March 2007

Tip-In Point

by Roger Feldman  --   Andrews Kurth, LLP
(originally published by PMA OnLine Magazine: 2008/01/05)
 

In our electronic trendy society, supposed “tipping points” where there are said to be basic societal changes, come and go too quickly for good public policy as well as for entrepreneurial innovators, capital investors and companies -- both utility and industrial -- all trying to adapt their strategies to the political winds.  Andy Warhol, the late social philosopher, once said that in the future everyone will have fifteen minutes of fame; the fear is that in an energy context this will come out sounding like this:  “Renewables and Conservation -- that’s so ‘70s.”  Are we at such a tipping point?  Well, it is certainly March Madness at least.  In a single week Silicon Valley proclaimed on the front page of the paper that clean technology to combat climate change is the next big VC boom, the Times lauded the environmental activist groups which used the web and worked with Goldman Sachs to influence the resource plan shape of the TXU takeover bid;   The Wall Street Journal headlined a giant windpower land gamble in Texas by several multinational corporations, and -- to make us all nervous -- Al Gore’s Oscar celebrity hosts declared themselves 100% carbon neutrals and wind-powered, although they themselves owned no windmills.

Well folks, it’s not a tipping point but a bubble unless these developments actually work to solve problems.  We have to recognize, for openers, that there are three different types of proposed solutions to relatable but different energy  problems of our day.

1.      Promotion of renewable energy resources as: (a) a domestic supply source for stationary and mobile sources (i.e., for “energy security”),  (b) near term enlarged electricity requirements (i.e., resurgent post-deregulation “need for power”), and  (c) as a source of reductions of all hydrocarbon uses (“global warming reduction”).

2.      Promotion of a combination of:  (a) technical energy efficiency (e.g., CHP),  (b) economically reduced energy efficiency (i.e., demand response reduction),  and  (c) moral (voluntary) suasion, to achieve similar objectives, while controlling rate increases through either utility practices or improved energy efficiency patterns.

3.      Promotion of mandatory environmental “cap and trade” global warming “schemes” which trigger response efforts using not only energy renewables and energy efficiency, but also technological breakthroughs aimed at pollution reduction (and possibly ancillary commercial uses).

Here, though, is the March Madness “tip-in point”: what is proposed can’t be said to be a “solution” unless it operates through a market mechanism that “monetizes” the consequences of these strategies in a way which demonstrably stimulates results in energy patterns.

In the vacuum left by the Federal government on these matters -- which may perhaps be a good thing in terms of allowing regional-specific mixed use of energy efficiency and renewables to achieve such solutions -- we have seen 23 states develop different types of Renewable Energy Credit programs (and several separate voluntary Certificate programs emerge) and we have seen 8 states following Texas to develop standards as well for Energy Efficiency Reduction Credits (for which some analogous voluntary programs are emerging).

Both renewable and energy efficiency programs require utilities to meet certain performance standards and purchase shortfalls in defined needed energy or efficiency compliance, as the case may be, from third-parties (or pay penalties).  Increasingly there is a drum beat for regulators to treat utilities just as well from a rate standpoint when they conform to these regimens as when they use their own assets to produce power (so called “decoupling”).

State proliferation has, in the case of each type of credit, naturally led the product of mechanisms to achieve national fungibility of the type in question. 

In the case of RECs, an industry working group, which I co-chaired, released version 1.0 of a standard form contract for national trading of renewable energy certificates (RECs), or “green tags.”  The document culminated a two-year effort by the working group, organized by two American Bar Association Committees, the Environmental Markets Association, and the American Council on Renewable Energy.  The Agreement is designed so that it can be used for RECs available in any state or non-profit REC programs then in existence.  The intention is that as people become accustomed to using it in bilateral transactions to effect the buying and selling of RECs, barriers between jurisdictions will erode and this, in turn, will pave the way for a national marketplace in RECs that is accessible to large and small players alike.

http://www.abanet.org/environ/committees/renewableenergy/RECMasterContract.pdf

Federal legislation under development for inclusion in the Senate energy bill would follow a format of increased energy efficiency obligations up to 1% per year for electric and gas providers.  Utilities, ESCOs, state and local government, and consumer equipment manufacturers could be sources of efficiency “supply” or equipment, materials, and practices that offer equivalent or  superior performance with less energy consumption. Credits can be aggregated for sale by third parties.  (Note: programs like “demand response” are generally considered “conservation” rather than “energy efficiency,” and are not included.)

Federal legislation for carbon is, of course, a major thrust of this Congress in terms of national cap and trade standards and carbon tax possibilities.

Whether the “monetization” solutions for renewable energy and efficiency and carbon credits will produce the “solution” to the “problem” that will keep clean tech from succumbing to the “15 minutes of fame” phenomenon in our culture is critical. 

Three key questions affecting the business and policy sustainability of the monetization “tip-in” solution need to be answered.  While they all may be tried at once through some mixture of incentives, it is important to consider the following questions:

1.         Will the proposed programs be  harmonious in operation in producing mutually-supportive results, e.g., optimum power production at minimum environmental cost?

2.         Do the proposed programs  have the potential throw weight to support the underlying national goals without encountering either major pushback or requiring other affirmative government programs?

3.         Are the economics of the program compelling enough -- even given the economic subsidies which they implicitly require governments to pay -- to constitute sustainable public policies which can be relied upon to support private business and thereby themselves continue to be sustainable?

In sum:  Will there be a “tip in” to provide the Big Green Team with a triumph in the March Madness of the energy world?

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.