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Putting Our Utilities on an Energy Diet

In the past, we made assumptions about our economy and our society that fit with the spirit of those times. The spirit of conquest and manifest destiny rushed through our American veins and led us toward the grand ambition of building a “modern” electricity and interstate highway system. We used our creativity to make energy from fossilized sunshine to power consumables and move people and products, generating electrons in abundance to ensure access to energy. Fast forward to the 21st century, and we still are using a fire hose to water a flower.

We are only 13% energy efficient in this country, which means we are blasting energy towards our needs in such a way that 87% streams right by us. Obviously, we need energy to create systems that ensure our quality of life. But in order to create an infrastructure for the 21st century, we cannot be hindered by the ways in which we thought in the 20th century.

Last century, electricity regulation was geared towards access, affordability and reliability, with no thought to the source of the power in question. The only strategy for access was to create as many electrons as we could as quickly as we could. Energy was a commodity, and the electricity we used as a society was largely invisible. Even now, most of us are served by on utilities whose mission is firmly rooted in the goal of access, affordability and reliability.

Trimming the Fat

We use a power system that delivers an overabundance of electrons and we do it because we were asking the wrong questions in our dialogue between electron creators and electron consumers.  Instead of focusing on access, affordability and reliability, we need to discern just how much energy is necessary to meet our daily needs and how should we provide just that much.

Like our obesity problem, we now create an overproduction of electricity “carbs,” that feed our needs like someone who is not paying any attention to the nutrition content of what we are eating, not to mention the number of calories we are ingesting. To be competitive in a global economy, we need make smarter energy choices.

In order for our economy to get back in shape, the first thing we should do is cut calories: let’s tackle the energy efficiency problem. There needs to be a basket of reform measures based on the needs of those that are starting this diet. The basic premise is that in order for a utility to have any utility in a competitive economy, it needs to fundamentally change from a McDonald’s franchise to a Weight Watchers corporation.

Imagine if our utilities were in the business of providing services to help us manage our energy in the most efficient way possible and when necessary, provide us with “healthy” energy choices? Instead of slopping electron gruel from a trough that is brimming over, let’s start reading the label about where our electrons are coming from and how many we are using. “Energy intelligence” is the first step on our path toward a cleaner energy infrastructure.  When utilities have started to provide this type of information to their customers, they have seen very interesting results.

According to Thor Hinckley, who manages the renewable power programs at Portland General Electric

PGE has started a dialogue about where energy comes from. We can tell the story of how much comes from coal (a surprising 23% in a state where there is so much hydropower) and we give our customers the option of 100% renewable. When we have this conversation [with customers], they have a couple of different reactions: 1) Now they have new information (so it’s NOT all hydropower), 2) the climate issue and concerns are now understood within the context of how our energy practice is driving some of the negative factors associated with the climate issue and 3) they have the choice to choose a clean energy option.

When it comes to the nexus between energy consumption and energy choices, it is fair to say that a utility has almost “perfect reach” into this demographic as the arbiter of electrons themselves.

So what if new business models were introduced? For example, imagine the GMAC model where in this case, energy service companies get into the business of offering consumer financial products to help finance retrofits.

Now, if you are McDonald’s and you want to sell Big Macs, of course you don’t broadcast the calories and triglycerides in the burgers.  And to be completely fair, if you are a conglomerate utility functioning in service areas that traverse multiple state lines, and whose regulatory agency only focuses on affordability, access and reliability, you are in a somewhat constrained position. It is much easier to some extent to have a municipal utility where the citizens collectively own the service and the regulatory body is represented by the city council. At least within that arena one can implement a Weight Watchers plan to help move away from the McDonald’s model.

That said, just because a utility is local does not mean that it is interested in enhancing the energy literacy of its service area.

Julia Hamm, president and CEO of the Solar Electric Power Association, has told me her organization believes that utilities have to be 100% integrated into the process of creating a clean energy infrastructure. “A lot of the answer has to point back to changes in the regulatory context where utilities do business,” she says. “In the case of solar, I really believe those utilities that are not as far along on the learning curve have to be given the right rules which remove the disincentive and add incentives.”

