Implications of Carbon Regulation for Renewable Energy Markets

1
Implications of Carbon Regulation for Renewable
Energy Markets

• Lori Bird, NREL
• Energy Analysis Seminar
• July 12, 2007

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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

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U.S. Voluntary Green Power Sales
EPA Green Power Partners purchased 6.9 billion
kWh of green power in 2006.
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Sources UCS RPS targets NREL voluntary
markets Voluntary market projections assume 35
growth actual growth ranged from 35 to 60
from 2003 to 2006
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Top 20 U.S. Green Power Purchasers(as of April
2007)
MWh/yr 1. PepsiCo
1,105,045 2. Wells Fargo Company 550,000
3. Whole Foods Market 463,1284. US Air
Force 457,5005. Johnson Johnson
400,7036. US EPA 329,8807. LA County
Sanitation 196,0038. Starbucks 185,0009.
DuPont Company 180,00010. US Dept of
Energy 165,06311. Vail Resorts 152,00012.
HSBC North America 124,54413. Cisco Systems,
Inc. 124,10614. Staples 121,40415. New York
University 118,61616. World Bank Group
114,73517. University of Pennsylvania 112,00018
. IBM Corporation 109,70419. US Dept of
Veterans Affairs 90,00020. NatureWorks LLC
89,000
Source U.S. EPA Green Power Partnership
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Whats 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 samecontracts specify
  details

NOx
Hg
Energy security
CO2
Resource diversity
Economic development
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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

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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, wed 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 andhas
  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

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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

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Greenhouse Gas Accounting Definitions
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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
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Will Future RECs Convey GHG Benefits?

• Depends on policy and design
• Carbon tax wont 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?

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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

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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

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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)

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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

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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)

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RPS Market Interaction Issues

• Will RPS reduce emissions beyond the cap?
• Many state RPSs 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?
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Emerging Cap and Trade Programs
RGGI
Considering Joining RGGI
Western States
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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

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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

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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

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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

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Current Voluntary Market REC Values
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
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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 didnt
  reduce the cap)
• To enable claims, necessary to be very clear
  about RE benefits

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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

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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?

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Additional Information

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