What Is a Green Tariff?

If you work in corporate clean energy procurement, you may have come across the term “green tariff.” Green tariffs provide a pathway for businesses – particularly those in regulated electricity markets — to purchase renewable energy credits or renewable energy from their utility providers. This blog provides a quick overview of what green tariffs are, explores the various options available for corporate buyers, and lists a few key elements corporate buyers should be aware of.

What Is a Green Tariff?

Many corporate clean energy options involve a company contracting with a project developer or private-sector company for Renewable Energy Certificates (RECs) or for both the energy and the RECs through a virtual power purchase agreement (vPPA). A green tariff, on the other hand, is administered by a utility directly and allows commercial and industrial (C&I) energy users to purchase RECs or bundled energy and RECs. Green tariffs are most common in regulated electricity markets where clean energy mechanisms such as vPPAs are unavailable, but they may sometimes be available in deregulated markets.

Types of Green Tariffs

Because green tariffs are utility programs, they can vary widely between regions and utility providers. That means companies with operations in different utility territories or electricity markets may need to work with multiple green tariff mechanisms.

There are a variety of tariff options to meet different corporate clean energy procurement needs and goals. The common thread is their purpose: to help companies without access to mechanisms like virtual PPAs take advantage of renewable energy resources and attributes. Despite the variety, most utility green tariffs fall into one of two buckets: REC-Only tariffs, and subscription tariffs.

REC-Only Tariffs

As the name implies, REC-Only tariffs enable utility customers to take advantage of RECs. A regulated utility may have its own renewable resource (e.g., a solar farm in its territory), or it may contract with a renewable developer to buy a PPA. The utility can then offer customers the green or financial benefits from the RECs associated with those resources. Customers of regulated utilities typically pay for these RECs in the form of an additional fixed fee, or rider, on their electricity bill.

Retail utilities that want to offer RECs to corporate customers will typically buy unbundled RECs in the open market and sell them to customers with a slight markup to cover program administration cost.

REC-Only tariffs tend to offer more flexibility for corporate customers because they have shorter contract terms (typically a year) and are often payable as an additional fee on an existing bill. The REC mechanism is simple and does not require significant expertise to contract. RECs do not need to come from additional (i.e., new) renewable energy resources. For those reasons, REC tariffs are generally better suited to smaller corporate utility customers, companies with less ambitious clean energy goals (e.g., annual matching vs. hourly matching), or those with less experience buying clean energy.

Green Subscription Tariffs

The biggest difference between a green subscription tariff and REC-Only tariffs is that green subscription tariffs typically involve clean energy purchases rather than renewable energy credits.

There are several common types of subscription tariffs, including pass-through PPAs, bring-your-own (BYO) supply, and customized green tariffs.

Pass-Through PPA

With a pass-through vPPA, a utility will solicit subscriptions from corporate customers: once it gets enough clean energy subscribers, it will go procure a new clean energy resource. The utility will forecast the net spend of the PPA and get approval from its regulators for the charges that will be allocated to subscribers.

Because utilities typically set the price for this type of tariff based on forecast PPA wholesale market prices, they will employ a balancing mechanism for the customers. For instance, if the PPA price is $40/MWh, and the projected market revenue is $30/MWh, the subscribers will pay the residual $10/MWh. If, at the end of the rate period, the utility finds that the actual PPA market revenue was $32/MWh (meaning the utility charged subscribers $10/MWh for something that only cost $8/MWh), it will roll the difference of $2 into the following rate period as a credit for the subscribers. Conversely, if the actual PPA market revenue was less than expected, the subscribers would pay more the following year to make up the difference. This is an important feature because public utility commissions usually require utilities to demonstrate that customers who did not subscribe to the green tariff programs won’t be subsidizing the customers who did. That is, if the program ends up costing more, the utility must recover the difference from its corporate subscription customers rather than passing on the costs to its broader ratepayer base.

The nuances of this pass-through PPA tariff lie in the length of the commitment a utility will require from its corporate customers. Before procuring clean power, utilities need to be confident there will be adequate demand: If the program has a short-term commitment (e.g., a year), the utility will need to assess whether there is sufficient customer demand beyond that first year. That is why many subscription tariff programs typically procure fewer MWh than actual customer demand. An oversubscribed tariff means that if a customer discontinues participation, another customer is ready to step in.

However, oversubscription can create challenges for corporate buyers. Limited supply means customers often end up on a waitlist or only get a fraction of the amount of clean energy they wanted.

