Will Green Power Survive California’s Energy Crisis?

With bated breath, the nation has been watching California to see how electric utility restructuring would affect the price of power, the reliability of electric service and the green power industry. Consumer advocates hoped for lower power prices. Environmentalists hoped to see green power on a larger scale than ever before. But skyrocketing energy prices and rolling brown-outs in California tell another story. Failed policies have left the utilities in financial dire straits, and many experts are scratching their heads about what to do next.

Green power develops electricity from such clean sources as photovoltaic panels, but supporters say California’s deregulation law is biased against them.
Photo courtesy of Green Moumtain Energy

As California tries to get its power industry back on its feet, environmentalists say the state"s burgeoning retail green power market (which was the largest in the nation) may be the biggest loser next to consumers.

California enacted laws and policies that restructured the utility industry in 1998. The laws allowed companies other than the utilities to offer electricity to home and business customers. In a restructuring similar to that of the long-distance phone industry, consumers for the first time had more than one choice about from whom they bought their power and how it was generated.

The new system was supposed to give everyone in the market a level playing field. But some say the situation was never completely fair for small, independent power providers who had to compete with the large, established utilities.

"California deregulation was rigged to favor utilities," says Rick Cunniham, San Francisco manager of Green Mountain Energy, one of the most successful green power providers. "It was set up so that no one could offer lower prices than the utilities. If you can"t offer lower prices, you have to find another benefit."

To compete, many independent power providers, like Green Mountain, offered "premium" environmental power products: power that was more expensive than utility power but generated from clean renewable energy sources like wind, solar, geothermal and hydropower. Though California utilities had been including some green power in their energy mix—25 percent of electricity production in 1996, according to the California Energy Commission—the premium green power sold by independents became the largest competition for utilities. Cunniham says two percent of residential and commercial users in California, more people than in other restructured states, switched to alternative power providers. Things were looking up for green power.

But then wholesale prices of fossil fuels on the state"s power exchange, a trading market for power similar to the stock market, went up from three cents per kilowatt-hour to 27 cents per kilowatt-hour. According to Dr. Jan Hamrin of the Center for Resource Solutions in San Francisco, the new system was thrown into crisis by June of 2000.

"When power exchange prices went up around 24 cents, it started going crazy," she says. "Most of the green power marketers had priced their products tied to power exchange prices. This caused a cash-flow problem."

With limits on how much they could charge, utilities were paying more for power than they could get back. Facing bankruptcy, utilities stopped paying their bills, which left power generators without funds to operate or build new plants. With no way to price their products, green power providers were faced with angry and confused customers. "Within a week, the whole market collapsed," says Cunniham. "We returned the majority of our customers to the utility."

Bodhi Burgess, environmental sustainability coordinator for Birkenstock USA in San Francisco, says Green Mountain"s retreat from the California market has left the company feeling uncertain about its energy future. About a year after Birkenstock signed on as Green Mountain"s largest corporate customer in California, Burgess got a phone call with the bad news. "They told us there was no way for them to continue providing us power," says Burgess. "If given the choice, our company would like to support clean air again. But, for a while, I think it"s going to be difficult for alternative power providers to be competitive."

Experts on the California power industry, like Hamrin, agree it will be impossible for green power providers to emerge from the crisis unscathed, and gaining back consumer confidence will be difficult. "It"s a big mess in California," she says. "Renewables, because they can add price stability, are part of the solution, but they are collateral damage in all the wars going on."

Hamrin says the state legislature will need to start over to create a balanced system with diverse sources of energy and a variety of contracts. "We need major surgery; I"m not sure first aid is going to work," she says. "All these things need to be done in a coordinated manner."

An emergency session of the California legislature convened last January to find a solution to the state"s power problems. Steven Kelly, policy director for the Independent Energy Producers Association in Sacramento, says the legislature passed a bill that allows the state, rather than the utilities, to procure energy.

Kelly says the lawmakers" focus on utilities has stymied the growth of alternative power providers in California. He adds that no one in the legislature is actively pushing for a more vibrant market system. "Saving the utilities is the focus, rather than letting them implode," says Kelly. "The green power market isn"t dead, but its future is questionable right now."

High prices and rolling brownouts are the only near-term guarantee in the California energy market. Since renewable energy offers at least a partial solution to the state"s ongoing woes, it may be the strongest alternative to a continuing pattern of long, hot summers.