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Smashing the Green Atom by Roger Feldman -- Bingham, Dana L.L.P. The news from the Washington Metro is not just of DeLays but of RECs. Senator Domenici recently announced that consideration of some type of clean energy portfolio standard was a concept which he would entertain as part of the new forthcoming Energy Act. Earlier Democratic proposals in Congress for a 10% green Renewables Portfolio Standard requirement by 2020 had foundered The Domenici approach is to add clean coal and nuclear power to the definition of “renewables” on the substantive grounds that these fuels have reduced harmful emissions as effectively as their green competitors and to dub the amalgam “Generation Portfolio Standards.” (There was also a suggestion of broadening acceptability of the politically rebuffed“ Renewable Portfolio Standard” if such inclusion was effected.) If nothing else, the Domenici proposal energized like thinking blue state minds on the need for “green-peace”, if an RPS was really to benefit renewable technologies. Attention on the emerging market for the related concept of “renewableenergy certificates” (RECs) already had been focused by the issuance of a major study on the subject by the National Renewable Energy Laboratory (NREL/TP-620-37388) and a joint undertaking by the Emissions Marketing Association/American Bar Association/American Council on Renewable Energy (recs.committee@emissions.org) to develop a standard industry agreement for trading transactions for RECs (or “green tags”). Reflecting cognizance that more and more of their members are being confronted with Renewable Portfolio Standards’ requirements by States, in which they make retail sales, EEI has also formed such a working group and elected to participate in the committee. Interest in RECs has been fanned too because of its confluence - whether apparent or real - with the still fragmented U.S. state efforts to deal with the global warming consequences of CO2 emissions - some of which could be displaced placed by renewables. Eliot Spitzer and several other State AGs have begun suing utilities, demanding that they reduce such emissions. Senator John McCain continues to carry the banner for carbon reductions. For supporters of renewables, it may seem to be a “What’s not to like?” situation. But three issues seem likely to emerge which will cloud that conclusions: complexity, diversity and economics. RECs, like atoms, are not the unified bodies their sponsors may have envisioned. In a brilliant stroke of metaphysics (defining economic characteristics as tangible realities) the commodity “electricity” has been split into its energy and its green (i.e. renewable source) elements. Following the pattern developed in the environmental pollution field of creating markets for previously disdained externalities by making their possession of value, “green tags” were first voluntarily created for bundling with retail sales to make them “green” in consumer eyes. Subsequently, State Resource Performance Standards created mandates for which acquired“ Renewable Energy Credits” would serve to provide compliance by utilities. Once green products and wholesale compliance products can be marketed and have value, they can also be traded, aggregated and sold as futures. The 2010 REC compliance markets are estimated by NREL as $100-$300million for the “voluntary” markets for green tags and $600million for RPS-fulfilling compliance markets. In supplier constrained markets, such as New England, prices for RECs have gone as high as $35-$49/MWH for new renewable energy sources. But when an economic value is founded on a theology (“internalization of economic externalities”) and in the absence of Federal Uniform Standards; that theology is formulated differently in the 50 American alchemical laboratories of democracy; is monitored and accounted for differently in the several different emerging regionally sponsored electronic data tracking systems being established, and has the breath of Kyoto Zen breathed into it, the potential for confusion of its definition is rampant. This confusion regarding the definition of RECs is captured in this NREL assertion, whose institutional blandness obscures the heated debate regarding its conclusion.“ A REC definition that includes environmental attributes (insofar as Federal and State laws and regulations have not taken specific attributes as a matter of law) is more credible and more practical given policy precedent, difficulties in tracking the separation of attributes, the possibility of consumer confusion in an alternative definition were used, and the fact that the market has been operating for a number of years under a definition that assumes environmental attributes are included.” (emphasis added) The definition is proposed to minimize the confusions which manifests itself in the effort for generators and marketers to color all renewable electrons as reward-winning green for dollar purposes. Otherwise, this might not be the case for those renewables located where RECs are sourced from areasiin which emissions markets (such as CO2and NOx) are regulated by cap and trade programs, and reductions of overall emissions are unlikely. Introduction of“ environmental attributes” into the RECs definition also stirs up divisions among proponents of divergent green technologies- particularly those like landfill gas,whose methane reduction of future carbon emissions, could receive short shrift- and ire on the part of those who point out, a renewable “green atom” may be ofgreater economic value if its true energy, environmental and green statutory compliance components remain unbundled. In the end, it’s about “greengoods” as well as “green attributes”. Renewable energy developers need a guaranteed revenue stream to finance new projects. Voluntary markets generally provide insufficient firm markets; depending on the region, compliance markets may still not provide sufficiently firm enough revenues. It is for this reason that there has been a gradual proliferation of states either requiring REC contracts as part of RPS statutes or establishing special funds to create RECs markets. Private RECs trading systems need to be judged by their ability to support private finance markets as well as by the clarity and firmness of the arrangements they impose. Legal work is required not only to firm up RECs’ financing requirements, but to resolve questions such as: ownership of RECs under PURPA and other regulatory programs; opportunities for renewables to participate in emissions markets; and compliance by RECs (with or with out disaggregated attributes) indifferent states’ RPS requirements (whether or not generated in these states). Similarly, seeking to reconcile trading conventions with security requirements, so that transactions are fully bookable; deducting increments of RPS requirements in some jurisdictions as part of tracking; reconciling “green tag” objective voluntary definitions with RPS compliance definitions in others - all are legal challenges just within the buzzing green, non- “Generation Portfolio Standard” workshop America’s Founding Fathers split church and state (up to now, anyway). Can the green atom be similarly split and accounted for, or absent Pax Domenici, is the market slated to become just a “great green wreck”? One can only hope the solution is “E Pluribus Unum.” ROGER FELDMAN, Co-Chair of Andrews Kurth LLP Climate Change and Carbon Markets Group has practiced law related to the finance of environmental and energy projects and companies for 40 years. In particular, he has analyzed and executed a wide variety and substantial value of project financings. He chairs the American Bar Association’s Committee on Carbon Trading and Finance, serves on the Board of the American Council for Renewable Energy, and has been a senior official in the Federal Energy Administration. He is a graduate of Brown University, Yale Law School and Harvard Business School. |
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