CARBON TRADING: Putting Hydro to Work in Green Markets

Participation in the Chicago Climate Exchange has earned Chelan County Public Utility District more than $900,000 in financing and helped the utility emphasize that hydropower is an important, emissions-free source of renewable energy.

By Gregg E. Carrington, Melissa L. Lyons, and Steven C. Lachowicz

As a result of joining the Chicago Climate Exchange (CCX) in 2007, Chelan County Public Utility District (PUD) has earned more than $900,000 in financing from its 1,300-MW Rocky Reach hydro project. CCX is a voluntary carbon-trading market launched in 2003 that allows companies to buy and sell carbon financial instruments (CFIs) to manage their carbon-producing activities.

CCX members voluntarily sign a legally binding agreement to reduce their greenhouse gas emissions on an annual schedule. CCX helps by allowing members to buy and sell CFIs as needed, perhaps to offset more carbon emissions than were expected in business operations. The CFIs are available because other CCX members reduce emissions and thus have offsets for sale.

Chelan County PUD owns three hydro projects, all of which are undergoing upgrades and environmental improvements: 48-MW Lake Chelan, 624-MW Rock Island, and Rocky Reach. CCX issues CFIs based on the reduction in greenhouse gas emissions resulting from project upgrades and improvements. The benefits are calculated as offsets of carbon-emitting resources. Chelan County PUD’s offsets are calculated based on a portion of incremental clean hydropower produced at Rocky Reach on the Columbia River in central Washington. Chelan County PUD recently upgraded the turbines and generators in all 11 units at this plant and invested more than $100 million in downstream fish-passage improvements in 2003 that also save water for power generation.

In December 2007, Rocky Reach became the first U.S. hydroelectric facility certified by CCX to provide offsets. Chelan County PUD recommends this program for other hydro producers, although it requires a rigorous certification process and some up-front financial investment. To become established and able to trade with the CCX, the PUD invested about $130,000 in registration and trading fees. Other expenses include staff time and legal costs.

Hydro producers need to be active in the discussion on how to make these markets work or risk having hydro ignored, which could have consequences for decades to come. “This project is an example of leadership that achieves simultaneous outcomes for energy generators and the environment,” CCX Chairman and Chief Executive Officer Richard Sandor said when Chelan County PUD was admitted to the exchange. Hydro’s participation was cited as an example of both increasing energy output and improving environmental quality – something the nation should find desirable for the foreseeable future.

Options considered early

As a public power entity, Chelan County PUD looks for opportunities to bring value to its customer-owners. Thus, it was natural to investigate the CCX, which in 2007 had developed North America’s only cap-and-trade system for all six greenhouse gases (carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, and sulfur hexafluoride). CCX converts emissions of all greenhouse gases into the equivalent metric tons of carbon dioxide, using the 100-year Global Warming Potential values established by the Intergovernmental Panel on Climate Change.

CCX members include Ford Motor Co., DuPont, Eastman Kodak, Monsanto, Honeywell International, and IBM. CCX members make a voluntary but legally binding commitment to reduce their carbon emissions by 6 percent by 2010. This can be accomplished by reducing their emissions, buying allowances from other members who reduced their emissions, or buying offsets.

Through the offset program, CCX members can support programs implemented by others to “offset” their greenhouse gas emissions. CCX brings buyers and sellers together and ensures that offsets offered for sale are verifiable.

CCX has an offset category for renewable energy, but no hydro projects had applied. Thus, when Chelan County PUD first began talking with CCX, CCX did not know much about hydro and the PUD did not know much about carbon markets. Both learned through this process.

In August 2007, Chelan County PUD submitted a proposal to CCX to be considered as a participating member (offset provider) and was approved, pending a verification report. Chelan County PUD’s hydropower is considered a verifiable offset because the PUD is generating incremental power from project upgrades and improvements installed after January 1, 1999, while still meeting all regulatory obligations. The incremental power comes from equipment efficiency improvements and operational efficiency improvements, such as the use of a new fish bypass system at Rocky Reach.

Renewable energy certified as offsets cannot also be sold in green markets nor used to meet state renewable portfolio standards.

After applying to become a member, Chelan County PUD hired a consulting company to complete an independent verification report for CCX. MWH reviewed the PUD’s hydro modernization work and examined results of the $107 million spent on a new downstream surface collector and bypass system for anadromous fish. MWH issued its verification report in November 2007. This report provided the number of carbon offsets MWH verified as eligible for registration at CCX. Chelan County PUD was ready to trade in December 2007 and executed its first trade in January 2008.

Financial benefits

When CCX approved the verification in December 2007, the exchange determined that about 1.75 million additional megawatt-hours (MWh) generated at the dam from 2003 through 2006 were eligible to be traded as carbon offsets. Those credits can be sold on the exchange to offset the equivalent of 700,000 metric tons of carbon emissions, and Chelan County PUD has sold some credits.

