This blog post was co-written with Josh Ryor, Intern with WRI's Charge initiative.

The challenges facing the U.S. electricity sector have been widely discussed in the last year—issues ranging from evolving pollution controls to slow growth in demand. In particular, many utilities see the rise of small-scale, distributed solar power as a threat to their businesses. Anxious about losing customers, utilities are moving to reform self-generation rules so that distributed renewable energy is less attractive. This trend—combined with many states’ long-standing rules limiting independent power purchase agreements—keep businesses that want to use renewable energy stuck with their local, fossil-fueled grid.

But there is a solution—a green tariff. A new WRI working paper suggests that when designed effectively, utilities can use green tariffs to cost-effectively provide renewable energy—a benefit for both their customers and bottom lines.

What is a Green Tariff?

A green tariff is a utility program that allows customers to source up to 100 percent of their electricity from renewable sources located on their local grid. Today, most renewable energy programs provided by utilities only offer customers Renewable Energy Certificates (RECs), or offsets—the green power associated with them may or may not be produced or used locally. Under a green tariff, utilities would supply renewable power through a portfolio of renewable energy projects either owned by the utility or contracted with independent power producers (IPPs) in the local area. Customers that are happy with their electricity today would not be impacted, while those that want to go above and beyond the standard mix could purchase local, renewable energy.

Why Do Customers Want Local, Renewable Energy?

Customers, particularly companies, have been buying RECs to offset their use of fossil fuel-based electricity so they can meet their sustainability goals. However, large companies and residential customers are both finding that directly buying the renewable energy—such as by installing solar panels on their roofs or signing long-term agreements with IPPs—rather than power from the utility means they can save on their electricity costs. In some parts of the United States, renewable energy costs less than purchasing electricity from the utility. Also, renewable energy prices will not rise, while electricity bills are expected to. Nearly 60 percent of Fortune 100 and Global 100 companies plan to find ways to affordably fuel their facilities with renewable energy and reduce their greenhouse gas emissions—many with local renewable energy rather than RECs alone.

Utilities, facing pressure on so many other fronts, would ideally maintain a positive relationship with these customers. Green tariffs are one emerging option to offer these customers the renewable energy they want. In their favor, utilities offering renewable power could tap into efficiencies, like a lower cost of capital and careful use of the distribution system to deliver lower-cost, renewable energy.

Companies are interested in collaborating with their utilities for more than lower prices, too. They trust the utility will deliver power reliably and consistently. The utility may be able to provide more flexibility for companies to move from one building to another as they grow or change their business. Finally, utilities may be able to offer green tariffs relatively quickly. This speediness is attractive because in states with limits on net metering or independent power producers, it may take years of legislative and regulatory efforts for companies to access renewable energy directly.

Making the Most of the Green Tariff Opportunity

Existing green tariff pilots, such as the recently approved “Green Rider” in North Carolina, are structured so that utilities are primarily a broker between IPPs and a particular commercial or industrial customer. Utilities could expand on this approach and build a portfolio of utility- and IPP-owned renewable energy projects to meet the needs of a group of customers. By carefully shopping for the best investment opportunities for a broad base of customers—rather than catering to specific companies’ needs—utilities could perhaps further reduce the cost of renewable energy. A carefully designed green tariff could provide benefits throughout a particular community. It can offer customers the renewable energy they want at a lower cost, provide the utility with a way to maintain a positive relationship with those customers, and cost-effectively scale up the use of renewable energy in new markets.

LEARN MORE: To explore green tariffs in greater depth—including consumer electricity trends, utility drivers, tariff structure and next steps—download the WRI working paper, Above and Beyond: Green Tariff Design for Traditional Utilities.