We expect the lights to come on when we flip a switch, unconcerned with how the electricity is produced or how it reaches our homes. We are aware of telephone poles, wires overhead, and transmission towers, solar panels, and windmills across the countryside. But as long as we pay our electric bills, we trust electric utilities to provide our power somehow.
Who produces the electricity we use? Where does it come from? How does it reach us when we flip that light switch? And is electricity as “green” as we are often told it is?
Residential and business electric customers across the country are served by three different types of energy providers: the traditional monopoly known as an investor-owned utility (IOU), the public power utility owned by a municipality, and the community choice aggregator (CCA). This last is a relatively new type of nonprofit purveyor allowed in nine states—Massachusetts, Ohio, California, Illinois, New Jersey, New York, Rhode Island, Virginia, and New Hampshire—that have passed legislation allowing them.
These entities form what is collectively referred to as the grid, an interconnected network for delivering electricity from producers to consumers.
Community Choice Aggregators
CCAs are the newest type of electricity provider. They buy electricity from private generating firms, many of which are small start-ups, and deliver it to end users over wires owned by traditional IOUs. Thus, CCAs function as middlemen between energy suppliers and consumers. They also compete with investor-owned IOUs to sign up entire cities or counties.
Electricity can be generated by coal, natural gas, diesel, nuclear fission, biomass, hydropower, solar panels, and windmills. Of these, the last five may be considered renewable sources, but green energy purists view only solar and wind energy as renewable.
California contains over 11 percent of the American population, its energy markets are deregulated, and it hosts twenty-five CCAs, which serve fourteen million customers throughout the state in over two hundred municipalities with over eleven thousand clean energy power purchase agreements.
In addition to these twenty-five CCAs, California has three large IOUs: Pacific Gas and Electric, Southern California Edison, and San Diego Gas and Electric. Together, they own a significant share of the state’s energy distribution infrastructure (poles and wires). California also has one large municipality-owned utility, the Los Angeles Department of Water and Power, as well as several smaller public utilities throughout the state.
In 2002, the state legislature passed a bill (Assembly Bill 117) admitting CCAs, which began forming shortly afterward. CCAs promise to provide “green” energy (i.e., generated by solar or wind) to reduce carbon emissions and counteract climate change.
When a CCA is established in their geographical area, California energy consumers, unless they opt out in advance, are transitioned by default from their traditional IOU utility to the CCA. Most California customers in areas where there is a CCA have not opted out, either because they were unaware of the transition process or because they proactively embraced renewable energy.
The IOU utilities still own the energy infrastructure that serves these areas and are entitled to a regulated rate of return on it. Customers, therefore, continue to receive their electricity bills from the IOUs, but these now show separate charges for energy consumption and use of the infrastructure. The California Public Utilities Commission (CPUC) regulates this rate of return as well as the energy rates. The IOUs collect the revenue and forward to the CCA the portion that pays for energy consumption.
California CCAs market different proportions of renewable energy: 100 percent (“green power”), 40 percent (“lean power”), and 50 percent (“clean power”). The customer rates per kilowatt-hour may be higher or lower than those charged by IOU utilities serving the same geographical areas. So far, CCAs have tended to match the rates charged by IOUs, but this practice may or may not continue.
How do CCAs guarantee that the electricity they deliver meets the promised proportions of renewable energy? In reality, it’s impossible to identify where electricity comes from once it’s been produced and released into the grid. CCAs typically buy some of the energy they deliver from “nongreen” sources like natural gas turbines and some from renewable generators.
Renewable Energy Certificates to the Rescue
In addition to buying renewable energy from producers, CCAs can also supplement their supplies with renewable energy certificates (RECs) issued by private firms that generate solar or wind energy. An REC is a piece of paper representing one megawatt-hour of renewable power generated and delivered to the grid. The Western Renewable Energy Generation Information System (WREGIS) tracks renewable energy generation, creates the RECs, and oversees a marketplace for trading them.
The existence of RECs and the WREGIS marketplace allows CCAs to boast that they supply as much as 100 percent green energy. Under this paradigm, CCAs subsidize small, private firms that generate renewable solar and wind energy by buying their RECs, then count these toward their own supply so that they can report the promised percentages.
Even firms that don’t supply energy can use RECs to enhance their green bona fides. Some have pejoratively referred to this business practice as “greenwashing.” Microsoft, for example, has announced plans to reduce its carbon footprint by buying RECs from a start-up firm that has developed a method of taking CO2 from the air and storing it underground.
The owner of an REC can either hold or sell it, but it can only be sold once. When a CCA or firm purchases an REC, it is purchasing proof of having “used” that renewable energy, even if the actual energy went elsewhere on the grid.
If you think this all sounds like a contrivance to virtue signal environmental responsibility, you would be right. Whether electric utility customers are receiving renewable energy isn’t clear, but that’s what they signed up for (by default, in most cases). CCAs, in any case, can claim they provide their customers with the responsible kind of electrical energy and thereby help them save the planet.
Jane Johnson is a retired college economics instructor who currently teaches economics at the Osher Lifelong Learning Institute in southern California. She is a graduate of Vassar College, and has graduate degrees from UC-Berkeley, and the University of Washington.
