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  • 1. MAXIMUM GENERATION, LLC Monetizing Environmental Revenue Streams William Pentland & Mark Graffagnini Maximum Generation, LLC - Monetizing Environmental Revenue StreamsMAXIMUM GENERATION, LLC
  • 2. Boom Time for Renewable-Energy New Investment in Sustainable Growth of Global Wind Power Capacity Energy, 2002-2008, $ billions Source: New Energy Finance Source: National Renewable Energy Laboratory Maximum Generation, LLC - Monetizing Environmental Revenue Streams
  • 3. U.S. DOE ENERGY RD&D FY1978-FY2010 Fission Fusion Efficiency Renewables Fossil including CCT demo Electricity T&D Hydrogen EERE ARPA-E RE-ENERGYSE 7,000 6,000 5,000 4,000 3,000 2,000 1,000 million 2000$ 0 Maximum Generation, LLC - Monetizing Source: : Gallagher, K.S., "DOE Budget Authority for Energy Research, Development, and Demonstration Database," Energy Technology Innovation Policy, John F. Kennedy School of Government, Harvard University, June 2008. Environmental Revenue Streams
  • 4. The scale and scope of policies promoting renewable-energy resources today have returned to levels not seen since the 1970s. Maximum Generation, LLC - Monetizing Environmental Revenue Streams Source: Mercom Capital
  • 5. Beware the Black Swan! Maximum Generation, LLC - Monetizing Environmental Revenue Streams
  • 6. What Are Environmental Markets? ERS – Offset Programs REC Programs  New Source Review –NOx  Renewable Portfolio Standards  CO2 offset programs  Voluntary Green Power Programs ERS – Cap and Trade Programs Existing In Development  Regional Greenhouse Gas Initiative  Western Climate Initiative  Midwest Greenhouse Gas  NOx Budget Trading Program Reduction Accord  Clean Air Interstate Rule  California AB32  ACES Maximum Generation, LLC - Monetizing Environmental Revenue Streams
  • 7. Major U.S Environmental Markets “Parties are transacting in a milieu in which rules are often not yet fully set and Emissions Cap likely to change mid-stream. and Trade Allowances The only thing certain about change in law risks is that there will be change in law risks that the drafters did not anticipate.” -Environmental Markets Assoc., REC Committee Environmental Trading Markets Renewable Energy New Source Markets – Emissions Voluntary and Offsets Compliance Maximum Generation, LLC - Monetizing Environmental Revenue Streams
  • 8. What Is Environmental Revenue? • One-time or ongoing payments by an entity (such as a state) to the developer or owner of an energy- generation project to reward the use of highly efficient and/or renewable energy generation technologies. • Environmental revenue streams” refer to the financial value received for the sale of property rights over previously non-monetizable attributes of renewable-energy, energy-efficiency and emissions-control projects. Maximum Generation, LLC - Monetizing Environmental Revenue Streams
  • 9. Environmental Attributes “Environmental Attributes or Green Tags” means any and all credits, benefits, emissions reductions, offsets, and allowances, howsoever entitled, attributable to the generation from the Unit(s), and its displacement of conventional energy generation.“ Environmental attributes include but are not limited to: 1. Any avoided emissions of pollutants to the air, soil or water such as sulfur oxides (SOx), nitrogen oxides (NOx), carbon monoxide (CO) and other pollutants; 2. Any avoided emissions of carbon dioxide (CO2), methane (CH4) and other greenhouse gases (GHGs) that have been determined . . . to contribute to the actual or potential threat of altering the Earth’s climate by trapping heat in the atmosphere; and 3. The reporting rights to these avoided emissions such as Green Tag Reporting Rights . . . in compliance with federal or state law, if applicable, and to a federal or state agency or any other Party at the Green Tag Purchaser’s discretion . . . . Primary REC Attributes Derived REC Attributes  Renewable fuel source  Emissions of the renewable generation  Avoided emissions  Geographic location of the generator  Price stability  Vintage of the generator  Eligibility for ERCs or offsets  Eligibility for certification or RPS Maximum Generation, LLC - Monetizing Environmental Revenue Streams
  • 10. Where RECs Originate? One MWh of Electricity Generated from Renewable Energy Power sold in power Renewable Energy markets and delivered Credit to end-users for consumption  One REC confers ownership to the environmental and other non-power attributes of one MWh of electric power produced from renewable energy.  Sold separately from commodity electricity - Monetizing Maximum Generation, LLC Environmental Revenue Streams
  • 11. What RECs Represent? • A REC is a property interest in one or more of the environmental attributes associated with specific renewable energy or energy-efficiency projects. The “Master Renewable Energy Certificate Purchase and Sale Agreement” created by the American Bar Association, the American Council on Renewable Energy and the Environmental Markets Association defines three possible forms RECs can take: • “Standard REC” includes all environmental attributes associated with the generation of electricity from renewable energy, whether or not such Environmental Attributes have been Verified or Certified and whether or not creditable under any existing Applicable Program. • “Basic REC” includes only the Certification of the generation of electricity by a Renewable Energy Resource, without any additional Environmental Attributes. • “Specified REC” includes specified Environmental Attributes in addition to the generation of electricity by a Renewable Resource. Additional environmental attributes may be specified individually or as the residue after specific Environmental Attributes are removed. Maximum Generation, LLC - Monetizing Environmental Revenue Streams
