Ken Silverstein EnergyBiz Insider Editor-in-Chief

Investing in renewable energy is definitely not risk free. Utilities are understandably nervous about putting capital into emerging technologies that may not have an immediate payback and that may not adequately be recovered through the rate base. But, many such investments appear destined to have positive returns. In the short run, a good number of utilities are being pushed by regulators to "go green." But, once those companies climb the learning curve and discover the potential, many will take a proactive stance.

"All these things, the renewable portfolio standards and the voluntary green markets, are driving the development of the industry," says Blair Swezy, principal policy advisor for energy analysis office at the National Renewable Energy Laboratory. In a personal talk at his Golden, Co. office, he acknowledged that regulators and tax breaks are pushing some utilities to act, although many have discovered renewable energy to be among their most economical offerings.

About 600 utilities -- 20 percent of all such companies nationally -- in regulated electricity markets now offer green power options, the laboratory says. That gives 40 million customers in 34 states the ability to purchase renewable energy to meet some portion of their electricity needs. Altogether, sales of renewable energy programs increased to 2 billion kilowatt-hours in 2004. That's a 43 percent increase over 2003.

Whole Foods, for example, has just said it will purchase all of its power -- for 173 stores in the United States and Canada -- from wind energy. That equates to 458,000 megawatt-hour credits a year. Prior to that, the grocery chain purchased 20 percent of its power from renewable energy sources. While Whole Foods can't know what energy source is providing its electricity, it can be assured that the credits it purchases will lead to green energy production -- helping to reduce the level of overall harmful emissions.

Meantime, at least 15 states have approved policies that require utilities to provide wind, solar, hydro, biomass and geothermal options to consumers. Those technologies are typically more costly than conventional generation and, therefore, the states are trying to help jump start their advancement by enacting portfolio requirements that will spur investment. The hope is that these actions will facilitate the economies of scale needed to drive costs down and to attract new players to the market -- all so that they can go head-to-head with conventional generation without the need for mandates and subsidies.

Creating Incentives

Undoubtedly, the realization of these aims will take time to mature, given that the technologies and the infrastructure to develop renewable sources are still in their infancy. But with proper planning, advanced lead times and government assistance, renewable energy is expected to generate a greater share of the market. Currently, non-hydro renewable sources make up about two percent of the United States' generating portfolio of 770,000 megawatts, although some say that could rise to 10 percent in 20 years.

States are promoting renewable energy not just by mandating that utilities generate fixed portions of their power from renewable sources but also by granting tax breaks for installing such green energy equipment as solar panels and fuel cells. They are also giving customers the choice of being assessed a small monthly fee that goes into a research fund to explore for new sources. Traditional fossil fuel development has been given other types of backing for decades.

"State renewable portfolio standards have started the ball rolling," says Swezy, with the renewable lab. "But wind has turned out to be one of the cheapest generation sources for some. It doesn't cost consumers much, if anything, if it is spread over a rate base."

Oklahoma Gas & Electric, for instance, bought half of a 102 megawatt wind project. The economics of the project led the utility to add 150 megawatts to its mix. Avista Utilities, meanwhile, currently supplies about 54 percent of its electric needs through hydropower and is now working to add to its renewable offerings beginning in 2007.

Along those lines, the California Public Utilities Commission has created the largest solar program in the country. It is a 10-year, $2.9 billion plan aimed at increasing the amount of installed solar capacity on rooftops in the state to 3,000 megawatts by 2017. The funds to facilitate the idea will come from utility customers while the state will provide some subsidies. Swezy and his colleague Lori Bird at the laboratory say that the 10-year commitment gives manufacturers the certainty they need to make costly investments -- all to meet the targets set by regulators.

Colorado law now says that renewable energy must constitute 10 percent of all retail sales by 2015. The interim goals are 3 percent by 2007 and 6 percent by 2010. Colorado Springs Utility is a municipal enterprise that is not required to meet those standards. However, it has said it will comply and in fact, is 80 percent of the way there to meeting the initial targets. To get the rest of the way, it will build more hydro plants as well as integrate biomass into its coal-fired facilities and use biogas from its wastewater plants.

Drew Rankin, energy supply manager for the muni, says that the new law pushes it to offer more renewable energy. The overall objective of the utility, consumers and regulators, he adds, is to balance reliability with costs and the environment. Toward that end, green energy such as wind is a more expensive option for the utility because it must be backed up with other generation sources. But, it is clean and it complements the company's portfolio.

Responsible Stewards

In a personal talk, Rankin says that among the renewables the utility offers hydro is its best value. After that, it is wind power. But, he is quick to add that power must be provided around the clock and that wind does not continuously blow. Therefore, the utility must hold excess capacity to ensure reliability, all of which adds costs that are borne by city residents, or customers.

"We are prudent stewards of the environment and the utility," says Rankin. "Our customers have directed us to balance cost, reliability and the environment. We as a society need to keep advancing the ball toward a more positive place. But the more education we have, the more we can have a rational discussion about how this balancing act is best achieved and over what time frame."

Renewable energy markets are advancing. The progress is a confluence of mandatory government actions taken to create certainty along with voluntary steps by both utilities and their customers. The economic and environmental benefits of such thinking have already started to emerge.

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