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Implications of Carbon Regulation for Renewable Energy Markets

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					Implications of Carbon Regulation for Renewable Energy Markets Lori Bird, NREL Energy Analysis Seminar July 12, 2007

Introduction
• Voluntary green power market growing rapidly
– Estimated $50-$70 million industry in 2005 – ~2,000 MW of new renewables supply voluntary markets (20% of total new RE capacity since 1997)

• Voluntary RE markets play important role:
– Empower consumers; enable action beyond mandates – Educate public about renewables

• What will happen to voluntary RE markets if carbon is regulated under cap and trade? • How will compliance REC markets be affected? • This presentation is based on recent NREL report with co-authors Ed Holt and Ghita Carroll

U.S. Voluntary Green Power Sales
(in millions of kWh) 2003 2004 2005 2006

Utility Green Pricing

1,280

1,840

2,450

3,400

Competitive Markets

1,900

2,650

2,150

?

REC Markets

660

1,720

3,890

?

Retail Total
% Change

3,840
--

6,210
62%

8,490
37%

12,000+
40%+

EPA Green Power Partners purchased 6.9 billion kWh of green power in 2006.

Estimated Future RPS and Voluntary Market Demand
120,000

100,000

million kWh/yr

80,000 RPS Voluntary Markets

60,000

40,000

20,000

0 2003

2004

2005

2006

2007

2008

2009

2010

Sources: UCS RPS targets; NREL voluntary markets Voluntary market projections assume 35% growth; actual growth ranged from 35% to 60% from 2003 to 2006

Top 20 U.S. Green Power Purchasers
(as of April 2007)
MWh/yr 1,105,045 550,000 463,128 1. PepsiCo 2. Wells Fargo & Company 3. Whole Foods Market 4. US Air Force 457,500 5. Johnson & Johnson 6. US EPA 7. LA County Sanitation 8. Starbucks 9. DuPont Company 10. US Dept of Energy 11. Vail Resorts 12. HSBC North America 13. Cisco Systems, Inc. 14. Staples 15. New York University 16. World Bank Group 17. University of Pennsylvania 18. IBM Corporation 19. US Dept of Veterans Affairs 20. NatureWorks LLC

400,703 329,880 196,003 185,000 180,000 165,063 152,000 124,544 124,106 121,404 118,616 114,735 112,000 109,704 90,000 89,000

Source: U.S. EPA Green Power Partnership

What’s in a REC?
• Absent regulation, property right for CO2 is not assigned • REC is currently used to capture CO2 value • However, not all RECs are same…contracts specify details
NOx

Energy security

CO2

Hg Resource diversity

Economic development

Many Voluntary Purchasers Buy RECs for Greenhouse Gas Benefits
• Clearer evidence from nonresidential customers, than residential sector
– Purchasing green power to meet GHG reduction goals – Purchaser news releases cite GHG reductions

• Products touting carbon benefits growing
– Carbon footprint calculators, selling tons CO2 displaced

Examples of Importance of Climate Change in Purchasing Decisions
“The most pressing issue of our time is climate

change….If everyone in the world bought renewable energy certificates like we have done, we‟d be well on our way to solving the climate problem.” – Aspen Skiing Co. news release March 2006

“Recognizing the importance of climate change, last December HSBC became the world's first major bank to commit to carbon neutrality and…has offset a substantial quantity of its carbon emissions by purchasing 79,181 MWh of clean, wind energy certificates.” – HSBC Bank News Release April 22, 2005

Scope of Current CO2 Claims for RECs: The Debate
• General Consensus: RECs can improve emissions profile of electricity purchases (green-up indirect emissions) • Currently, RE provides a CO2 emissions benefit by displacing conventional generation
– either avoiding new plant or backing down existing plant – value can be captured in the REC

• Can RECs be used as “offsets” for other types of emissions (automotive, airplane)?
– Debate largely over whether RECs are additional to what would have otherwise occurred without customer payment

• Need for industry standards and consensus
– Green-e GHG standard is forthcoming

Greenhouse Gas Accounting Definitions
Definition
Direct Emissions (scope 1) Emissions controlled by organization

Examples
Emissions from onsite generation, other energy use

Indirect Emissions (scope 2)
Other Indirect (scope 3) Offsets

Emissions outside of direct control of entity

Power purchases

Other emissions outside of Employee travel, direct control manufacturing Reductions achieved Forestry projects, through projects outside of methane capture scope of company‟s indirect or direct emissions

Debate in the Press
Financial Times, “Industry caught in carbon „smokescreen‟” 4/25/2007 “Widespread instances of people and organisations buying worthless credits that do not yield any reductions in carbon emissions. Brokers providing services of questionable or no value. A shortage of verification, making it difficult for buyers to assess the true value of carbon credits.” Market needs credibility to continue to grow

Will Future RECs Convey GHG Benefits?
• Depends on policy and design

• Carbon tax won‟t impact ability of RECs to convey CO2 benefits
• Carbon cap and trade may limit ability of RE to affect overall emissions levels, depending on design
– CO2 property right determined by allowance – Key question: will renewables be granted allowances?

