Jon Muller crunched the numbers on a way for homeowners to claim they are using renewable energy without installing wind turbines or solar panels. -promoted by desmoinesdem

This post is for those who want to encourage renewable energy, and are willing to put their money where their mouth is. This isn’t for people who are merely willing to reduce consumption, which has the side benefit of actually saving money. We’re talking about people willing to pay more for their electricity if they think it’s renewable.

While I don’t personally fall into this demographic, the following information may be helpful to ensure people don’t overpay for the right to claim they are using renewable energy. Or alternatively, to maximize the amount of renewable energy production per extra dollar they are willing to spend.

You may have heard of a company called Arcadia Power, which offers homeowners a way to power their homes with renewable energy (ie. wind and solar) without actually installing any equipment. It’s an interesting approach to increasing demand for soft energy.

It works like this. You sign up with Arcadia, and that empowers them to receive your utility bill on your behalf. They are essentially an aggregator for Renewable Energy Credits (RECs). They buy RECs from various sources, than allocate the RECs to their customers. RECs are typically traded by utility companies that operate in states with Renewable Portfolio Standards (RPS). Utilities in many cases can purchase RECs from renewable energy producers, essentially taking credit for the power that is produced without actually having to construct renewable power plants, such as wind farms or solar arrays. But in the case of Arcadia Power, they sell the RECs to homeowners (and businesses) who are willing to pay for them, even though no law requires them to do so.

You are not technically using renewable energy. Your utility is still providing the electricity into the grid that you subsequently consume. It’s more like you’re voting for renewable energy. If a wind farm is sending electricity into the grid, and the RECs are consumed (as a matter of accounting) by Arcadia’s customers, then it cannot be allocated to or consumed by any other entity. By increasing demand for RECs, it will in theory raise the price of RECs, and utilities will either have to build renewable energy facilities or pay the rising price of the RECs to meet their State’s RPS. Your decision to vote for wind energy at your home will (again, in theory) ….on the margin….increase renewable energy production upstream, in some utility in some state. RECs are fungible. They can be used anywhere.

So how does Arcadia make money? In two ways. They have a Free Option and a Premium Option.

The Free Option allows you to participate with 50 percent of your usage. It’s cheap, but not quite free. Their billing system gets your utility bill, then automatically draws your payment from your bank account 3 days later. While I haven’t researched all utilities, MidAmerican Energy gave me 22 days to pay my bill after they cut it. Not really a big deal, right? Actually it adds up, but it depends on your cost of capital.

Say your bill is $150 per month. You’re giving Arcadia Power the use of your funds for 19 days a month, or 228 days a year. That’s an average daily cash position for Arcadia Power of $93.69. If your marginal cost of capital (the highest interest rate you pay on your highest debt) is 5 percent, then that works out to a cost to you of $4.68 per year, a small fraction of your annual utility expense.

Arcadia Power is a privately held company. A private equity deck was available for a price, but I did not buy it. But it’s unlikely their cost of capital is less than 10 percent. That would imply a benefit to them of $9.37 per year, per customer like you. 100,000 customers like you would provide a benefit to Arcadia Power of nearly $1 million.

The Premium Option allows you to offset 100 percent of your usage in favor of renewable energy. Arcadia charges you 1.5 cents per kWH. If you’re currently paying 10 cents, that’s a 15 percent increase in your utility bill. If you use an average of 1,500 kWH per month, for example, the cost of the service would be $22.50 per month, or $270 per year (plus the minor cost of money, as described above).

But this is where it gets a little hinky. You’re not really paying 1.5 cents per kWH to make an election for renewable energy. You’re paying 3 cents per kWH for the last half of your consumption. That’s because the first 50 percent would have been free.

So, the bottom line is, the Free Option is a really good deal, provided you’re confident Arcadia will pay your bill after you pay them. Payment of your bill is ultimately your responsibility. In the example provided, you are able to offset 9,000 kWH of electricity for something like $5 or $10. Each REC is 1,000 kWH, so that’s 9 RECs for $1 each or less. The Premium Plan has you paying $270 to offset the second 9,000 kWH per year. That works out to $30 per REC.

There are options that are better than the Premium Option. One of them is possibly better than the Free Option as well. You can either 1) buy RECs directly and avoid the middleman, or 2) take the plunge and put solar panels on your roof. (There is actually a third option. You could determine the cost of the options, and simply make a donation to the Sierra Club or environmental organization of your choice. Or give a political contribution to a candidate fighting for renewable energy.)

The first option is eliminating the middleman. Bonneville Environmental Foundation (BEF) sells RECs directly to anyone. You don’t have to send your bill anywhere. I purchased one REC for $8.00, which is $7 more than Arcadia’s Free Option, but $22 less than the Premium Option. It takes no longer than ordering a sandwich from Jimmy John’s. There may be other options similar to this organization; I didn’t look further once I found this one. That said, with respect to pure REC options, here’s what you’re looking at:

100 percent Offset with Arcadia: $275
100 percent Offset with BEF: $144
100 percent Offset with Arcadia/BEF Mix: $77

Again, these are the costs of “voting” for renewable energy. The other option would be to consider investing in a solar array for your home. That’s a blog entry unto itself. But in many places, including MidAmerican territory in Iowa, a solar array for your house is more cost-effective than any of the REC options. It also doesn’t rely on any economic theories to determine whether or not you’ve actually reduced consumption of fossil fuels, if that is indeed your objective.

Without getting too far into the weeds, I ran the numbers for my house, assuming $3.00/watt array cost, 1.5 percent utility inflation, and 0.5 percent annual decay in output. The cost after credits for my array would be about $24,000. I would save approximately $1,800 per year, growing about 1 percent per year. I can borrow the money for 4.25 percent. On a Net Present Value basis, I would save $27,000 over 20 years. In other words, instead of paying an extra 15 percent to Arcadia Power to use RECs, I’d save 12.5 percent to actually reduce electricity purchased from the utility.

For my purposes, that’s probably not a sufficient rate of return to justify the upfront expense. But at least the sign is positive rather than negative. And you would be 100 percent certain that you’ve actually reduced consumption of fossil fuels.

One last bit of advice. Before you even think of buying RECs or installing solar panels (or possibly donating to the Sierra Club), do the simple things you can do to reduce your energy consumption. Replace all your incandescent lights with LEDs. If you have already replaced all your incandescent lights with CFLs, then replace your CFLs with LEDs. With rebates available, and periodic sale prices on LEDs, the payoff will be closer to a dozen months than a dozen years. Nothing else comes close.

Of course, do all the other things that have high payoffs, such as energy efficient appliances, insulation, windows. There are so many things you can do to reduce your consumption of fossil fuels, and actually save money in the process. Buying RECs to reduce your carbon footprint, just as installing solar panels, should be something you do after you have made the sensible investments that actually save you money.