Two powerful policy mechanisms are decoupling for the carrot side of the conversation and renewable portfolio standards for the stick persuasion. Indeed, where the carrots and sticks are in place, a clean energy infrastructure is possible.

A big issue in terms of the haunting spirit of the 20th century is that our whole electric grid was designed for centralized, controlled power plants running on a continually available feedstock, not for intermittent renewable energy distributed widely across service territories, and certainly not to be able to help the end user understand where the power was coming from.

So if Julia Hamm is right about the need for 100% buy-in by utilities, we will have to create the right regulatory environment in which they can profitably do business while providing customers with the energy intelligence they need to make informed decisions about their own energy use. This means that regulators, consumers, and utilities themselves will have to be fully engaged in the challenge.

Even though I am an optimist, I have to say that scenario seems ambitious even to me. I think it is going to be easier to put in place replicable models that demonstrate the new conversation, which includes some or all of the following:

  • a robust campaign to help our citizens become energy literate;
  • a federal decoupling policy for all domestic utilities;
  • an accelerated national energy efficiency portfolio standard; and
  • a way to un-grandfather long-term contracts so that our infrastructure is not weighed down by the 20th century.

If in the global arena, the ultimate “sport” is the alignment of resources with energy use, we don’t want to be weighed down as the lumbering competitor; we want to be lean and fierce. Ultimately, the utility of a utility is focusing first and foremost on delivering negawattage while transitioning to clean megawattage in the most cost effective way possible.

Hold the cheese.  Where’s the treadmill?

Scaling Up Renewables and the Smart Grid

There are many experts who feel that the market potential of renewable energy will only be fully realized if smart grid technologies and services are successful. But first, we need to define the smart grid.

In the broadest sense, “smart” refers to a kind of reactive and interactive capability of the energy transmission and distribution infrastructure that is driven both by the generators of electrons and the demands for those electrons.  So, the smart grid is defined as “digital energy” by those that focus on the information and communications technologies that will help build the interactive capability of its promise. 

For the utility stakeholders, the smart grid is an “intelligent utility infrastructure.” And because of that, utilities with have to change their business model (and sometimes the regulatory context in which that model functions) as well as make changes to their entire operations to encompass the commodity aspect of energy and step up their customer interactions. 

Finally, some refer to it as the “modern grid,” recognizing that this new infrastructure represents a 21st century approach to retrofitting a 19th century understanding of energy flows. 

I will be referring to the interaction between technologies and services in this space as the “smart grid,” since it seems that is becoming the dominant way to describe this new system.

Late last year, the DOE awarded $435 million to sixteen different smart grid pilot projects in the U.S.  A map of pilot projects can be found on OpenEI’s Smart Grid Gateway. In addition, the DOE organized a “smart grid task force,” whose activities and resources can be found here.  These projects represent field research on how all the different stakeholders and technologies will combine to expand these projects into a smart grid that will transform our infrastructure. 

When awarding these funds, the DOE focused on these critical goals for the grid:

  • Increased reliability
  • Increased security
  • Greater economic efficiency
  • Greater energy efficiency
  • Improvements to the environment
  • Increased safety
  • Utilizing a vision; not randomly implementing technologies

You may note that in this list, better integration of distributed renewable generation is not made distinct, though one could back into it through diversification of energy resources as increasing reliability and security.  Interestingly, just like the many definitions for the smart grid, there are many opinions about the need for renewable energy in the smart grid, with some feeling that renewables are central and others feeling renewables are irrelevant.

The DOE funded nine demonstration projects to specifically address the issue of renewable integration into the grid.  In these projects, it is looking for a 15% peak load reduction on a distribution feeder through both renewable and efficiency technologies.

Pilot Project in Boulder

Right in NREL’s backyard, a community scale “demonstration” smart grid project is underway in Boulder, CO. The first in the U.S. the Denver smart grid demonstration project preceded those that are now in development as a result of the recent funding from DOE.  This initial experiment has had mixed reviews.

The success of the smart grid depends on the private and public sector’s stakeholder involvement with systemic issues of transparency versus security.  According to many businesses that are building smart grid “solutions,” there are two aspects to the way that energy should be thought of in terms of efficiency.  Adrian Tuck, the CEO of Boulder-based smart grid company Tendril, recently gave testimony to Congress on the matter. 