  • 12. REC Market Drivers Voluntary Markets Compliance Markets Competition from RPS compliance Renewable Portfolio Targets markets Consumer demand for local resources Availability of cost-effective resources Type and location of resource Ability to site new projects Geographic eligibility, banking, penalties Time limitations on eligible projects Generation, LLC - Monetizing Maximum under RPS programs Environmental Revenue Streams
  • 13. Renewable Portfolio Standards (July 2009) ME: 30% by 2000 VT: (1) RE meets any ☼ NH: 23.8% by increase 2012 2025 WA: 15% by ☼ MA: 15% by 2020* MN: 25% by MT: 15% by 2020 2025 2015 OR: 25% by 2025 MI: 10% + 1,100 ND: 201510% MW by 2015* RI: 16% by by 2020 WI: Varies by 20B ☼ NY: 24% by SD: 10% by 2015 2013 CT: 23% ☼ NV: 25% by by 2020 2025* IA: 105 ☼ OH: 25% by ☼ CO: 20% by 2020 MW 2025† ☼ PA: 18% by IL: 25% by 2020 CA: 20% by KS: 20% by 2025 UT: 20% by 2025* 2010 2020 * ☼ MO: 15% by VA: 15% by 2025* ☼ NJ: 22.5% by ☼ AZ: 15% by 2021 2021 2025 ☼ MD: 20% by ☼ NM: 20% by 2020 ☼ NC: 12.5% by 2021 2022 TX: 5,880 MW by ☼ DE: 20% by 2015 2019* HI: 20% by 2020 ☼ DC: 20% by 2020 State renewable portfolio standard ☼ Minimum solar or customer-sited requirement State renewable portfolio goal Solar water heating eligible * † Extra credit for solar or customer-sited renewables Includes separate tier of non-renewable alternative resources Maximum Generation, LLC - Monetizing Environmental Revenue Streams
  • 14. Eligible Projects for REC Markets Energy Efficiency Municipal Waste CHP/Waste Heat Ocean Thermal Solar Thermal Photovoltaics Geothermal Landfill Gas Waste Tire Fuel Cells‡ Biomass Biofuels Electric Hydro Wave Wind Tidal AZ X X X X X X X X CA X X X X X X X X X X X X CO X X X X X X X CT X X X X X X X X X X X X X DE X X X X X X X X X X DC X X X X X X X X X X X HI X X X X X X X X X X X X X X IA X X X X X X IL X X X X X X X MA X X X X X X X X MD X X X X X X X X X X X ME X X X X X X X X X X X MI X X X X X X X X X X X MN X X X X X X X X MO X X X X X X MT X X X X X X X NC X X X X X X X X X X X ND X X X X X X X NH X X X X X X X X X X X NJ X X X X X X X X X X NM X X X X X X X NV X X X X X X X X X X X X NY X X X X X X X X X X OH X X X X X X X X X X X OR X X X X X X X X X X PA X X X X X X X X X X X RI X X X X X X X X X X SD X X X X X X X X X TX X X X X X X X X X X UT X X X X X X X X X X X X VA X Maximum Generation, LLC - Monetizing X X X X X X X VT X Environmental Revenue Streams X X Source: U.S. Environmental Protection Agency X X X
  • 15. Approval Process for RECs • Certification: “Does this product meet acceptable standards for quality?” Certified products come from eligible renewable resources and meets product-marketing standards. Certification validates the product’s environmental attributes. • Verification: “How do I know I’m getting what I paid for?” Third-party certification usually carries a requirement for independent verification to document that the amount of green power generated equals the amount of green power sold to customers. Third-party independent auditors apply the verification process to retail and wholesale electricity providers. The audit verifies that the green power behind the product was produced and placed on the utility grid and helps verify the product’s environmental benefit. Verification serves as a form of buyer protection against deception or fraud. • Deliverability: Power generators subject to an RPS are typically required to meet their mandates with power produced from renewable energy in-state or delivered for consumption within the state or regional transmission system where the RPS policy applies. Although some states like Missouri do not include delivery requirements, the vast majority of RPS programs include delivery requirements of any sort or another. Maximum Generation, LLC - Monetizing Environmental Revenue Streams
  • 16. Voluntary Markets REC Prices Volume Generation Region Term Bid Offer (MWh) LFG SERC 2006-2007 40,000 $1.00 $1.50 Wind WECC 2008-2012 30,000 $3.50 $5.00 Wind SPP 2006-2010 30,000 $2.00 $4.50 Wind National 2008 25,000 $1.50 $3.00 Geothermal CA 2006 50,000 $1.75 $2.25 Biomass PNW 2008-2011 50,000 Maximum Generation, LLC - Monetizing $2.50 $3.50 Environmental Revenue Streams Source: Evolution Markets, August 2006
  • 17. Compliance Market REC Prices CT CLASS I CERTIFICATES Term Bid Offer Last Date 2006 $7.00 $10.00 $8.75 6/11/2006 MA "NEW" CERTIFICATES Term Bid Offer Last Date 2006 $49.00 $55.00 $52.25 7/26/2006 TEXAS RECs Term Bid Offer Last Date 2006 $3.00 $6.00 $4.00 7/27/2006 NJ SOLAR Term Bid Offer Last Date PY 06/07 $225.00 $260.00 $240.00 8/30/2006 NJ CLASS I Term Bid Offer Last Date Maximum Generation, LLC - Monetizing PY 06/07 $6.50 $9.50 Environmental Revenue Streams $7.75 7/14/2006 Source: Evolution Markets, August 2006
  • 18. Renewable-Energy: Regional Supply and Demand Supply and demand for the Midwest, 2004-2015 (MWh) Maximum Generation, LLC - Monetizing Environmental Revenue Streams
  • 19. Supply and Demand Projections for the New England, New York & Mid-Atlantic, 2004-2015 (MWh) Maximum Generation, LLC - Monetizing Environmental Revenue Streams
  • 20. Supply and demand Projections for Heartland & Southeast, 2004-2015 (MWh) Maximum Generation, LLC - Monetizing Environmental Revenue Streams
