Michael Giberson

From the PR desk:

HOUSTON, Sept. 4, 2012 /PRNewswire/ – Direct Energy has launched New Leaf Energy, a new Texas brand that offers 100 percent renewable, air-pollution-free energy, 100 percent from Texas wind turbines. New Leaf Energy brings expanded product choice in Texas’ green energy market and a variety of plan options that ease the way for residential customers in Greater Houston, Dallas-Fort Worth, Corpus Christi and beyond to help support long-term sustainability of the region and the planet.

“New Leaf Energy is committed to renewing the future, one household at a time,” said Rob Comstock, senior vice president at Direct Energy and general manager for the company’s Texas residential business. “It meets one of the industry’s highest standards by sourcing only 100 percent Green-e® Certified renewable wind energy, at rates designed to make renewable energy easily accessible for consumers. By choosing New Leaf Energy, they are making a statement to electricity producers that they support and prefer electricity provided by renewable sources. As more people sign up with New Leaf Energy, more renewable energy is produced.”

Consumers signing up for this product are promised their power is sourced only from “100 percent Green-e® Certified renewable wind energy,” and what’s more that power is “100 percent from Texas wind turbines.”

I don’t see any asterisks tagged on to these claims where they explain – hey, the wind doesn’t blow all of the time, the sun doesn’t shine all of the time, and there is hardly any hydropower in Texas even in years without a drought, so once in a while we will supplement your power supplies with a mix of coal, natural gas, and nuclear energy and then we will buy extra wind power sometime later. Nope, in the press release and on the company website the claims are “all renewable, all of the time.”

Therefore, officially, I am amazed. Since Direct Energy doesn’t plan to cut off its “100 percent Texas wind” consumers when Texas wind power production drops off, I can only conclude that the company has solved the complex technical issues surrounding energy storage.

SOMEWHAT RELATED: “Renewable Incentives Spark Debate at Texas Hearing” from the invaluable Texas Tribune.

ADDED: In case you’re wondering, there are not a lot of ski lifts in Texas either.

Michael Giberson

The most detailed study of a prepaid power program in the United States is EPRI’s “Paying Upfront: A Review of Salt River Project’s M-Power Prepaid Program.” The report provides a good overview and assessment of the program. See the abstract, copied below, for more of a description of the content.

One issue of interest with prepaid is whether it promotes energy conservation. The Salt River Project has studied this question a few times and, with varying methods, has found that M-Power customers tend to consume about 12 percent less power than customers on traditional post-paid power accounts.

Not all of the conservation effect may be due to the prepaid program itself, however. In M-Power, consumers get an interval meter installed that can provide relatively instant feedback on consumption rates and remaining balance. Non M-Power consumers get a monthly paper bill that arrives a week or so after the end of the billing period. Some of the conservation effect may be driven by the instant feedback and greater sense of awareness and control that such a device provides.

The Texas market may offer an additional approach to study this question. Many millions of customers have received smart meters in the last few years, and all power customers in the ERCOT portion of the state will have smart meters within the next year or two. These customers can already gain relatively contemporaneous feedback on consumption rates, whether prepaid or post-paid. I haven’t seen any studies of whether smart meter consumers tend to reduce consumption (with billing plan and rates constant), but presumably retailers are watching there data for such affects.

And within the population of customers with smart meters, some are switching into prepaid retail contract. A careful study, perhaps structured similarly to those described in “Paying Upfront,” could give further insight into whether it is the meter information or the change in financial terms that inspires the conservation effect.

A few weeks ago I met a program manager responsible for a prepaid service for one of the Texas competitive retailers. He spoke of how a prepaid contract changes the relationship between customer and retailer to one that is more “conversational.” Every day the retailer emails or texts the consumer with account status information. Additional, more detailed information may be available online. The relationship becomes more interactive. Perhaps there is something about the changing financial terms that changes the way prepaid retail consumers think about buying electric power. Or maybe this same change is available to any consumer with instant feedback from a smart meter.

ABSTRACT for  EPRI’s “Paying Upfront: A Review of Salt River Project’s M-Power Prepaid Program“:

Arizona’s Salt River Project (SRP) has operated M-Power, the largest electricity prepayment program in the United States, since 1993. The customer population has grown to about 100,000 (approximately 12% of all residences served by SRP), and it has expanded from the initial target population—consumers with arrears facing service terminations and low-income customers—to include consumers with different expectations from M-Power service. The in-home portion of the SRP prepay configuration consists of a user display terminal (UDT) that communicates with the customer’s meter. The purchasing component of the M-Power program is the self-service kiosk, known as a PayCenter, accessed via a Smart Card, which is also the conduit through which electricity consumption information is transferred back to SRP.

The constant aspects of the M-Power experience have been a high level of customer satisfaction and an overall conservation effect reported by SRP of approximately 12%. SRP attributes the conservation effect to a variety of factors, noting that M-Power requires consumers to pay attention to when and how they use electricity, allowing them to make immediate adjustments in usage to lower their bills.

This report provides an overview of how the M-Power program works along with an examination of the technology, systems, and costs associated with the program. The overview is followed by an analysis of customer perceptions of the program as well as a discussion of the program’s potential conservation effect. The report concludes with a discussion of impact studies needed to answer several outstanding research questions, including the effect of various types of payment options on conservation as well as whether SRP’s experience is transferrable to other markets, climates, customer circumstances, and supply conditions.