He said,  “Energy efficiency is best measured across at least two dimensions. On the one hand, we can and must focus on improving the throughput efficiency of the electric system and the buildings it serves, including programs to fund improvements in insulation, caulking and replacing appliances. On the other hand, we must also consider the real-time market and environmental information that can drive true transactional and behavior changes. The impacts of these changes can drive tangible energy efficiency and environmental benefits.” 

In other words, consumers will (hopefully) make better energy choices if they have access to energy information in their homes and/or businesses.  “Smart” in the smart grid lexicon then also refers to smarter consumer choices.  It is this access to information that has some Boulder residents grumbling; the smart meters exist in their homes, but the information that these meters are collecting in this program is not shared with the homeowner.

The utilities involved in Boulder were not able to provide energy information to the homeowners for a few reasons, most of which stem from their not being equipped to handle the onslaught of customer questions that they feared would come as a result.  In addition, a case can be made that consumer behavior would be even more changed if customers were billed based on time-of-use (TOU) pricing.  Since the utilities involved in this program didn’t have TOU pricing for residential customers in place, it could be argued that customer usage data wouldn’t have much value for the customers anyway.

Building customer information systems that are capable of accepting detailed demand data and displaying it for customers and customer service representatives who accept calls from customers will require massive utility investment.  Investing in and implementing this type of infrastructure and implementing TOU pricing requires approval by utility commissions, which can take years.

The challenge for all of us will be to align the right incentives for existing energy providers with the right mechanisms for sharing energy information with energy users.

Smart Grid and Renewables

Why is the smart grid so important to renewable energy generation, and specifically distributed renewable energy generation?  If smart grid is done correctly, information in the electricity infrastructure will allow the grid to “intelligently” accept more energy from intermittent sources like solar and wind.   Without this intelligence, the existing grid will have difficulty incorporating larger amounts of intermittent renewable energy.

Think of the situation as analogous to the interaction between automobiles, roads and traffic lights.  If we were to introduce ever-increasing numbers of vehicles to our roads with no signals to direct the flow of traffic, the whole system would collapse quickly into accidents and blockages.  It is this “intelligence” – the signals that direct the traffic – that enables vehicles to move through the system relatively seamlessly.  Since the roads need to be accessible by the vehicles being introduced to the system, potentially more roads will need to be built to accommodate these new vehicles from wherever they originate.

Similarly, power generated from sustainable sources like wind and solar pose problems in terms of controlling how and when this power is generated and introduced into the grid.  Energy from these intermittent sources needs to be matched intelligently to the needs of the end user in order to be able to integrate these newer renewable resources as an asset to our energy infrastructure as opposed to a liability.  Without these measures, renewables may never penetrate markets beyond niche applications.

Those of us who have been working in renewables for years  (and my own organization having a 30 year track record), may bristle at the idea that we are “new” but if we are to become the status quo, smart grid may be an important element to how we get there.

For more information about where Smart Meter Pilot Projects are taking place in the U.S. and beyond, check out the Clean Energy Infrastructure section of the Clean Energy Economy, developed by NREL.

The Clean Energy Economy Gateway Where the Medium is the Message

Here is an observation: If we build a clean energy economy and infrastructure, there are three major shifts in the overall energy picture that will be realized:

  1. Energy will evolve from an invisible entity we take for granted to a visible resource we measure and manage.
  2. Energy will transform from a mostly commodity market to a service industry.
  3. Energy technology and services will improve; creating a network of generation and distribution that transcends our current linear, hierarchical flow of electrons.

In many ways, the transformation in telecommunications over the past decade may be very similar to this coming energy revolution.  The recipient of information by way of a phone call or a broadcast news program on a television set has become an active participant in this information exchange; where ten years ago an individual was simply the recipient in a one-way flow of information to her, now she can post a blog on her personal website, power up her iPhone to run numerous “apps,” and engage myriad other interactions in this information space.  In other words, she is now an active participant in the exchange of information, reading an article online and commenting on it on her Facebook page.