  • 21. RECs – Risk Transfer • Risk transfer mechanisms in REC transactions REC Procedures 3rd party certificates Do ERCs or Voluntary RECs count Verification methodology for RPS compliance? Verifying vlidity of RECs 13 states + D.C. NO creation on voluntary 3 states YES market 5 states Uncertain Maximum Generation, LLC - Monetizing Environmental Revenue Streams
  • 22. The American Clean Energy and Security Act Section 101 establishes a program requiring retail electric suppliers to submit renewable energy credits and electricity savings equal to a percentage of their annual electricity sales beginning in 2012. Distributed renewable generation facilities are issued 3 Federal renewable electricity credits for each megawatt-hour of renewable electricity generated with the granting of triple credits to be reviewed for adjustment in 2014 and every 4 years thereafter. It is assumed that the adjustment reviews result in an adjustment to 1 Federal renewable electricity credit per megawatt hour issued to distributed generation facilities starting in 2014. However, distributed renewable generators placed in service during a year when triple credit is granted continue to receive triple credit for 10 years. Maximum Generation, LLC - Monetizing Environmental Revenue Streams
  • 23. How Will Senate Shape Federal RES? Bingaman Markey Waxman 4% by 2011, 20% by 2021 (through 6% by 2012, 25% by 2025 RES Target Same as Markey 2039) (through 2040) All suppliers selling more than 4 All suppliers selling more Covered Entities Same as Markey million MWh (except in Hawaii) than 1 million MWh “Existing” vs. RECs for existing renewables “New” No distinction No distinction cannot be traded Renewables Yes – States may petition Energy No – Markey proposes an to reduce annual Yes – EE can be used to meet up to Efficiency independent EERS in a obligation by up to 20% if 25% of target each year Allowed? separate bill (H.R. 889) utilities comply with separate EERS Three federal RECs/kWh Two federal RECs/kWh for projects from distributed Credit on tribal lands; three RECs/kWh for generation sources Same as Markey Multipliers distributed generation (at (non-combustion projects “customer site,” 1MW limit) “at or near” customer Maximum Generation, LLC - Monetizing site, up to 2 MW) Environmental Revenue Streams
  • 24. Federal RES Affect on State RPS • Dual RECs System: All three proposed bills create a dual RECs system, with federal RECs separate from state renewable electricity standard RECs. While this method may be required, based on other elements of the legislation, it may also create tracking problems and confusion over appropriate claims, because there could be two RECs (federal and state) issued for a single megawatt hour of renewable generation. Because state RECs generally specify that they contain renewable energy attributes and establish a basis for claiming renewable energy, the federal REC cannot also contain these attributes. • The Environmental Tracking Network of North America (ETNNA) is convening a national dialogue, the goal of which is to address the technical issues associated with interregional REC trading. If successful, ETNNA’s efforts will create a foundation where it will be possible to trade RECs among regions; the actual practice will likely depend on the state rules for eligible renewable resources for their RPS (not addressed by ETNNA). • State RES Interaction: All of the bills call for preserving the integrity of existing state RES standards, although the Markey and Waxman bills contain more specific language to that effect. One key issue is whether state RES standards can be more stringent than the federal standard. For example, utilities in states with higher RES targets than the federal target in a given year may be allowed to sell “excess” RECs to utilities in other states for federal compliance. If this is allowed, state targets would not necessarily be more stringent than the federal RES. Both the Markey and Waxman bills include language that gives states the authority to decide how to address this issue. The Bingaman bill is less clear and includes only a generic state savings clause that does not directly address the issue. Maximum Generation, LLC - Monetizing Environmental Revenue Streams
  • 25. Looming Changes for REC Markets Feed-in Tariffs – When and where? Cap and Trade National RPS, solar Markets? What carve-out? Next? Accelerating state RPS requirements. Maximum Generation, LLC - Monetizing Environmental Revenue Streams
  • 26. Monetizing Environmental Revenue Streams Cap and Trade Regimes CO2 Markets Maximum Generation, LLC - Monetizing Environmental Revenue Streams
  • 27. Cap and Trade Programs Cap & Trade Market-based approach to Allowances are then allocated Sets a limit on emissions and reduce GHGs and emission to sector companies for free establishes a tradable set of levels across specific industry or for a fee through an allowances for emissions for sectors in specific geographic auction-type process (the the sector (i.e., the “Cap”) regions basis for the “Trade”) Maximum Generation, LLC - Monetizing Environmental Revenue Streams
  • 28. Cap and Trade Programs Control Period Maximum Generation, LLC - Monetizing Environmental Revenue Streams
  • 29. Cap and Trade Ways to meet cap Cap resulting in declining emissions Reducing pollution/emissions through greater pollution control (e.g., carbon sequestration) Improving energy efficiency (e.g., installing a CHP system, more efficient lighting, etc.); or Purchasing additional allowances available on the market State uses proceeds to fund RE/EE projects with grants, tax credits, etc. Maximum Generation, LLC - Monetizing Environmental Revenue Streams