Michael Giberson

We know that several Texas generators were unprepared for the possibility of severe cold on February 2, and now comes word that at least one retail electric provider was similarly unprepared for the possibility of price increases. ERCOT real-time power prices jumped to about $3000/MWh for most of the emergency period that morning. Abacus Resources Energy has defaulted on its financial obligations to ERCOT, reportedly unable to cover costs due to the spot power price spike. More, from the Fort Worth Star-Telegram:

[Abacus Resources] General Manager Mark Angell said last week’s unprecedented spike in wholesale power costs, when numerous generating stations were out of action because of the weather, overwhelmed the company’s financial resources.

Buying power for its 7,700 customers, most of them residential, typically cost Abacus from $11,000 “on a good day” to $25,000 “on a bad day,” Angell said. “You take that to $300,000 a day, and it doesn’t compute.”

Abacus needed to come up with $750,000 to pay its energy bills and also meet cash collateral requirements required by ERCOT. That wiped out the company’s reserves.

“It was a once-in-20-years occurrence, and we got caught,” Angell said.

A couple of observations:

• Any retailer that was severely bit by the price spike was a retailer that hadn’t secured enough power to meet its customers’ demand for that cold morning. Forward contract prices for the time period were likely in the $50/MWh range. In short: The cold was forecast, retailers have means to hedge themselves against financial exposure, retailers who were short that morning will pay.
• And, by the way, generators who were contracted to deliver power and failed to deliver will also be covering their shortfall at the spot market price. The only generators that will be paid the seemingly exhorbitant $3000/MWh are those who had capacity not already under contract and were capable of delivering that uncommitted capacity to market.
• Profit and loss is a great motivator, but only especially motivating when companies can actually go out of business.
• Unlike the case in 2008, when a few companies went out of business and simply dumped their customers into the default “Provider of Last Resort” service, Abacus has arranged for its customers to transition to one of two other retailers that serve the same area. I don’t think that this transitioning is required of Abacus, but it is an improvement over last time.  It suggests that the retail provider industry can learn from past mistakes.

Who pays?

News items suggest that various consumer advocates are worried that, ultimately, consumers will have to pay for whatever losses retailers suffered last week through higher prices. One of the beautiful things about the relatively open and competitive retailer marketplace in the ERCOT region is that this isn’t true in any general sense. Prices on retail supply contracts should be forward looking, based on the expected cost of the supplier fulfilling that contract over the contract period. Since any future contract period won’t include February 2, 2011, future customers can’t be made to take that hit.

A local Starbucks had its roof cave in after heavy rains revealed a structural flaw. When the store re-opens, will they stick consumers with a surcharge to cover the cost of rebuilding? No, coffee consumers have alternatives, and because consumers have alternatives the coffee company will take the hit. Same for retail power consumers in ERCOT.

A few ways that last week’s power emergency can lead to higher prices for consumers: (1) if all companies become a more cautious, and contract-up extra power in advance or otherwise add to their hedges against rare power emergencies, then rates will creep up to cover the higher cost of operations.  But this only works if all companies become more cautious, including any new company that may want to join the market. Otherwise some company will have lower rates and take customers from the newly cautious; (2) if changes to Texas PUC or ERCOT regulations on retailers force them into excessive financial commitments, raising all retailers’ costs and so all retailers’ rates; or (3) if ERCOT decides to carry (or is forced into carrying by legislative or regulatory action) substantially higher amounts of reserves or to make other changes to operations to cover the possibility of rare power emergencies.

In case 1 the competitive market will yield higher prices to reflect the adjusted risk perceptions of participants in the market. In case 2 it is the residual monopoly transmission grid that will lock consumers into higher prices. By the way, when ERCOT’s retail market finally grows to its smart grid potential, events like the February 2nd power emergency will look a lot different. They might even look like non-events. Probably the subject of a future post.

In sum, a company has been driven from the market. Bad news for the company, the management, employees, and especially the owner. Not especially bad news for consumers in the short run, and ultimately good news.

Profit and loss can be a powerful motivator.

Michael Giberson

Via Tim Haab at Environmental Economics, a news story from The Columbus Dispatch reporting that five Columbus suburbs were ending a program in which the communities bought gas on behalf of residents that didn’t opt for another supplier.

“There’s really not a need for government to be in it,” said Dana McDaniel, Dublin’s assistant city manager, who announced the decision yesterday.

In May, The Dispatch reported that the group’s prices were often higher than those of Columbia Gas of Ohio, the regulated utility. The fixed price was set each year and stayed the same for 12 months, while Columbia’s price changed every month.

Some residents had voiced concerns that the group’s fixed-rate prices were too high and that the opt-out system for enrollment was confusing.

One of those residents, Barbara Drobnick of Gahanna, withdrew from the program in December after finding out that she had been automatically enrolled. Yesterday, she said she was pleased to hear the program was being discontinued.

“I like that they’ll be doing what cities are supposed to do, rather than making deals with private companies on my behalf,” she said.

More:

Since the consortium began in 2005, its price was higher than Columbia’s in 43 out of 63 months, according to a Dispatch analysis of pricing and consumption data. Customers who had the city group plan that entire time and had average gas usage would have paid nearly $800 more than if they had gone with the utility.

It is a bit unfair, as McDaniel said later in the article, to compare the 12-month fixed rate price in the program to monthly variable price deals offered by Columbia.  A fairer comparison would look at what other 12-month fixed rate plans were offering at the same time the five-city group renegotiated each next year’s rate.

But I tend to agree with the McDaniel’s line quoted above, “There’s really not a need for government to be in it.”