When we think about an energy transformation, we can begin to visualize how our own assumptions may be holding us back from imagining the possibilities on the cusp of our horizon (for example, very few opinion leaders thought anyone would want a mobile phone in their early days).  Already analysts and experts who are keeping tabs on the nascent “smart grid” industry are starting to coin terms like “prosumer” as opposed to “consumer.” 

The concept of prosumer starts to paint a picture of a system in which the end user is also a producer.  She becomes a “participant” enabling the types of technologies that allow her to understand which appliances are using the most energy and when that energy is most expensive. She is able to plug in her electric vehicle to a household socket that is powered by solar panels on her roof. She is able to sell excess energy back to the energy service company for a specific rate.  The energy service company then monitors all of this information and suggests upgrades that better fit her lifestyle.  It is an engagement between a network of participants, all mitigating the creation and flow of electrons within the larger system. 

It is that active engagement of a network to create an energy ecosystem that I refer to when speaking about the medium as the message; in this case, the medium is an open platform that seeks to facilitate clean energy economic development through active engagement by clean energy business and community leadership.

The Clean Energy Economy Gateway (CEE Gateway) is an experiment in community building.  Like Wikipedia, the community drives the content of this open platform of information about the newly forming clean energy economy.  Unlike Wikipedia, where content is largely created for its own sake, the CEE Gateway is meant to be used as a tool for regional clean energy economic development.  It is meant to engage a network of clean energy companies, researchers, developers, policy makers and financiers to collectively help create strategies to shift from a 19th century energy paradigm to a 21st century one.  

Through the gateway, active stakeholders can understand the complexity of regional energy infrastructure issues and set realistic energy goals to move the industry ahead.   The goal of this endeavor is for the CEE Gateway to help deliver a cohesive approach to shifting our dependence on the old system of energy to enabling active participation in the new one. 

A critical element of this new mechanism is the synergy between organizational information, infrastructure (utility-scale clean energy facility descriptions and clean transportation data), and policy context.  We often talk about clean energy success being dependent on market factors, technology development and policy implementation and the CEE Gateway attempts to provide accessible insights on all three fronts.  We accomplish this by using virtual tools to map this activity both on the social media platforms and on both static Google maps and the more dynamic Google Earth platform.  The CEE Gateway on the Wiki feeds in to the Clean Energy Landscape on Google Earth

It is in the landscape that context is truly key; on the platform users can visualize layers that include renewable resource maps, congressional districts and new applications that the global clean energy community develops.  So in other words, an economic developer can see which companies in clean energy are developing projects in what districts and where the resources are for future expansion. 

More importantly, the content of the landscape is driven by the clean energy community’s contributions to the open platform of the Gateway, so this is a dynamic and iterative mechanism with which to view these relationships.

Cautious optimism is the general feeling on many fronts these days in the realm of clean energy.  We have a tremendous opportunity to rethink how we engage with our energy infrastructure and clean energy leadership knows very well already the power of networks.  It is our fierce hope at NREL that the Clean Energy Economy Gateway will be a catalyst for accelerating our transformation from an extractive economy to one fueled by innovation and creativity.  Now it is up to us to build the future we want for ourselves.

The Business and Politics of Carbon

The activity around making markets for carbon continues to grow as climate issues gain more traction in the policy realm under a new administration. For those who are not up to speed on the ins and outs of carbon markets in general, I would refer them to the last time I wrote about the issue, a link to which can be found at the end of this article.

This time around I will focus on the business case for carbon offsetting and on the treatment of carbon in the Waxman-Markey legislation currently being debated in Congress. Broadly speaking, voluntary carbon markets refer to the markets for carbon credits outside the scope of regulated carbon reduction. They are driven by businesses and organizations that pay a third party to make a measurable reduction in greenhouse gas emissions (usually CO2) though they have no legal requirement to do so. This reduction “offsets” the organization’s current carbon footprint, “crediting” it with the equivalent reduction.

Until legislation mandates some sort of action towards carbon mitigation, whether a cap and trade mechanism or a carbon tax, there is no compliance market for carbon nationally in the United States. According to a recent report by New Energy Finance, the value of the transactions in the voluntary carbon market globally has doubled in the past two years, increasing from US $335 million in 2007 to $705 million in 2008.