  • 30. Cap and Trade • 3 Main programs: – Regional Greenhouse Gas Initiative (“RGGI”) – Western Climate Initiative (“WCI”) – NOx Budget Trading Program/Clean Air Interstate Rule (“CAIR”) Maximum Generation, LLC - Monetizing Environmental Revenue Streams
  • 31. Cap and Trade—RGGI Maximum Generation, LLC - Monetizing Environmental Revenue Streams
  • 32. Cap and Trade—RGGI Summary of RGGI Key Characteristics Scope 25 MW or larger Connecticut, Delaware, Maine, Maryland, States Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, and Vermont Dates Compliance date began January 1, 2009 Emissions reductions 10% by 2018 •Purchase Allowances Compliance •Emission Reductions •Increase Energy Efficiency Offsets Allowances Limited compliance mechanism Violations Strict penalties Legal mechanism “Model rule” as implemented by states Maximum Generation, LLC - Monetizing Environmental Revenue Streams
  • 33. RGGI Emissions Caps by Year 190000000 185000000 180000000 175000000 170000000 165000000 160000000 155000000 2009 2015 2016 2017 2018 Maximum Generation, LLC - Monetizing Environmental Revenue Streams
  • 34. RGGI Model Rule Concepts Applicability CO2 Budget Units & Sources Permitting Requirements Vary by state Account representative must monitor compliance with Monitoring & Reporting program and report emissions CO2 Authorized Account Representative Key figure in RGGI system Submitted by Authorized Account Representative to ensure Compliance Certificate compliance; main enforcement mechanism of RGGI CO2 allowances for 2009-2012 begin on January 1, 2010 and Life expectancy of Allowances continue each year thereafter for the allocation year that is three years after the applicable deadline for application Key to concept of carbon allowance “banking” that is central to cap and trade Bank account principals CO2 Allocation Tracking System (“COATS”) Accounts Serial numbers for allowances Authorized Account Representative controls Penalties for noncompliance Maximum Generation, LLC -allowances for next period; fines, sanctions Forfeiture of Monetizing Environmental Revenue Streams
  • 35. Cap and Trade—RGGI State CO2 Budget (short tons) Auction Proportion CT 10,695,036 77% DE 7,559,787 60% in 2009, increasing by 8% each year until 2014 ME 5,948,902 Up to 100% (see specific state formulas) MD 37,503,983 100% MA 26,660,204 99% NH 8,620,460 At least 70% (up to 2011); at least 83% thereafter NJ 22,892,730 99% NY 64,310,805 100% RI 2,659,239 100% VT 1,225,830 100% Total 188,076,976 Maximum Generation, LLC - Monetizing Environmental Revenue Streams
  • 36. Cap and Trade—RGGI – Voluntary Renewable Energy Set-Aside Allocation—Each state allocates a certain number of tons of emissions to this account. • Voluntary renewable energy • Such data must be from reputable sources (retail electricity providers, organizations that certify renewable energy products, and other parties) • Data must be verifiable • As explained above, voluntary RE purchases are controversial means to comply with requirements Maximum Generation, LLC - Monetizing Environmental Revenue Streams
  • 37. Cap and Trade—RGGI • CO2 Offsets Allowances – Specifics vary by state – Limited deductions allowed = general rule – Eligible programs: – Landfill methane gas capture and destruction – Reduction in emissions of SF6 – Sequestration from afforestation – Reduction or avoidance of CO2 emissions from natural gas, oil, or propane end-use combustion due to end-use energy efficiency; and – Avoided methane emissions from agricultural manure management operations. – CHECK YOUR LOCAL STATE Maximum Generation, LLC - Monetizing Environmental Revenue Streams
  • 38. Cap and Trade—RGGI • CO2 Offset Allowances (cont’d) • Project Locations: – Local State – Any outside state in which the relevant state agency has signed a MOU with the RGGI states to carry out certain obligations with respect to offset projects, including audit requirements • Eligible CO2 Emissions Credit Retirements—Emissions Credit Retirements – International permanent retirement of GHG allowances or credits that place a specific tonnage limit on GHG emissions, provided those allowances or credits are valid at the time of filing the consistency application; – UNFCC certified GHG emission reduction credits. Maximum Generation, LLC - Monetizing Environmental Revenue Streams
  • 39. Cap and Trade—RGGI • Additional Requirements— – Government mandated reductions are not eligible – CO2 allowances shall not be awarded to an offset project that includes an electric generation component unless the project sponsor transfers legal rights to any and all attribute credits (other than the CO2 offset allowances awarded under the model rule) generated from the operation of the offset project that may be used for compliance with a Renewable Portfolio Standard or other regulatory requirement, to the state regulatory agency or its agent. – No double-dipping RPS/RECs and offset allowances – VARIES BY STATE – CO2 offset allowances shall not be awarded to an offset project that receives funding or other incentives from any System Benefit Fund, or funds or other incentives provided through the consumer benefit or strategic energy purpose allocation required by law. – CO2 offset allowances shall not be awarded to an offset project or CO2 emissions credit retirement that is awarded credits or allowances under any other mandatory or voluntary greenhouse gas program. Maximum Generation, LLC - Monetizing Environmental Revenue Streams
