Clarifying the Interaction between REC

1
Clarifying the Interaction between REC
Emission Policies Markets Treatment of
Renewable Energy under the RGGI Model Rule and
Other Markets Policies

• Bob Grace, Sustainable Energy Advantage, LLC
• CEC IEPR Workshop
• March 13, 2007

2
Acknowledgements

• Research and analysis funded by
• Authors
• Bob Grace, Sustainable Energy Advantage, LLC
• Tom Rawls, THR Associates, LLC
• Advisors
• Rob Harmon, Bonneville Environmental Foundation
• David Wooley, The Energy Foundation
• A work in progress

The content of this presentation represents the
opinion and position of the authors and should
not be construed to reflect the position of the
funder
3
With cap trade policies, how do air quality
benefits of RE get recognized compensated?

• Key Commercial questions
• How do RE Generators get recognized for producing
  emission-free generation?
• How do RE Generators receive compensation for
  benefits created?
• If RE benefits not recognized, what do retail
  green marketers have to sell?
• Why should customers buy RE if emissions not
  reduced?
• Are these RECs Im buying RPS compliant?

• Key Policy Questions
• Is RPS an emission reduction tool?
• Will CT policies
• Remove RE from emissions-reduction toolbox?
• Disable ability for RE to emission reductions
  claims?
• Potentially undermine the ability to RE site
  projects?
• Kill the voluntary RE market?
• Which combinations of cap trade policies and RE
  policies markets
• Produce the intended results?
• Eliminate commercial chaos?

4
A Tale of Two Worlds

• RE Markets Policies
• RPS Requirements
• Voluntary Markets, green Power (GP)
• Support 20 of new RE capacity additions and
  growing fast
• Currency tradable Renewable Energy
  Credits/Certificates (RECs)
• Evidence of 1 MWh of generation
• Carry emission and other direct
  characteristics, or attributes (at a minimum)
• Role in disclosure (or labeling) rules
• Sale is vehicle for compensation
• Tracked by REC registry

• Cap Trade Emission Policies
• In absence of cap trade, RE emissions benefits
  estimated via modeling
• With Cap and Trade (CT)
• Many CT are indifferent to benefits of RE
• Emissions benefit must be formally recognized, or
  RE unable to produce, be recognized for, claim or
  be compensated directly for those benefits
• If not formally recognized, value provided by RE
  is lowering cost of compliance
• Currency tradable emission commodities (TECs)
• Tradable commodity created by regulation,
  recognizing emission benefits
• sale is a vehicle for compensation
• e.g. allowances, offsets, VERs, etc.
• Tracked by emission registries

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Problem 1 generation attributes or
environmental attributes are insufficiently
precise terms
Terms widely misunderstood stakeholders and
policymakers mean different things. Solution
More Precise Terms
Primary Attributes (PA) inside the fence
characteristics
Secondary Attributes (SA) outside the fence
impacts or benefits

• Unique, no more info needed
• Look at the generator
• Look upstream (e.g. sustainable biomass)
• Actual emissions
• Emission-free
• Biomass/LFG
• Zero net GHG
• Direct GHG reductions (CH4 ? CO2)
• actual emissions NOx, SOX etc.
• Other, e.g. Type, location, vintage
• Tracked by GIS

• Need additional info
• Interaction with the system, and/or policy
• Without CT ? Incremental generation displaces
  emissions ,fuel use from (typically) fossil
  fuel-based marginal resource
• estimated by dispatch study
• avoidance of marginal, or net reduction
• With CT, a function of policy
• administratively-determined)
• Ex. NOX Allowances or offsets
• Not tracked by GIS

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Problem 2 A REC represents, or includes, all
the attributes
Tracks RE only
Tracks all generation
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? RECs cannot be universally forced to carry or
include secondary attributes. (but, can be
attached for compliance requirements)

• PA are unique, SA are not
• SA ? depend on where, when, or policy...
• Depend on presence or absence of CT policy
• Policies differ among states, pollutants
• Vary by applicability/size, e.g.
• exempt gen. lt 25 MW
• opt in approach
• Depends on where energy is used
• Vary by usage
• If RPS assumed in setting a cap, benefits already
  presumed counted
• GP impact can should create benefits, but cant
  know use when first creating REC
• Set-aside allowances not automatically conveyed
• must apply for TECs, quantities limited
• cant presume universal applicability

