April 2007

Kermitology

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

That the tipping point in national belief in global warming’s existence has occurred is not news.  What it means for different facets of the energy business -- notably renewable energy -- is actually more problematic than it may seem.  Time recently published a list of 51 things its readers could do to “make a difference” with respect to global warming.  Some items on the list would warm an energy merchant’s heart:  “Buy Green Power, at Home or Away.”  Some were pseudo-policy pronouncements: “Pay the Carbon Tax” -- you may not know we had one but, Time assured us,  it’s better than the “cap & trade” schemes Congress and California are pursuing.  And other suggestions empowered us all to make a statement, without mercy to non-energy merchants (“Remove the Tie”), and enhancing -- if not entrancing --others (“Wear Green Eye Shadow.”).

Everyone has joined in the denunciation of  global warming.  There’s a simple reason.  As the spokesman for the Alliance of Auto-Manufacturers put it:  “If you’re not at the carbon negotiating table, you’re on the menu.”  True.  But, I would warn energy entrepreneurs, if you’re not on the green menu, you’re not at the table (to earn traditional green -- or Euro currency colors.)  It’s well and good for renewables advocates to “prove” analytically that by 2025 renewable energy could provide more than the US needs for new power capacity, and by 2030 could supply 30-40% of US petroleum products.  The reality of renewables usage will be materially affected by how carbon-minimizers evaluate their contribution to abatement and adaptation.

The increasingly Commonly Accepted Wisdom among the carbonoscenti is that to stabilize carbon emissions, seven different categories of reduction techniques will be used -- not a single magic bullet.  Renewables is one of these “wedges.”  So too -- and in many cases immediately more effective -- is reduction of energy use.  More perceptibly direct is powerplant pollution control, and right up there (as EDF has now recognized) is nuclear power.  Nuclear is by far the largest single source component of carbon reductions achieved by US voluntary programs.  And out at the technological margins the higher tech direct carbon solutions like  IGCC full commercialization and CO₂ storage are the long term solutions looked to as the consequences of cap and trade. 

So to understand, know the comparative “value” of the renewable energy resource merchant’s product, it is necessary to view the world through green eyeshades, green eyeshadow, and green currencies:  those firms needing or perceiving the future need to have a legal compliance or a social PR;  Kermitologists reflecting the general public’s increasing angst at pictures of stranded penguins, dried up riverbeds, and prospects of flooded coastal plains; and financial commodity traders who see carbon futures trading as the greatest thing since tulipmania. 

But what does it mean to purveyors of renewable energy solutions?

·                    First, the need to grapple with no new metrics of social utility: demonstration of mitigation through the actual avoidance of emissions from fossil fuel sources which otherwise would have occurred.  Evaluation of the net carbon balances of their physical production;  competitive assessment of  carbon displacement profiles with competing energy sources.  The comparative measurement and explicit and implicit monetary valuation given by government based on the metrics is critical to the renewable industry.  It is principally the life time system merits of improving renewables from carbon displacement perspective are legally recognized by governments that they will thrive. 

·                     Second, recognition that the Renewable Energy Credits programs of individual states are not today a vehicle for the denomination and trading of carbon rights.  The price assigned to RECs in effect includes limited implicit value, and no explicit value, for carbon mitigation potential of  renewable green energy purchases.  Only now is a modest first stab at modifying this situation being undertaken by a joint working group made up of American Bar Association/Emissions Market Association/American Council on Renewable Energy members.  Some rigorous carbonomicists simply view RECs (like European feeder tariffs) as a special interest diversion from the GHG-reduction crusade, or a second order of merit type of market.

Whether renewable energy will be given explicit value in a future US GHG cap and trade system is of course, still problematic.  Perhaps renewables will be afforded some type of set-aside or special valuation in the system.  But the form that will take, and  what proof of carbon displacement additionally will be required to prove the renewables’ “value,” remains to be seen.

Certainly the current European scheme, the basic EU ETS which is presently in place, relegates the promotion and growth of renewables  to the realm of special side effects motivated by the individual policies of member states.  The CDM and JI initiatives for the creation of offset carbon credits which may be used in the EU ETS system are project-specific in nature.  They are not limited to renewables, and in fact, from a cost-effectiveness standpoint, near-term may best be served  by various industrial gas reduction projects which offer lower capital delivery costs, with less reliance on project finance.  By contrast, repowering medium hydro, wind, or biomass cogeneration take longer to complete, present higher risk, and may present measurement issues.  There is an absence of long-term perspective enshrined in the system. 

So the amount of renewable green energy on the national carbon reduction menu remains to emerge as a consequence of the actual shape of longer term legislation and regulation, the effectiveness of competing technologies in the US, abroad, and to the extent they can be interfaced.  Renewables clearly not being served as dessert at the GHG Earth Day party, even though Time’s recommendation #28, complete with appropriate cake illustration, is: “Have a Green Wedding.”  Serious evaluation is required of the following three basic questions:

(1)              
What role do renewables play in the GHG/Carbon Reduction and related Offset Schemes presently in place in the world?

(2)              
What form should the US GHG markets take relative to the present European GHG/Carbon Reduction Scheme so that renewables play an optimum role?

(3)              
What public policy incentive programs and regulatory formulations would make renewable energy most pertinent to GHG/Carbon reduction programs on a sustainable basis?

This word of Kermitological advice is offered:  It’s harder to be a renewable green merchant then you think in the new GHG world.  It is up to the industry to better identify its niche and make sure it continues to occupy it in the GHG 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.