  • 40. So, you have a project…how does RGGI benefit you? • Apply for project financing from state – Auction proceeds are used to fund specified projects • Selling allowances to entities that need additional allowances for compliance – Establish a General Account (see procedures for COATS Accounts) • June 30, 2009 was cut off for projects prior to January 1, 2009. • 6 Month Time Limit to file consistency application for projects after January 1, 2009. • HARD DEADLINES: Any project that fails to meet these timing deadlines will be denied the consistency application and will result in the “continued ineligibility of the subject offset project.” • Consistency Application—used for allowances generated outside RGGI system; one state per application – Transfer allowances under a purchase/sale agreement and have the transfer recorded in the COATS system Maximum Generation, LLC - Monetizing Environmental Revenue Streams
  • 41. Cap and Trade—RGGI • Auction Process – Online auction platform administered by a 3rd party, World Energy Solutions, Inc. • World Energy Solutions offers other “green” credits services through the World Energy Exchange and World Green Exchange. – Each auction is in accordance with the statutory and/or regulatory authority of each state offering CO2 allowances for sale in that auction. – Each state offering CO2 allowances for sale in a CO2 Allowance Auction retains the authority to make its own regulatory determinations in conducting the auction. Maximum Generation, LLC - Monetizing Environmental Revenue Streams
  • 42. Cap and Trade—RGGI • Auction Process (cont’d) – Uniform-price, sealed-bid auction format. – Bids for each auction are entered separately and each auction clears independently. For each auction, all bids are first ranked by bid price from high to low. – Cumulative demand is noted at each bid. – The cumulative demand at each bid is the sum of the bid quantities of all bids with bid prices greater than or equal to the bid price of a particular bid, including the bid quantity of a particular bid. Maximum Generation, LLC - Monetizing Environmental Revenue Streams
  • 43. Cap and Trade—RGGI • Auction Process (cont’d)—Clearing Price & Number of Allowances – If total demand < or = supply of CO2 allowances – Bid price is reserve price – All CO2 allowances are awarded – If total demand > supply of CO2 allowances, and • the cumulative demand at a bid exactly equals the supply of CO2 allowances offered for sale in the auction, • the clearing price is the bid price of the bid, or bids in the event there are multiple bids with the same bid price, after the marginal bid(s). • CO2 allowances are awarded to all bids with bid prices greater than the clearing price, – the cumulative demand never exactly equals the supply of CO2 allowances offered for sale in the auction at some point, the clearing price is the bid price of the marginal bid(s). CO2 allowances are awarded to all bids with bid prices greater than the clearing price. Maximum Generation, LLC - Monetizing Environmental Revenue Streams
  • 44. Cap and Trade—RGGI • In addition, CO2 allowances are awarded to marginal bid(s) according to the following possible scenarios. – If there is one marginal bid at the clearing price, that bid will be partially fulfilled with the remaining available supply. – If there are multiple marginal bids, the tie will be resolved by a random process. Each tied marginal bid will be assigned a number that is randomly generated by a computer. CO2 allowances will be awarded to bids in increasing order by the value of their assigned random number until remaining available supply is exhausted. If the last accepted tied marginal bid is for more CO2 allowances than are available, that bid will be partially fulfilled with the remaining available supply Maximum Generation, LLC - Monetizing Environmental Revenue Streams
  • 45. Cap and Trade—RGGI Auction • Auction Example: – Assume 100,000 allowances are being auctioned – Reserve price is unknown Maximum Generation, LLC - Monetizing Environmental Revenue Streams
  • 46. Bidder Name Bid Price Bid Quantity Cumulative Demand Bidder E $5.00 27,000 27,000 Bidder A $4.95 10,000 37,000 Bidder A $4.80 11,000 48,000 Bidder D $4.70 20,000 68,000 Bidder B $4.10 10,000 78,000 Bidder E $4.10 12,000 90,000 Bidder C $3.85 10,000 100,000 Bidder E $3.80 10,000 110,000 Bidder B $3.75 15,000 125,000 Bidder C $3.25 20,000 145,000 Bidder A $3.05 12,000 157,000 Bidder C $3.00 40,000 197,000 Bidder D $2.25 16,000 213,000 Bidder A $2.15 13,000 226,000 Maximum Generation, LLC - Monetizing Environmental Revenue Streams
  • 47. Cap and Trade—RGGI • Auction Process (cont’d)—Example – The bid price at which supply of CO2 allowances equals cumulative demand = $3.85 – 100,000 allowances being auctioned; cumulative demand = 100,000 allowances bid on by market – $3.85 is the marginal bid – The next lowest bid is the clearing price, in this case $3.80 – All bids with prices > $3.85 are awarded Maximum Generation, LLC - Monetizing Environmental Revenue Streams
  • 48. Cap and Trade—RGGI Previous Auction Results Auction No. Auction Format Allocation Year Quantity Quantity Sold Clearing Price Offered Auction 1 Sealed Bid, 2009 12,565,387 12,565,387 $3.07 9/15/08 uniform price Auction 2 Sealed Bid, 2009 31,505,898 31,505,898 $3.38 12/17/08 uniform price Auction 3 Sealed Bid, 2009 31,513,765 31,505,898 [sic] $3.51 3/18/08 uniform price 2012 2,175,513 2,175,513 $3.05 Auction 4 Sealed Bid, 2009 30,887,620 30,887,620 $3.23 6/17/09 uniform price 2012 2,172,540 2,172,540 $2.06 •Observations: •Allowances prices auctioned by state not very high •Future years are being priced lower than current control periods •Pricing information on non-auction transfers from project developers not easy to find Maximum Generation, LLC - Monetizing Environmental Revenue Streams