• Other Practical Constraints
• Conflicts with a variety of existing laws, regs,
  claims
• Different units (REC MWh allowance lb or
  ton)
• RPS requirements on load, CT (typically) on
  generators
• SA data not readily available to REC tracking
  systems
• Today, none of REC registries track SAs
• But could be set up systems to optionally track
  SA linked to PA

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Solution 2 Acknowledge PA as content of Basic
REC while recognizing the role of REC

• ABA/ACORE/EMA Standard REC Contract A partial
  solution, in structure, not terminology
• check-box for included attributes acknowledges
  uncertainty commercial unreality of included
  PA SA in the REC an attempt to make more
  explicitly and simplify (this is good)
• Calls the result a REC, where meaning of RECs can
  vary from contract to contract (this perpetuates
  the problem)
• Basic definition of a REC aligns with the bundle
  of primary attributes (what GIS systems create
  and track)
• Many uses require REC (e.g. REC bundled with
  SA)
• If TECs created, can be attached to the basic
  REC
• E.g. for CA RPS compliance
• Rename ABA/ACORE/EMA contract ? Standard
  Attribute Contract
• Define REC as the limited compliance tool.
  Anything else may be attached

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Problem 3 Policy Conflicts Uncertainty

• Policies established without clear statements of
  objectives
• Within individual states, one agency or branch
  doesnt understand what others have done, and
  broad lack of consistency between states
• Are RPS an emission reduction tool or not?
• Clean Air Interstate Rule (CAIR)
• NOX Set-aside allowances, in some states
• RE projects in these states need to apply for
  TECs, not automatic
• Quantity limited. Could be over-subscribe
• Federal SO2
• Was a RE set-aside, now expired

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Policy Conflicts Uncertainty, cont.

• Regional Greenhouse Gas Initiative (RGGI)
  treatment of RE
• No TECs for RE
• RPS-driven GHG Reductions modeled in cap?
• maybe, not clear ? RPS impact analyzed, but cap
  level is political
• Modeling assumed full compliance with existing
  RPS policies, inconsistent w/various RPS
  approaches
• Optional GP feature in model rule ? TECs
  set-aside and auto-retire for GP sales,
  enabling buyer to make claim (unknown which
  states will adopt)

Conceptual illustration RPS in baseline
considered in setting CT targets
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Todays Landscape lots of modelsThe Wild
West (1)
1 MWh RE Produced
1 MWh RE Produced
1 MWh RE Produced
TEC
No framework for treatment of SA
REC
TEC
REC
REC
Verification
Verification
Reduce the Cap
Verification

• CT, cap unaffected by RE
• Voluntary REC sales under RGGI (unless voluntary
  rule adopted)
• Federal SO2
• NOx in most cases

• CT, cap reduced by RE
• Existing RPS targets under RGGI Model Rule
• However, not precisely accurate, as no direct
  correlation between modeling and the cap

RPS without explicit emission regualtions in
place (i.e. most states) (e.g. northeast states
for GHG pre-RGGI) GP transactions without
emission registry or emission CT ? assume SA
conveyed to buyer. Inferring displacement of
generation, estimating emission benefit (the
reason for purchase)

• Implications
• No TECs created
• No direct CT revenue for RE
• No clear emission reduction claims with REC
  purchase (RPS or GP)
• RE benefits from increased cost of competition
• RE reduces cost of CT compliance

• Implications
• No TECs created
• No direct CT revenue for RE
• RE can claim emission reductions
• RE benefits from increased cost of competition
• RE reduces cost of CT compliance

• Implications
• No official TECs created
• Disposition of SA defined in contract (with
  attestations, audits), no independent
  verification
• RE can claim emission reductions
• Buyer seller want to hold SA in face of
  current and future uncertainty -- both parties
  want to be conservative pending clarification

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The Wild West (2)
1 MWh RE Produced
1 MWh RE Produced

• TEC
• CT allowances allocated to RE or acquired
  (set-asides), or
• Voluntary TEC registration

• TEC
• CT allowances allocated to RE or acquired
  (set-asides), or
• Voluntary TEC registration

REC
REC
Verification
May be sold off
Verification

• RPS Allows selloff of SA/TEC
• PA RPS proposed rules are clear
• DE RPS intent is clear, but implementing
  language leaves open to interpretation
• MD RPS rulemaking intent clear, but regs leave
  generation attributes undefined
• MA RPS - DOER considered and rejected requiring
  bundling or retirement but silent in rules in
  practice, NOX has been sold off without effecting
  RPS eligibility
• RI RPS rules allow but DEM expected otherwise
• Implications
• RE may not reduce emissions, but lowers cost of
  RPS compliance

