October 2005

RECs SECTS

by Roger Feldman  --   Bingham, Dana L.L.P.
(originally published by PMA OnLine Magazine: 2005/10/31)
 

“Renewable Energy Credits” - a potential boon to merchant power — involve the creation of a new property right that the Founding Fathers demonstrably did not think of (but might have if the current circumstances obtained). It will never get there if the culture wars - not just between Blue and Red, but between shades of green - brings it down. The following guide to RECs SECTS illuminates my point and its implications for merchant power developers.

One of the areas on which the Energy Policy Act of 2005 essentially was silent was the ways in which commodity market operations could be encouraged to enhance power production or deal with the environmental bottlenecks to clean new power development. Into that vacuum has flowed a variety of different schools of thought.

As a starting point, what we have today are approximately 20 States in regions of the country generally corresponding to those where RTOs or similar organizations have taken root prescribing minimum power purchases of differently specified types of renewables (“RPS”) and setting different types of rules as to potential sources of sales into the States.

Providing the necessary infrastructure for creation to issue verification and tracking and retirement of RECs are Generation Attribution Tracking Systems (GATS). Currently they operate in ERCOT, NEPOOL and Wisconsin (soon to be part of the Midwest Renewable Energy Tracking System). Coming aboard soon will be PTM and the massive WREGIS for the Western States. Note: these GATS are designed as registry systems, some with electronic bilateral contract facilitation. There is no national trading floor. It is toward this grail - Congressionally scorned - that proponents of RECs as a sustainable development credit source strive in different ways; with divergent themes.

Beyond that, we have widely branching schools of thought as to where the RECs notion might go. For lack of generally accepted terminology, I term the two leading schools — “clean fuels” and “renewables.” The “clean fuels” proponents almost gained the Congressional heights. Their notion was that RPS should extend to any type of energy that contributes to a better environment and incidentally more domestic sourcing, without reference to its sourcing, i.e. including notably clean coal and nuclear. This approach challenges the renewables to justify themselves on an environmental policy basis. Were it to be associated with RECs (whether or not tradable) it could essentially confirm the role of traditional baseload plant builders (who are getting the go-ahead to be the new generation of plants even in competitive states.

The Renewables have a non-voluntary school of thought that government should use compliance market mechanisms to foster green applications for environmental and fuel diversity reasons. RECs should be a means of meeting green compliance standards, thereby swelling the alternative, somewhat distributed resource generation market. While exposed to merciless derision by its opponents for potentially promoting non-economic energy results, the approach is potentially consistent with the core concepts of “internalizing an externality”.

A corollary financing thought here is that those renewable markets can swell if there is a “trading floor” nationally for renewables. Then, wind RECS from Wyoming can be purchased to help Florida utilities meet their green RPS quotas, thereby benefiting both. Markets for the actual energy commodities (including power) now drive the daily operation of our national system; so too the argument runs should uniformly defined green-ness traded via standardized contracts and implemented on a national trading floor. (This is a current goal toward which the ABA-EMA ACORE project is directed.)

Major disputes roil the compliance renewables camp include “Bundling” vs. “Unbundling,” i.e., marketability of the green component separate from the power component. It pits, for example, the CPUC and traders against an unlikely combination of self sufficient utilities on the one hand and certain consumer groups on the other. Out-ofstate sourcing and valuation of credits are other arguments within the bundled sphere.

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.