California PUC decision could greatly impact its tradable REC

California Public Utilities Commission (CPUC) recently proposed to end a moratorium on the approval of tradable renewable-energy credits (TREC) transactions, and raise the cap for large investor-owned utilities to 40%. RECs are tradable energy commodities that represent 1 MWh of electricity generated from an eligible renewable energy resource.

At its March meeting, the CPUC authorized the use of TRECs for compliance with California’s renewable portfolio standard (RPS), subject to certain limitations. These included a cap limiting the use of TRECs for RPS compliance for the largest investor-owned utilities (Pacific Gas and Electric, Southern California Edison, and San Diego Gas and Electric) to 25% of their annual RPS compliance obligations. That cap was to remain in place until December 31, 2011, when the CPUC would consider modifying or removing it. The CPUC also imposed a price cap of $50 per TREC, which expires on the same date.

After the March decision, the three large utilities filed a joint petition, seeking modification of the usage and price caps and of the criteria used to determine whether a contract was a TREC transaction subject to the 25% cap. The Independent Energy Producers Association also filed a petition seeking modification of the criteria used to determine whether a contract was a TREC transaction.

In May, the CPUC issued a decision holding implementation of the March decision pending resolution of the petitions. At this time, the CPUC also imposed a moratorium on the approval of any contracts that would be defined as TREC transactions under the March decision.

The most recent proposed decision would lift the hold imposed in May, and end the moratorium on approval of contracts defined as TREC transactions. It would also modify the cap on TREC transactions, allowing the largest investor-owned utilities to meet up to 40% of their annual compliance obligations through TREC transactions. The decision would further modify the cap by exempting future deliveries under contracts approved prior to the effective date of the March decision from counting toward the cap. That decision would have included any future deliveries under existing contracts categorized as TREC transactions towards the 25% cap. The recent decision, however, would not alter the criteria used to determine whether a transaction was a TREC transaction.

The definition of TRECs established in the March Decision (and unchanged by the recent decision) could have a significant effect on the use of generation from renewable resources located outside of California. TRECS are generally traded apart from the energy associated with their creation. This contrasts with bundled transactions in which both renewable-energy credits and the associated power are sold together. The March decision defined bundled transactions as any transaction with a generator that had its first point of interconnection with a California balancing authority, or in which the power associated with the renewable energy credits was dynamically transferred to a California balancing authority. The March decision also recognized that some transactions with firm transmission arrangements might qualify as bundled transactions, but left that for future consideration.

The definition of bundled transactions adopted by the March decision would mean that any transactions with renewable resources that do not have their first point of interconnection with a California balancing authority, or do not transfer power to a California balancing authority, would be deemed a TREC transaction subject to the cap. This would be true even if the renewable resource delivered power to California under a firming and shaping arrangement. The more generous cap proposed by the recent decision would allow California’s largest investor-owned utilities to enter into more contracts with renewable resources located outside the state.

Stoel Rivers LLP

www.stoel.com

How Will the Waxman-Markey Bill Affect the Energy Industry?

Controversy has arisen around the House of Representatives’ approval of the American Clean Energy and Security Act (ACES) of 2009, also referred to as the Waxman-Markey bill. As you’d expect, many coal-powered utilities are taking a public stand against the bill which limits allowable carbon emissions, while firms with investments in carbon-neutral power production are big supporters. After much research and considering the effects of the ACES bill on the American economy and the environment, it is apparent that there is no right nor wrong side, no impending doom, nor heraldic solution – only winners and losers.

Many scientists are convinced greenhouse gases, such as CO2 and SO2, impact our environment by increasing average temperatures around the globe. However, CO2 and other greenhouse gases are vital to our planets entire ecosystem. A study published in the New York Times states that without greenhouse gases, global average temperatures could be some 30 Fahrenheit degrees lower than they are today. Hence, it is increasingly difficult to show that the excessive emissions of the 20th, and now 21st, centuries have either directly or indirectly led to the global warming we now experience. A review of historical climate trends shows global temperatures naturally fluctuating. Due to this fluctuation it is not conclusive whether global warming is due to man’s irresponsible contributions, such as greenhouse gas emissions, or whether the warming stems from natural phenomena. Still, it is hard to debate that excessive emissions are good for the environment.

Here’s where Henry Waxman (D-CA) and Edward Markey (D-MA) come in. They have devised a way to limit total U.S. carbon emissions by 2050 to 83% of 2005 levels. Great! The government will finally assist Americans in reducing their carbon footprint. Of course, it’s not that simple. Controversy arises in the very mechanisms of the bill – cap and trade.

The Waxman-Markey bill, or ACES, will set a cap on the amount of carbon emissions allowed in the U.S. throughout any given year. Renewable electricity credits (RECs) will be sold to electricity producers that use high-carbon emitting fuels, such as coal (which emits about 2,200 lbs of CO2 per MWh). At the same time, companies that produce power through lowcarbon emitting sources, such as natural gas (which emits about 1,100 lbs of CO2 per MWh), need not purchase RECs nor will they recieve extras. Finally, companies that produce electricity without emitting any CO2, such as wind and solar, will be given one REC per MWh produced.

The next step is where the problem balloons, the trade portion. After distributing the RECs to companies, those holding extra credits can trade them to those emitting excess carbon. The intermediary for this trading will be the worldwide commodities trading markets such as the New York Stock Exchange or the Chicago Mercantile Exchange. Here, investors are not interested in keeping energy prices low, nor are they concerned with lowering greenhouse gas emissions. They are not even interested in the economic effects their trading has on the energy industry. They simply wants to turn a profit. Trading does have its place, but too much trading can get out of hand. Recall the summer of 2008 when oil prices skyrocketed to $147/barrel due largely to investor speculation and greed. Because of this trade portion in the bill, the National Association of Manufacturers, in association with Science Application International Corp., expects as much as a 50% increase in consumer electricity prices and as little as 22% for industrial application by 2030. Other sources predict a more moderate outlook.

While you can debate the bill’s pros and cons, companies with an investment in wind, solar, hydro, and other carbon neutral energy sources will certainly flourish with the passing of the Waxman-Markey bill. Electricity producers will be scrambling to reduce their carbon emissions thereby decreasing their REC costs. Subsequently, wind-turbine OEMs will experience a boom in demand.

So when all is said and done, who are the winners and who are the losers? The losers will be those slow to invest in low carbon-emitting power sources. And winners: those involved in renewable energy.

Another topic to discuss is how ACES will impact consumers. Will we be losers paying upwards of an additional $1,800/year just because the law states that the old ways of producing energy is bad? Or will we be the winners, living in a rejuvenated and clean society free of harmful emissions? What do you think? For a more detailed information, including video discussions, visit my blog on the Engineering Exchange.