Retired not disposed of independently

• RPS Compliance requires PA SA bundled
• NY RPS (but DEC unclear on NOX)
• CO RPS (if any)
• CA RPS
• AZ, WA RPS
• TX RPS? (ambiguous)
• Voluntary transactions (purchases by savvy
  customers)
• Implications
• RE reduces emissions

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Problem 4 Commercial Uncertainty

• With the Wild Wests uncertainty, buyers and
  sellers both want retain SA (just in case)
• Confusion increasingly confounds contract
  negotiations between REC buyers sellers (what
  needed, how to document/verify?)
• Some RE developers and owners want multiple
  additive revenue streams
• Will TECs yield a supplemental revenue streams?
• Is it accurate to think that that allowance
  revenue would actually be in addition to REC
  revenue?
• Do allowances create broader policy and financial
  platform to support RE?
• For a generator, is it actually beneficial to
  have a TEC if already have a market for RECs?
• In efficient market, value of REC would drop by
  value of allowance. Those who want both revenue
  streams win only through market inefficiencies.
• Do RE generators want inefficient markets?

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Problem 5CTs may limit RE emission reductions
claims

• CTs which dont reduce the cap or allocate
  retire TECs as a result of GP preclude a clear RE
  emission reduction claim
• Voluntary choices use RE to neutralize carbon
  footprint may (be unable to deliver have their
  motivating impact disabled)
• Market is large and growing fast
• Major businesses, governments buying GP or RECs
  to meet GHG goals and make claims (reducing GHG,
  GHG-neutral)
• EPA as a salesman - encouraging corporations to
  increase GP purchases for emission reduction, but
  is it pushing the policies to enable the
  claims???
• Home Depot is featured on NREL site, for example
• States using GP for meeting GHG goals (e.g. CT)
• Threat to RE siting
• if cant say RE creates some of its most obvious
  benefits, communities may be less willing to
  accept perceived burdens

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Solutions 3, 4, 5

• A Consistent Framework

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What should happen in a world with RPS? Align
approach with Policy Objectives
RPS with GHG reduction purpose (i) if a CT
present, and
(ii) If no CT
If RPS NOT included in CT baseline
If emission reductions associated with full RPS
compliance presumed in setting CT targets
1 MWh RE Produced
1 MWh RE Produced
REC
TEC
1 MWh RE Produced
REC
TECs allocated to RE or acquired (set-asides)
Emission benefit created by displacement
Compliance
REC
TEC
Real benefits already counted
Compliance
Compliance
retired
RPS which is NOT deemed a GHG reduction policy
(ii) If no CT
(i) if cap trade is present

• Many RPS may fall
• into this category
• considerable uncertainty
• In this case, cant make
• any claims about
• emission benefits
• of the RPS!

1 MWh RE Produced
1 MWh RE Produced
TECs e.g. Voluntary Registry
REC
TECs allocated to RE or acquired (set-asides)
REC
Compliance
May be sold off
Compliance
May be sold off
(buyer beware! Commercial market ahead of legal
regulatory framework)
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What should happen Voluntary GP Market
Voluntary Market Expectations of REC transaction
(that a REC transaction results in an emission
benefit are one and the same)
(ii) If no CT
(i) if CT
1 MWh RE Produced
1 MWh RE Produced
REC
TEC
1 MWh RE Produced
REC
REC
TEC
TEC Allowances allocated to RE or acquired
(set-asides)
OR
No sale of SA may be made to 3rd party (then
benefits are assured) ? To do otherwise implies
at least implied double counting SA
Verification
Verification
Reduce the Cap
Retired (associated with buyers load) or
Conveyed to buyer
Retired or conveyed to buyer
RGGI Voluntary Option creates TECs and
automatically retires (est. true-up)
In all cases, incremental GP purchase yields
emission reduction!
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Load-Based CapCalifornias Potential Future
Approach

• Quasi-closed system with requirement applied to
  load serving entities (LSEs)
• Focus on characteristics (PA) rather then
  benefits/displacement (SA)
• Ex A compliance purchase of RECs from zero GHG
  emission source (e.g. wind) creates space under
  cap for LSE
• Excess RE purchases can free-up allowances
• RE Generator has no SA to sell, but LSE below cap
  can spin off pseudo-TEC representing surplus PA
  
• RE generator can decide to either
• Sell REC with SA bundled to LSE for compliance or
  as GP, or
• Sell TEC (REC dissolves in WREGIS if sell TEC)
• For Voluntary GP sales need approach to reduce
  cap
• Like RGGI voluntary option
• e.g. remove REC, assign system avg. emission
  rates to remaining null power purchase by LSE