  • 49. Cap and Trade—RGGI • Next Auction – September 9, 2009 • Auction 5-2009 – 28,408,945 allowances Sealed bid, Uniform Price • Auction 5-2012 – 2,172,540 allowances Sealed bid, Uniform Price • For more information, see http://www.rggi.org for future auctions and information Maximum Generation, LLC - Monetizing Environmental Revenue Streams
  • 50. Monetizing Environmental Revenue Streams Cap and Trade Regimes WCI, NBP Maximum Generation, LLC - Monetizing Environmental Revenue Streams
  • 51. Cap and Trade—WCI • The Western Climate Initiative (“WCI”) was initially launched in February 2007 • Aims to reduce overall GHG emissions by 15% below 2005 levels by 2020 • Only in Design Phase • Common characteristics with RGGI; RGGI = official commentator on design Maximum Generation, LLC - Monetizing Environmental Revenue Streams
  • 52. Cap and Trade—Nox Budget Trading Program (“NBP”) • Background: – Initiated in 1998 – Previously called the “NOx SIP Call” – 2 Phases: • Phase I: 2003 or 2004, depending on state • Phase II: 2007 – Expired at end of 2008 – Replaced by Clean Air Interstate Rule (“CAIR”) NOx season in 2009 Maximum Generation, LLC - Monetizing Environmental Revenue Streams
  • 53. Cap and Trade—NBP/CAIR • July 11, 2008—D.C. Circuit Ct. of Appeals issued a ruling vacating CAIR in its entirety – EPA must replace with a new set of rules – Dec. 23, 2008—D.C. Circuit Ct. allowed the current rules to remain in place until EPA issues new rules Maximum Generation, LLC - Monetizing Environmental Revenue Streams
  • 54. Monetizing Environmental Revenue Streams Offset Programs NSR, Oregon Climate Trust, WA State Program Maximum Generation, LLC - Monetizing Environmental Revenue Streams
  • 55. Offset Programs • Offsets—measures to permanently retire and counteract emissions of pollutants into the atmosphere; • Monetized through – “ERCs” (Emission Reduction Credits) • Contrast: prevention or cuts in pollution before emissions occur, e.g., reducing electrical generation – Carbon Finance—$$ granted from state agency such as a climate trust • Example of offset programs: afforestation, wetland projects, carbon sequestration, etc. • Overlap with cap and trade Maximum Generation, LLC - Monetizing Environmental Revenue Streams
  • 56. Offset Programs Offset Program Life Cycle & Monetization Stream Carbon Finance $$ • Oregon Climate Trust RE/EE Project Proposal • WA state offset program • Afforestation/Sequestr ation • Landfill methane Pre-construction capture/destruction Permitting • Avoided emission from Verification/Certification EE Process • Approved RE Projects Permanent Reduction in • Agriculture manure Emissions mgmt Emission Reduction Credits (“ERCs”) $$ Maximum Generation, LLC - Monetizing Environmental Revenue Streams
  • 57. Offset Programs – RGGI and many other cap and trade devote certain % of allowances to “offset allowances” • Offset allowances in cap and trade are usually limited in nature – Specific Offset programs: • New Source Review • Oregon CO2 program • Washington State Offset Program Maximum Generation, LLC - Monetizing Environmental Revenue Streams
  • 58. Offset Programs Relationship between Offsets and Cap and Trade: Offset Allowances As A Cap and Trade Compliance Measure (RGGI example) Offset Allowances CO2 Allowances 3% 97% Maximum Generation, LLC - Monetizing Environmental Revenue Streams
  • 59. Offset Programs • State agencies set specific parameters • Common Criteria: – Additionality – Certification/Verification – Permanent Maximum Generation, LLC - Monetizing Environmental Revenue Streams
  • 60. Offset Programs—New Source Review • New Source Review (“NSR”) – Applies in all areas of the U.S. that are not in attainment with the National Ambient Air Quality Standard (“NAAQS”) • NAAQS established minimum levels on lead, NO2 CO, particulate matter (pm), smog and SO2 • Air quality maintained throughout the U.S. • Any area that has pollutants > standard levels is a “nonattainment zone” Maximum Generation, LLC - Monetizing Environmental Revenue Streams
  • 61. EPA New Source Review Ozone Non-Attainment Zone Source: EPA, http://www.epa.gov/oar/oaqps/greenbk/map8hr.html Projects eligible for ERCs within the nonattainment zones will typically be valuable. Maximum Generation, LLC - Monetizing Environmental Revenue Streams
  • 62. Offset Program—NSR • Preconstruction permitting program designed to prevent more pollution from new or expanded sources of emissions and ensure that existing plants are as clean as possible • Major provision: – New or expanded emission sources must offset more than 100% of increased emissions by making reductions within the local airshed Maximum Generation, LLC - Monetizing Environmental Revenue Streams
  • 63. Offset Programs—NSR • Offsets must be obtained as part of the permitting process for the increased emissions project • To satisfy reduction requirements, industries may purchase Emission Reduction Credits (“ERCs”) – ERCs essentially a commodity that can be traded among facilities w/in a ltd. geographical area – One-time payment to the source generating reductions Maximum Generation, LLC - Monetizing Environmental Revenue Streams
  • 64. Offset Programs—NSR • 3 basic types of NSR permits: – Prevention of Significant Deterioration (“PSD”)—for major sources or major modifications in a nonattainment zone – Nonattainment NSR permits – Minor Source Permits • Issued by state environmental agencies Maximum Generation, LLC - Monetizing Environmental Revenue Streams