It is interesting to dig a bit deeper into why these voluntary markets are growing despite having no compliance mechanisms. Ultimately, a regulated market for carbon based on mandatory parameters may be the most effective, but in the interim there has been increasing involvement with voluntary carbon markets, with the drivers coming from the private sector. The New Energy Finance report outlines some interesting findings for the “business case” for carbon off-setting:

  • First, New Energy Finance identified 3,000 organizations that were end-buyers of voluntary carbon offsets. This number was seen as “significant” given the industry’s common characterization as a “fringe” entity.

  • The greatest business benefit from carbon offsetting is the protection or enhancement of corporate reputation, according to those surveyed in the New Energy Finance report. This is interesting in light of the fact that one of the drivers for sustainability measures within corporations in general is risk mitigation. Companies have reported that a motivating factor for adopting sustainability principles is the protection or enhancement of brand value, an intangible asset that all companies need to protect. It seems that this motivation applies to carbon offsetting as well.

  • While a business case can be made for carbon offsetting, it was not the only reason for engaging in that activity. According to their respondents, 15% of those companies New Energy Finance surveyed said that offsetting their emissions was driven by the desire to be a good corporate citizen (that said, one could argue that being a good corporate citizen inherently protects your brand’s reputation, which is good for the bottom line).

  • Surprisingly, carbon offsetting activity did not positively impact employee morale in any significant way. In fact, employees were confused about how carbon offsets worked and why it was beneficial to engage in this activity.

  • Finally, given the “scale and diversity” of offset users, New Energy Finance predicted that the voluntary carbon market will continue to grow, once the global recession is over.

While the voluntary carbon market is an important transitional step toward an economy that captures the true cost of a carbon intensive energy system, it will most likely take some sort of regulatory approach to accelerate the internalization of carbon externalities in the marketplace. So, let’s turn to the most prevalent legislative mechanism that is seeking to accomplish that end: The Waxman-Markey Clean Energy Bill (H.R.2454), otherwise known as the American Clean Energy and Security Act of 2009 (ACES Act).

According to many spectators and participants, this bill represents a demonstrable move towards the United States adopting clear, identifiable carbon reductions. That said, according to those involved with the clean energy industry, there are many challenges to be met in terms of decision-makers crafting a piece of legislation that would effectively address the carbon issue, in turn accelerating the markets for energy efficiency and renewable energy.

Tim Greeff, political director at the Clean Economy Network, puts it this way, “While there are many important provisions in the legislation that will help facilitate a more rapid transition to the deployment of cleaner technologies, the legislation faces a substantial hurdle in the Senate. As it stands now, there are well over a dozen Senators who have significant concerns with different provisions of the bill and are not convinced of its benefits for clean energy, jobs and the economy. ”

The bill outlines a cap and trade mechanism for greenhouse gas emissions reduction, aiming to decrease emissions by 17% by 2020. However, the cap and trade program being designed within this legislation would give away 81% of allowances for free, as opposed to the cap and trade program advocated by the White House which would auction off the allowances and use the proceeds for clean energy investments and a tax cut for the underprivileged. Other aspects of the legislation:

  • The bill allocates 36% of allowances to the power generation sector through 2025

  • Auctioned volumes would increase dramatically after 2025, rising from 19% to 65% by 2030. Beginning at a low auction rate would allow covered entities (the power sector) time for the technological transition they will need to make in a carbon constrained economy

  • The legislation would ease restrictions on offset usage to reduce compliance costs. After 2017, it would remove an 80% offset discount factor for international offsets and allow increased international offset usage to compensate for domestic shortages of offsets when domestic prices are less than or equal to allowance prices

  • The bill relaxes criteria for inclusion in the early offset supply pool to broaden the scope of eligible programs beyond the Climate Action Registry and the Regional Greenhouse Gas Initiative (this may address some of the shortage issues of domestic offsets)

Getting the program and the price right in this new approach to carbon mitigation will be key to making sure that we are creating the right landscape for accelerating markets for renewables, efficiency services and technology. The internalization of carbon costs into our economic infrastructure will be important for creating the right market environment for the uptake of renewables, perhaps as important as the creation of a smart grid to be able to integrate distributed generation beyond niche applications. But that’s a story for another day.