For compliance.
1 MWh RE Produced
REC
TEC
LSE
Pseudo-TEC If below the cap

• Implications
• RE does not reduce emissions unless LSE stays
  below the cap
• No TECs for RE
• No direct CT revenue for RE
• No clear emission reduction claims with REC, but
  RE can claim zero emission
• RE benefits because LSE willing to pay more for
  RECs (up to allowance revenues)

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Clarifying Role of Renewable Energy

• Clear terminology distinguish primary
  secondary attributes
• Standard REC contract ? Standard Attribute
  Contract
• Be realistic about expectations for REC tracking
  systems
• Primary attributes ? the basic unit for a REC
• REC ? Secondary attributes can be attached to,
  not inherently included in, the REC
• Policymakers
• Clarify, articulate policy objectives, and build
  accordingly
• Acknowledge need value for voluntary GP
• Avoid RPS, CT designs that undermine ability to
  claim emissions benefits for RE
• Lowering cost of RPS (by not requiring SA for
  compliance) also (i) lowers the value of RPS, and
  (ii) and undermines ability to SITE RE
• Generators
• Dont expect that recognition (value) will
  necessarily come from supplemental revenue
  streams (may or may not)
• Markets/policies allowing retention of SA could
  undermine RE market, siting

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e.com
21
REC Definitions vs. RPS Compliance
RequirementsCA vs. RGGI States

• California (WREGIS) REC PA SA Compliance
  requires PA SA (w/ exceptions)
• Renewable energy credit includes all renewable
  and environmental attributes associated with the
  production of electricity from the eligible
  renewable energy resource (except benefits
  attributable to solid waste and utilization of
  biomass or biogas)
• All RGGI States utilize comprehensive approach to
  PA tracking for all generation, not just RE
• Massachusetts Rhode Island (NEPOOL GIS) REC
  PA Compliance requires REC only
• Generation Attribute. A non-price characteristic
  of electrical energy output of a Generation Unit
  including, but not limited to, the Units fuel
  type, emissions, vintage and policy eligibility.
  NEPOOL GIS Certificate. A document produced by
  the NE-GIS that identifies the relevant
  Generation Attributes of each MWh accounted for
  in the NE-GIS.
• Connecticut (NEPOOL GIS) REC PA Compliance
  requires REC only
• Certificates for renewable energy power generated
  within NEPOOL shall be accounted for in
  accordance with the current operating rules of
  the NEPOOL GIS. For compliance May rely
  exclusively on the data contained in the
  quarterly and annual reports issued by the NEPOOL
  GIS
• Delaware (PJM EIS) REC PA only Compliance
  requires REC only
• (REC) means a tradable instrument comprised of
  all the Generation Attributes equal to 1
  megawatt-hour of electricity derived from
  Eligible Energy Resources and that is used to
  track and verify compliance with the provisions
  of this Regulation. A REC does not include
  emission reduction credits and/or allowances
  encumbered or used by a Generation Unit for
  compliance with local, state, or federal
  operating and/or air quality permits associated
  with the 1 megawatt-hour of electricity.
• Maryland (PJM EIS) REC generation attributes
  (undefined), but legislative history implies PA
• "Renewable energy credit means a credit equal
  to the generation attributes of 1 megawatt-hour
  of electricity that is derived from a Tier 1
  renewable source or a Tier 2 renewable source.
• Environmental attributes stricken from law,
  replaced by generation attributes, an undefined
  term probably intended to 1 PJM REC, but not
  explicit.
• Penn. (PJM EIS) Proposed rule REC PA
  Compliance requires REC only
• Proposed rule An alternative energy credit
  represents the attributes of 1 MWh of electric
  generation that may be used to satisfy the
  requirements of 75.31. A certified alternative
  energy credit does not automatically include
  environmental, emissions or other attributes
  associated with 1 MWh of electric generation.
• New York (today, environmental disclosure under
  quasi-contract path regime NY GATS REC system in
  future) no RECs yet Compliance requires PA SA
  (w/ exceptions)
• central procurement RFP for environmental
  attributes (RPS Attributes)
• Compliance requires conveyance of All
  characteristics (incl. direct emissions)
  benefits (incl. avoided emissions) , including
  acquire retire (e.g. for set-aside allowances)
• Excluding TECs associated with fuel usage or
  encumbered for compliance with operating and/or
  air quality permits.