Maximum generation, llc monetizing environmental revenue streams - webinar

MAXIMUM GENERATION, LLC

Monetizing Environmental Revenue
Streams
William Pentland & Mark Graffagnini

Maximum Generation, LLC - Monetizing
Environmental Revenue StreamsMAXIMUM GENERATION, LLC

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

Environmental Revenue Streams

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

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.

The scale and scope of policies promoting renewable-energy resources
today have returned to levels not seen since the 1970s.
Environmental Revenue Streams Source: Mercom Capital

Beware the Black Swan!


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

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


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.


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

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

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.


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

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


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

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.

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

Source: Evolution Markets, August 2006

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
2006 $49.00 $55.00 $52.25 7/26/2006

TEXAS RECs
2006 $3.00 $6.00 $4.00 7/27/2006

NJ SOLAR
PY 06/07 $225.00 $260.00 $240.00 8/30/2006

NJ CLASS I
PY 06/07 $6.50 $9.50
Environmental Revenue Streams $7.75 7/14/2006
Source: Evolution Markets, August 2006

Renewable-Energy: Regional Supply and Demand

Supply and demand for the Midwest, 2004-2015 (MWh)


Supply and Demand Projections for the New England, New York & Mid-Atlantic,
2004-2015 (MWh)


Supply and demand Projections for Heartland & Southeast, 2004-2015
(MWh)


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


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.


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
site, up to 2 MW)

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.

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.

Monetizing Environmental
Revenue Streams
Cap and Trade Regimes
CO2 Markets


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”)


Cap and Trade Programs

Control
Period


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.


Cap and Trade
• 3 Main programs:
– Regional Greenhouse Gas Initiative (“RGGI”)
– Western Climate Initiative (“WCI”)
– NOx Budget Trading Program/Clean Air
Interstate Rule (“CAIR”)


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


RGGI Emissions Caps by Year
190000000

185000000

180000000

175000000

170000000

165000000

160000000

155000000
2009 2015 2016 2017 2018


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

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


– 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


• 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


• 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.


• 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.


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


• 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.


• 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.


• 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.


• 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


Cap and Trade—RGGI Auction
• Auction Example:
– Assume 100,000 allowances are being
auctioned
– Reserve price is unknown


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


• 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


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
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
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


• 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


Revenue Streams
Cap and Trade Regimes
WCI, NBP


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


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


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


Revenue Streams
Offset Programs
NSR, Oregon Climate Trust,
WA State Program


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

Offset Programs
Offset Program Life Cycle & Monetization
Stream Carbon Finance

$$ • Oregon Climate
Trust
RE/EE Project Proposal
• WA state offset
program
• Afforestation/Sequestr
ation
• Landfill methane Pre-construction
capture/destruction Permitting
• Avoided emission from Verification/Certification
EE Process
• Approved RE Projects Permanent Reduction in
• Agriculture manure Emissions
mgmt
Emission
Reduction
Credits (“ERCs”)
$$


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


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%


Offset Programs
• State agencies set specific parameters
• Common Criteria:
– Additionality
– Certification/Verification
– Permanent


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”


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

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

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

• 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


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

• 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



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)


• 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


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


• 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


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


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



• 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



• 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


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”?


• Importance of OR Climate Trust program
– WCI
– Standards


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

• 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)


• 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

Calculating ERS
Hypothetical CHP Projects


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


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

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


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


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


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
Environmental Revenue Stream, $/year 168,870.02

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

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