  • 65. Prevention of Significant Deterioration (PSD) Permit Status, February 2009 SIP Approved Areas EPA or Delegated Areas Combination of SIP and EPA or Delegated Areas Maximum Generation, LLC EPA, http://www.epa.gov/nsr/where.html Source: - Monetizing Environmental Revenue Streams
  • 66. Offset Programs—NSR • 1 ERC = 1 ton/year of reduced emissions • ERCs are strictly defined and limited to specific actions • ERCs are state-specific, i.e., can only be used in the state in which they are created Maximum Generation, LLC - Monetizing Environmental Revenue Streams
  • 67. Offset Programs—NSR Elements of an ERC: Source creating emissions Surplus to other emission must take an enforceable Permanent, measurable limits that otherwise Enforceable permit condition for the might apply reduction “Additionality” (discussed later) Maximum Generation, LLC - Monetizing Environmental Revenue Streams
  • 68. Offset Programs—NSR • Pricing varies widely within the NSR • In CA, prices can exceed $120,000 for NOx ERCs – Usually, they are in the approximately $3,000 to $7,000 per ton range Maximum Generation, LLC - Monetizing Environmental Revenue Streams
  • 69. Offset Programs—NSR Ways to Generate ERCs under the NSR Shutting down major Scaling down operations in Emission reduction permitted facilities in nonattainment zone technology/fuel switching nonattainment zones • Surrender permit to state • e.g., if permit allows • e.g., installing CHP • File documentation to use operation at 100% capacity technology at a large ERCs generated from shut at 150 tons and owners scale industrial facility in a down down to 75% of operations, nonattainment zone owners may file application • Original permit must be to create 37.5 tons of ERCs revised to reflect new, lower after the original permit is emissions revised to reflect the scale • Revised permit’s lower down emission rate is enforceable against operator Maximum Generation, LLC - Monetizing Environmental Revenue Streams
  • 70. Offset Programs—NSR • Calculating ERCs at a particular site: – Establish a baseline period (usually most recent 24-month period) – Determine prior annual emissions (usually from fuel use records) – Determine future maximum annual potential (from permit modification documents after installation) • ERCs = [(Prior Annual Emissions – Future Max. Potential)*Mkt Value of Credits] – Transaction Costs Maximum Generation, LLC - Monetizing Environmental Revenue Streams
  • 71. Offset Programs—Oregon Climate Trust • Oregon established CO2 emission standards for certain types of new facilities – Pre-construction requirement – Technological limitations make it impossible to comply with EE alone • 2 options to comply: – Offset projects (direct vs. indirect) – Contribute capital to fund offset projects Maximum Generation, LLC - Monetizing Environmental Revenue Streams
  • 72. Offset Programs—OR Climate Trust • Orgeon Climate Trust – Non-profit – Only organization authorized to generate offsets – Developers pay fixed $/mton of excess emissions to Climate Trust – Offset developers get $ by responding to RFPs from Climate Trust – Case-by-Case Maximum Generation, LLC - Monetizing Environmental Revenue Streams
  • 73. Offset Programs—OR Climate Trust • 2005 pricing: $4.80/metric ton CO2 • 2007-08: $5.00/metric ton CO2 • Total investment in offset projects: $8.8 million • 2 CHP projects: – OR State Univ. – Newark, MA Maximum Generation, LLC - Monetizing Environmental Revenue Streams
  • 74. Offset Programs—OR Climate Trust • Climate Trust Model = different: – Spot market vs. Climate Trust • E.g., CCX – Carbon finance to fund offsets projects that result in reduced emissions – Strict quality assurance guidelines key: • Additionality (3 tests) • Prior approval Maximum Generation, LLC - Monetizing Environmental Revenue Streams
  • 75. Offset Programs—OR Climate Trust OR Climate Trust Additionality Guidelines Test Name Rule of Thumb Project ≠ mandated by law, policy, statue or Test 1 Regulatory Surplus regulatory framework Implementation Financial, technological, institutional barriers (must Test 2 barriers meet at least 1, preferably > 1) Capital constraint and/or internal rate of return; not 2(a) Financial Barriers feasible without carbon finance Primary reason for project/technology is reduced 2(b) Technological Barriers emissions 2(c) Institutional Organizational, cultural, social barriers Test 3 Common Practice “business as usual”? Maximum Generation, LLC - Monetizing Environmental Revenue Streams
  • 76. Offset Programs—OR Climate Trust • Importance of OR Climate Trust program – WCI – Standards Maximum Generation, LLC - Monetizing Environmental Revenue Streams
  • 77. Offset Programs—WA • 2004: WA placed limit on CO2 emissions from new fossil-fuel powered plants – Also covers increased production > 15% or 25 MW • Facilities must offset 20% of new CO2 emissions – NOTE: CHP systems receive credit, need not offset full 20% • May 2007: New rule adopted CA air emissions standards; took effect 7/1/08 Maximum Generation, LLC - Monetizing Environmental Revenue Streams
  • 78. Offset Programs—WA • 3 ways to comply with emission limits: – Direct investment in CO2 offset projects – Purchase carbon credits • Must be verified by regional authorities – Indirect investment (pay 3rd parties to complete offset project) • Eligible Projects incl. alternative energy, EE, CHP) Maximum Generation, LLC - Monetizing Environmental Revenue Streams