Subscription tariffs, including pass-through PPAs, usually follow one of two paths: customers can join on a first-come, first-served basis, or they can get a pro rata allocation. Unfortunately, neither option is appealing to a company committed to reducing its scope 2 emissions. It can be difficult to forecast emissions reductions or implement a decarbonization roadmap if you don’t know whether you’ll be able to access your utility’s program. For instance, Entergy is implementing a green subscription tariff in Louisiana (Geaux Green) but has a waitlist for large corporate customers (small businesses aren’t even eligible at this point). That waitlist has created uncertainty for companies in the state who don’t know whether they will be able to receive all the clean energy they want.

Pass-through PPAs are often attractive to smaller corporate energy buyers or those with less experience buying clean energy because the contract term is usually short, there is no upfront cost, and the payment mechanism – typically a subscription fee – is straightforward (although PPAs do require more expertise to contract than RECs).

Bring-Your-Own Supply

The next variation of green subscription tariffs is BYO supply. This is most common with retail providers, like those in ERCOT. The name says it all: corporate customers work with their retailer to integrate their own PPAs (e.g., solar, wind, storage, etc.).

Georgia Power provides a good example: It recently reached an agreement with the Public Service Commission and the Clean Energy Buyers’ Association to allow corporate customers in its territory to “work with third-party developers to identify and bring clean energy projects to Georgia Power’s system”. The utility must approve the company’s planned assets to ensure reliability, and benefits from spreading the cost of its transmission infrastructure to more load. BYO tariffs are appealing to large energy users with expertise in procuring, developing, and managing clean energy assets because it affords them greater control over their own energy mix. Experienced clean energy buyers and managers know how to contract this type of complex agreement. And BYO tariffs support more granular emissions calculations and clean energy goals, such as hourly matching and additionality, which is important to organizations with ambitious decarbonization goals.

Customized Green Tariffs

The third type of green subscription tariff is customized tariffs, which involve a negotiation between a retail provider and large corporate energy buyers. These tariffs – typically bilateral, but increasingly involving multiple utility customers – are essentially a supply agreement between the customer and the utility stipulating what clean energy resources each will provide. They also tend to involve longer-term commitments than other tariffs. For instance, when Silicon Valley Clean Energy developed a customized green tariff for Google a couple years ago to cover some of its office space in Northern California, the agreement had a ten-year term.

Because they are highly customized, these tariffs require significant power demands and expertise from the corporate buyer. Historically, that meant they were only available to the very largest energy users (and most sophisticated clean energy buyers) such as Google.

Utilities and corporate customers are trying to change that by designing the tariffs to be repeatable and scalable. For instance, Duke Energy recently proposed a suite of new tariffs to enable large corporate customers to “fund novel technologies like long-duration storage and advanced nuclear as they try to decarbonize.” And Google just announced a partnership with NV Energy in Nevada to develop a new “clean transition tariff” (CTT). The CTT establishes a long-term energy agreement between a utility and customer that can “facilitate investments into new projects that deliver clean firm capacity to the grid.” Nevertheless, for the moment, the scale, duration, and complexity of these customized tariffs will make them most appealing to large energy users and those with more experience in corporate clean energy procurement and/or ambitious decarbonization goals.

Green Tariff Considerations

There are several elements corporate clean energy procurement professionals should keep in mind when considering green tariffs:

• First, are you looking for additionality? Some tariffs, such as REC programs, may involve existing clean energy projects that do not qualify as “additional.”
• Second, what is the term of the commitment? For companies anticipating changes in their energy use, a long-term agreement may not be the right move. Others that want to hedge their energy costs over the next decade or more will want to avoid shorter-term agreements.
• Third, what is your exposure to the market? Does the tariff involve a fixed dollar per megawatt hour (MWh) like a REC-only purchase, or are you exposed to the performance of the underlying asset, as in a market-based green subscription tariff?
• Fourth, are you able to designate a specific resource ahead of making a commitment with your utility? Specifying the project allows companies to announce their support of a particular project that is greening the local grid.

In 2020, one-third of the U.S. was served by vertically integrated, regulated utilities, where standard PPAs or vPPAs (i.e., corporate contracts directly with clean energy developers) are difficult or impossible. Utility green tariff programs offer customers in regulated and retail markets alternatives, allowing them to invest in and claim the benefits of renewable energy. Whether a company opts for a REC-only program or pursues a customized green subscription tariff, there are options to suit different corporate energy uses, expertise, and sustainability goals.

Simplify Your Corporate Clean Energy Procurement

At Verse, we specialize in helping businesses navigate the complexities of clean energy procurement, vPPAs, and green tariffs. If you’re interested in exploring how green tariffs can support your corporate sustainability strategy, we’re here to help.