The U.S. Carbon Market

There is so much talk today about carbon legislation that I’d like to ask a really basic question. How do carbon markets work? And how do they help foster the development of renewable energy? — Danny B., Whitehouse Station, NJ

Despite the name, carbon markets do not trade existing carbon. They trade the reduction of carbon emissions into the atmosphere. So, like other emissions trading schemes, such as the sulfur dioxide “market” that helped to reduce the acid rain problem here in the U.S. over the last twenty years, carbon markets would theoretically mitigate carbon emissions as part of the effort to address climate change. Of course, there are problems other than climate change that come about with a carbon intensive economy. Fluctuating fossil fuel prices, dependence on politically unstable regions for the energy that fuels our economy, pollution issues such as the Exxon Valdez spill, as well as increasing concern about the theoretical phenomenon of “peak oil” all are weaknesses of a carbon intensive energy system.

Ultimately, however, carbon markets today are principally based within the context of greenhouse gas (GHG) reduction and the growing public concern about our warming planet and the catastrophe this could pose. The idea is straightforward at first glance, but becomes fairly complex rather quickly in terms of actual measured emission reduction as well as “unintended consequences.”

Carbon Market Definition

Carbon markets can be either voluntary or mandatory. In a voluntary carbon market, an entity (company, individual, or another “emitter”) volunteers to offset its carbon emissions by purchasing carbon allowances from a third party, who then takes this money and uses it towards a project that will reduce carbon in the atmosphere. These projects include planting trees (natural carbon sequestration) or investment in renewable energy generation (the additional renewable capacity reduces fossil fuel use from a traditional carbon-emitting energy source).

Compliance carbon markets function under a regulated limit to carbon emissions (a “cap” on emissions), where permits or “allowances” are given or auctioned to carbon emitters who then have to figure out how to conduct their business within this set limit. This creates a market for these allowances, where lower emitting entities can trade their extra allowances to those who need the additional capacity, hence the term “cap-and-trade” carbon markets.

The European Example

To understand a bit more about how these carbon markets work (or how they sometimes don’t work), let’s take a look across the Atlantic. The EU Emissions Trading Scheme (EU ETS) is the first international initiative to attempt to tackle this type of GHG market. It is a compliance market, functioning as a cap-and-trade and a credit-and-trade system under mandates set by the Kyoto Protocol. Article 17 of this accord sets up an ETS, where Annex I countries can exchange emission permits between them or trade emissions reductions from the investment projects made abroad under what are called the Kyoto mechanisms (Clean Development Mechanisms (CDM’s) if they take place in countries with no carbon limit, Joint Implementation (JI’s) if they take place in countries with a carbon limit). The EU ETS represents about 65% of the total volume of carbon traded worldwide representing $19 billion in 2006 according to The Climate Group, an international NGO (non-governmental organization) that tracks growing carbon markets.

Potential Market Pitfalls

There have been two prominent snafus in the roll-out of the EU ETS. The first concerns the creation of the allowance market itself. Evidently, the initial dispersal of allowances “over-allocated” them. In other words, the emissions cap as it was set did not match up with the number of allowances that were allocated to emitters. So, the market had the wrong signals and it took some time for the price to adjust.

The second issue, and potentially a more entrenched one, surrounds the CDM’s and accountability. Emitters in the developed countries of the EU will often seek the lowest-cost way to satisfy their emissions reductions, often in the form of a CDM in a developing country. Within this decision are some potential problems: Is the project an additional reduction effort, or would the project have taken place anyway in a BAU (business as usual) situation (otherwise known as “additionality”)? Can the project’s emissions reductions be verified? Does the project create fewer GHG emissions, but produce other environmental and/or social problems? All of these concerns are creating increasing criticism of the EU ETS as it is currently run and have led to the United Nations raising the bar on approving these CDMs. This creates additional investment risks associated with the market, as projects that are slated to commence to fulfill reductions may be unable to pass muster.

