supplies may not be available for voluntary markets. Furthermore, if generators choose to hold RECs in anticipation of future regulation, this would also reduce total supply.”

Taking that thought a step further, an impending crunch could be seen as an investment opportunity by financial speculators (known euphemistically in the energy biz as the non-commercial sector) who have, in the past, hoarded futures as a way to bid up pricing and then make a killing when prices spike. Such a strategy could further exacerbate renewable power pricing volatility and raise near-term pricing.

A company or institution that publicly promised to buy green power could then find it necessary to break that commitment, or pay dearly to continue such purchasing.

Plan Ahead

If your firm or organization is considering (or has already made) a commitment to buy green power, consider a forward purchase now to avoid price spikes around the corner. Doing so may also be a good way to hedge against general power price hikes. And remember: just as a pound of feathers weighs as much as a pound of iron, avoiding a pound of carbon emitted in Brazil, Wyoming, or New York each has the same effect on climate, so it pays to shop around. If you don’t know how, work with an experienced energy procurement specialist to find the lowest-cost way to keep your firm’s promise to go green. ES