Cap and Trade Design 101
• Set level of cap • Determine number of allowances (each allowance equals 1 ton, sum to cap level) • Distribute allowances to emitters
– – – – – Based on historic emissions (SO2) Output-based (MWh generation) Load-based (under discussion in CA) Auction (some RGGI states plan to use) Set aside for EE/RE (SO2, NOx SIP call, CAIR)

• Generally, cap is lowered over time

Future RE Emissions Benefits and Claims Under Cap and Trade
• Renewables will be able to reduce total CO2 level if:
– CO2 allowances are retired or – the cap accounts for future RE

• Otherwise, RE displaces conventional generation, but total emissions unchanged
– freed-up allowances are sold to another emitter, bringing emissions back up to cap

Will Renewables Get Allowances?
• Open question for CO2 • Policy precedent for other pollutants
– Title IV SO2 program included EE/RE set aside, although not widely used for RE – 7 states have EE/RE set asides under NOx Budget trading program – Additional states have proposed set asides under new Clean Air Interstate Rule (CAIR)

Voluntary REC Market Issues
• If RE does not reduce CO2 emissions
– Consumers may lose motivation to buy RE (lower demand) – or value of RECs may fall (no CO2 value) – Decline in demand or value may reduce market ability to support new project development

• REC+ product (retire allowance + REC)
– likely raise costs to consumers or lower REC value – or consumer could simply retire allowance without REC – reduce ability to lead to new RE development

Consumer Disclosure and Claims
• Will consumers understand what they are buying? • Will they think their RE purchases affect CO2 emissions? • What kinds of claims will marketers/utilities and purchasers be able to make?
– Renewable energy is “emissions free” – Purchasing RE “reduces your (indirect) emissions” (but overall level of carbon remains unchanged)

RPS Market Interaction Issues
• Will RPS reduce emissions beyond the cap?
– Many state RPS‟s mention GHG reduction goals

• Will cap take into account RE driven by RPS?
– RPS demand modeled in RGGI but cap not directly lowered; many political considerations in setting cap

• Must RECs used for RPS compliance include CO2 allowances, if granted?
– Some states require allowances to remain bundled with the REC – CO, NY, AZ require allowance retirement with REC – PA and DE do not

REC
CO2?

Emerging Cap and Trade Programs

RGGI
Considering Joining RGGI Western States

Emerging Cap and Trade Programs
• Regional Greenhouse Gas Initiative (RGGI)
– 10 states participating, others observing – Covers fossil fuel generators ≥ 25 MW; CO2 only – Baseline emissions, 2009-2014; 2.5% reduction annually 2015- 2018

• California (AB32) and 5 other Western States
– – – – Feb 2007 signed by 5 Governors, UT later joined MOU to establish regional GHG reduction goal Intent to establish cap and trade, consistent with CA AB32 Program to be designed by August 2008

• Increased debate at federal level

How Will Voluntary Markets Interact with RGGI?
• RGGI furthest along and takes effect in 2009 • States are still developing rules, so it remains to be seen, but… • Most states are leaning toward auctioning allowances
– Therefore, RE would not get allowances, unless there is also a set aside

• However, RGGI model rule provides option to states to deal with voluntary RE markets

RGGI Option: Retire Allowances on Behalf of Renewables
• RGGI Model Rule allows for retirement of allowances on behalf of RE/REC sales
– Demand could be estimated in advance or after the fact

• Retirement would lower total emissions and enable RE claims of CO2 benefits • However, it is not clear if states will adopt it
– Maine has included it in proposed legislation – Other states (NY and NJ) considering it

Other Options: Allocate Allowances to RE
• Receiving and retiring an allowance gives RE marketers the ability to make strongest claims • Two primary methods:
– Output-based
• Allowances granted to generators based on electricity production • E.g., WI and PA proposed under Clean Air Interstate Rule (CAIR)

– Set-asides for renewables
• Regulators specify certain % of total allowances to be granted for renewables and efficiency (or other) • RE must apply, but no competition with fossil fuels for these allowances

• However, no guarantee allowance will remain bundled with REC; generator could sell to emitter to maximize revenue

Current Voluntary Market REC Values
Voluntary Market REC Prices for New Wind, 2006 Region SPP WECC/CA National $/MWh 1.30-4.50 3.00-5.00
8.20-13.70

1.80-5.00
2.80-7.90

$/MT CO2 1.50-5.00 avoided

Source: Evolution Markets Prices converted to $/metric ton avoided assuming average regional CO2 emissions rate from Egrid (U.S. EPA 2004). CCX prices $2-$4.50/MT EU ETS prices $8-40/MT

Set Cap to Account for Future RE
• Cap could be adjusted to account for RE growth
– Could estimate RE expected from voluntary markets – Or adjustment could be periodically after the fact – Difficulty is that many political considerations in setting cap
• (Example: RGGI modeled RPS demand, but didn‟t reduce the cap)

• To enable claims, necessary to be very clear about RE benefits

Do We Need Both Voluntary RE Markets and Carbon Regulation?
• RE will likely benefit from carbon regulation, but voluntary markets can still play role • Consumers may want to support RE beyond mandates or policies • Emissions caps may not be tight enough to address effects of climate change • Support for RE technologies today could help transform the technology earlier • Renewable energy provides other benefits
– fuel diversity, energy security, economic development

• Weak cap could do little to improve competitive position of renewables, which may not compensate for lost CO2 value

Conclusions
• Voluntary REC markets growing rapidly today, market needs credibility to continue to grow • Need for industry consensus and standards regarding scope of current CO2 emissions claims • Impact of carbon regulation on voluntary markets depends on policy design • Cap and trade programs will limit emission reduction claims by renewables, unless allowances can be retired or caps account for RE • Best policy solution for voluntary markets may not be same for wind energy generators • Will consumers still have sufficient motivation to make REC purchases without CO2 benefits?

Additional Information
Report: Implications of Carbon Regulation for Green Power Markets by Lori Bird, Ed Holt, and Ghita Carroll
http://www.eere.energy.gov/greenpower/resources/pdfs/41076.pdf


				
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