  • 79. Offset Programs—WA • WA Dept. of Ecology or WA Energy Facility Site Evaluation Council must approve – List of pre-qualified 3rd party offset providers – Min. price for 3rd party provider = $1.60/ton of CO2 • Pricing info not available for direct offsets • No new facility has chosen to purchase offsets through the program to date, so no transactions have occurred Maximum Generation, LLC - Monetizing Environmental Revenue Streams
  • 80. Calculating ERS Hypothetical CHP Projects Maximum Generation, LLC - Monetizing Environmental Revenue Streams
  • 81. Calculating ERS • Hypothetical Project Assumptions: – EPA Combined Heat and Power Partnership, Environmental Revenue Streams for Combined Heat and Power, December 2008, http://www.epa.gov/chp/documents/ers_progr am_details.pdf – Massachusetts – 10 MW gas-turbine-based CHP system Maximum Generation, LLC - Monetizing Environmental Revenue Streams
  • 82. Calculating ERS: Gas Turbine CHP System Performance Net Capacity (kW) 10,146 Fuel Use (MMBtu.hr, HHV) 123.6 Heat Rate (Btu/kW) 12,178 Electric Efficiency (%) 28% Steam Output (lbs/Hr) 48,150 Steam Pressure (psig) 150 Steam Temperature (F) 365 Recoverable Thermal Energy (Btu/kWh) 5,220 Electric/Thermal Output Ratio 0.65 CHP Efficiency (%) 70.9% Emissions NOx Emissions (lb/MWh) 0.672 NOx Emissions (tons/year) 28.2 Net CO2 Emissions CHP Basis (lbs/MWh) 738 CO2 Emissions (tons/year) Maximum Generation, LLC -28,195 Monetizing Environmental Revenue Streams
  • 83. Calculating ERS • NSR Payment – NOx Emissions from retired unit, tons/year • 91 – Transaction Cost ($5,000-$15,000) • $7500 – NOx credits (91-28.2) = 62.8 – Market Value of offsets = $4500 – NSR Payment = $275,100 Maximum Generation, LLC - Monetizing Environmental Revenue Streams
  • 84. Calculating ERS • CO2 Offsets Payments – Regional Emissions Rate • 0.571 – Monitoring/Verification costs $2500/year – CO2 Credits • (Nameplate Capacity*Annual Capacity Factor)*8760-CO2 Emissions from generator – Market Value ($5/ton) – ERS = CO2 credits*Market Value – Costs • $97,585 Maximum Generation, LLC - Monetizing Environmental Revenue Streams
  • 85. Calculating ERS • REC Market Payments – RECs generated • Nameplate Capacity*Annual Capacity Factor*8760 • 84,435 – REC Market Value • $2/REC – 84,435*$2 = $168,870 Maximum Generation, LLC - Monetizing Environmental Revenue Streams
  • 86. Calculating ERS--Hypothetical Environmental Revenue Streams Calculator Source: EPA, Environmental Revenue Streams for Combined Heat & Power, 2008, http://www.epa.gov/CHP/documents/ers_program_details.pdf Inputs (Info Needed) Project Data Notes Generator Nameplate Capacity, MW 10.146 Annual Capacity Factor, % 95% NOx emissions, tons/year 28.2 CO2 emissions, tons/year 28,195 NOx New Source Offsets for CHP Project Data Notes NOx emissions from retired unit, tons/year 91.00 Actual, historical emissions Offset transaction cost, $ 7,500.00 One-time pmt ($5k-$15k) NOx Credits, tons/year 62.80 Market Value of Nox credits, $/ton 4,500.00 Latest price from brokers Environmental Revenue Stream, $ (one-time pmt) 275,100 CO2 Offsets Project Data Notes CO2 regional emission rate, tons CO2/MWh 0.571 Obtain from eGRID or state-approved source for region Cost of monitoring & verfication, $/year 2500 $2500/year CO2 credits, tons/year 20,017.39 Market Value of CO2 credits, $/ton 5 Latest price from brokers Environmental Revenue Streams, $/year 97,586.96 REC Market Project Data Notes RECs Generated, MWh 84435.01 Market Value of REC, $/kWh 2 Latest price from brokers Maximum Generation, LLC - Monetizing Environmental Revenue Stream, $/year 168,870.02 Environmental Revenue Streams
  • 87. Calculating ERS—Hypothetical Environmental Revenue Streams Calculator Source: EPA, Environmental Revenue Streams for Combined Heat & Power, 2008, http://www.epa.gov/CHP/documents/ers_program_details.pdf Inputs (Info Needed) Project Data Notes Generator Nameplate Capacity, MW 0.025 Annual Capacity Factor, % 95% NOx emissions, tons/year 0.34 CO2 emissions, tons/year 1,117 NOx New Source Offsets for CHP Project Data Notes NOx emissions from retired unit, tons/year 25.00 Actual, historical emissions Offset transaction cost, $ 7,500.00 One-time pmt ($5k-$15k) NOx Credits, tons/year 24.66 Market Value of Nox credits, $/ton 4,500.00 Latest price from brokers Environmental Revenue Stream, $ (one-time pmt) 103,470 CO2 Offsets Project Data Notes CO2 regional emission rate, tons CO2/MWh 0.571 Obtain from eGRID or state-approved source for region Cost of monitoring & verfication, $/year 2500 $2500/year CO2 credits, tons/year (998.20) Market Value of CO2 credits, $/ton 5 Latest price from brokers Environmental Revenue Streams, $/year (7,491.02) REC Market Project Data Notes RECs Generated, MWh 208.05 Market Value of REC, $/kWh 2 Latest price from brokers Environmental Revenue Stream, $/year 416.10 Maximum Generation, LLC - Monetizing Environmental Revenue Streams
  • 88. Insurers offer special risk-transfer products that target complex risks connected with renewable energy projects, including the performance guarantee cover. Unique insurance covers performance warranty of solar modules for a period of 25 years that cover the possible risk of a performance deterioration in photovoltaic modules. The warranty guarantees that the modules will perform to at least 90 per cent capacity in the first ten years and to at least 80 per cent in the remaining 15 years. The insurance solution offers module producers a greater degree of business. Maximum Generation, LLC - Monetizing Environmental Revenue Streams