Accountability and Oversight

There is also an issue surrounding the appropriate enforcement and oversight mechanism and/or institution for verifying emissions reductions and trading. This applies not only to verification of emissions reductions claims, but also oversight to make sure that “double-counting” of reductions doesn’t occur. That is, when multiple stakeholders take credit for distinct emission reductions that should only be attributed to one emitter.

In the United States, third party NGO’s have stepped in within voluntary markets to fulfill this function, but their role is questioned by corporate watchdog groups who suspect that being reliant on corporate funding for their existence compromises their objectivity. There has been some talk about establishing a “self regulatory organization” like the Securities and Exchange Commission (SEC) to regulate a compliance carbon market here in the U.S. should national cap-and-trade legislation pass. Some sort of independent global stakeholder may need to be created to fill this role internationally (the definition of independent to be determined). Whatever the solution, it cannot be overstated that the success of the carbon market will be based on the trust between its participants.

Carbon Markets in the U.S.

Which brings us back to the United States, where, by all accounts, there appears to be some sort of national carbon legislation on the horizon and where several regional initiatives are already in place. For a complete overview of all the legislation that’s currently on the table, the Pew Center on Global Climate Change provides a spreadsheet that outlines all of the particulars.

Ultimately, for a carbon market to have traction it needs to be fungible; it needs to be able to act like financial markets that can navigate internationally. But in the meantime, we have a growing voluntary market and several regional compliance markets already underway. The Chicago Climate Exchange is the largest voluntary carbon trading system in the U.S., trading $36.5 million worth of offsets in 2006 (some of this may represent renewable energy investments). And the U.S. is home to the largest provider of carbon offsets by volume; the Climate Trust had reduced carbon emissions by four million metric tons by the end of 2005.

In California, AB 32 has been signed into law mandating greenhouse gas reduction of 25 percent by 2020 and 80 percent by 2050. The California Air Resources Board is the entity responsible for enforcing this cap, and for making plans and rules that will implement the goal. It is expected to introduce a cap-and-trade system to achieve these reductions.

The Regional Greenhouse Gas Initiative (RGGI-pronounced “Reggie”) is a regional cap-and-trade system for participating Northeast states that has just experienced its first trades. An option trade between EcoSys Capital Adviser and energy trader Vitol was the inaugural transaction on February 14th, 2008. The next trade was a forward trade placing a price for allowances at $7 a ton, putting an annual value for the RGGI market at $1.3 billion. These regional and voluntary markets are testing grounds for future carbon market growth.

Carbon and Renewables

The broader question of how carbon market development relates to renewable energy development is a bit tricky. Right now, it is safe to say that any price tag associated with carbon could be good for renewables in the long run as carbon intensive energy generation becomes more expensive, making renewable energy generation more cost competitive in comparison. And within voluntary markets, sometimes renewable energy projects are created to represent an emissions offset so one could argue this builds the renewable market directly.

But there is some tension in the ultimate design within carbon pricing. The question becomes, are we designing a system that rewards least-cost carbon mitigation that may continue our reliance on carbon intensive fuels by focusing on cleaner emissions and projects that don’t necessarily displace carbon intensive fuel dependence? Or are we designing a system that rewards emissions reductions through efficiency measures and innovation in terms of both carbon mitigation and renewable energy development?

Interestingly, if we focus solely on carbon sequestration and other technologies that create cleaner carbon emissions, these applications could potentially compete with renewables within a trading framework that ideally would reward all solutions to climate issues.

If, for example, Renewable Energy Credits (RECs) are not bundled with Certified Emission Reductions (CERs) then there is a potential for emissions reductions to be sourced solely from carbon mitigation and not renewable projects (based largely on current costs). Basically, renewable energy projects impact overall carbon emissions. As emissions are reduced as these renewables come online, the carbon quota should decrease to reflect this in order to maintain the right price signals in the market and to ensure that renewables are associated with emissions reductions. This market performance is facilitated by linking RECs and CERs.

This is one example of the way in which carbon and renewables impact each other, which brings us to the observation that it is important for renewable energy proponents to follow carbon issues. We should keep close watch on the technology that is being developed that would mitigate carbon problems through sequestration and emissions reductions as a potential market competitor. But perhaps more importantly, we need to be well informed about policy that addresses carbon to look for a framework for synergy between these technologies and renewables.