All trading at CCX is done in terms of metric tons of carbon. One CFI is equal to 100 metric tons of carbon, and Chelan County PUD received 7,023 CFIs for 2003 through 2006. For every one MWh of verified renewable generation, the PUD offset 0.4 metric tons of carbon, the standard emission rate of a combined cycle gas turbine.

Through the end of 2008, Chelan County PUD earned gross revenues of more than $1.5 million from CCX transactions, and the PUD received about $900,000 after expenses and credits to power purchasers. The PUD had to pay initial fees of about $30,000. In addition, there are registration fees and transaction costs of about 20 cents for each offset. Net funds Chelan County PUD receives through the exchange market are being used to support and enhance the PUD’s environmental, conservation, and system efficiency improvement programs.

The PUD’s average sale price was $4.93 per metric ton of carbon. In 2008, prices ranged from $1.45 to $7.35 per ton, and the market dropped below $2 in September 2008. Prices primarily are driven by policy developments, which will continue as the U.S. contemplates regional and federal cap-and-trade systems.

Participation as a CCX offset provider may not be as easy for all hydro producers because they must have no direct carbon emissions. Direct emissions result from the on-site combustion of fossil fuels, such as using natural gas to power industrial operations and/or gasoline to operate vehicle fleets. Because Chelan County PUD’s power comes from hydroelectric and wind plants, the PUD has no direct carbon emissions.

For those that qualify, participation brings benefits beyond cash revenues. For example, Chelan County PUD has received media attention and industry notice as an environmentally responsible utility willing to share its story of participation in these emerging markets.

Clean benefits earn political praise

The political value of this work also is apparent. When CCX approved Chelan County PUD as an offset provider, both of Washington state’s Democratic senators offered supportive comments.

“Chelan PUD has made substantial investments in its operations over the past several years which greatly benefits salmon survival,” said Sen. Patty Murray. “I am pleased that their leadership and innovation are being rewarded by the Chicago Climate Exchange.”

Sen. Maria Cantwell said, “Chelan PUD has shown how we can make hydropower, one of our nation’s cleanest energy sources, even greener.”

Washington Gov. Chris Gregoire added her own endorsement: “I am pleased that they (Chelan PUD) are managing hydropower in an environmentally responsible way.”

The more voices and active participation the better as emerging markets are formed.

It will be critical for the Pacific Northwest – with its low-emissions, hydro-based system – to be involved in the final design of any cap-and-trade program. It would be beneficial for other hydro producers to join CCX or other similar emerging markets.

Other green markets

Beyond the CCX, the PUD has transacted in the voluntary renewable markets as well. These markets consist of buyers and sellers transacting in renewable energy credits (RECs), each of which represents 1 MWh of renewable generation. Some buyers are companies looking to be “green,” so they purchase RECs from a renewable generator. For the seller, REC revenues provide additional funds to help support and finance renewable projects.

Chelan County PUD also has found ways to maximize its investment in wind power, by selling green e-wind renewable energy credits (RECs) to voluntary market participants. The PUD has an 8.3-percent share of Energy Northwest’s Nine Canyon Wind Project near Tri-Cities, Wash. Prices for the green e-wind RECs have ranged from $4 to $6.25. RECs are different because they are traded in renewable markets, while CCX represents a carbon market (renewable generation is converted to tons of carbon). In addition, RECs are traded through bilateral contracts, while CCX transactions are done through an exchange.

Chelan County PUD is determined to engage in the formation of new energy policies used to regulate carbon emissions, encourage alternative energy sources, and reward clean energy producers. The PUD is convinced that hydropower is the most abundant renewable energy source and has a large role to play. Companies want to be recognized for being environmentally sensitive. Wall Street and others are beginning to recognize that, so there is some financial reward for those entities who can help others achieve their environmental goals. But in the end, it’s all about reducing carbon emissions and providing clean, renewable energy.

As a result of its active and successful efforts with CCX, as well as developing habitat conservation plans, relicensing hydro projects, and trading RECs, PUD managers have been asked to participate in statewide advisory groups and national discussion forums. While not guaranteeing automatic acceptance of every position advocated by hydropower producers, a seat at the discussion table at least guarantees access to the audience. Hydropower offers many benefits without the challenges facing other renewable technologies (costs, shaping, and reliability, among others). It deserves to get careful attention as the global energy debate moves forward. Taking an active role in opportunities such as CCX is one more way hydro can demonstrate cost-effective environmental benefits that eventually must be widely recognized as an important part of the changing energy picture.

Waterpower Climate Change Symposium

On Wednesday, July 29, in Spokane, Wash., the Waterpower conference is hosting a symposium on Climate Change. This symposium features sessions on new climate change policies and how they will affect hydropower, market opportunities for hydropower, and management in a carbon-constrained world.

Gregg Carrington is managing director of energy resources, Melissa Lyons is power resource analyst , and Steve Lachowicz is director of communications with Chelan County Public Utility District (PUD). Carrington oversaw the process of applying to the Chicago Climate Exchange (CCX), and Lyons manages the PUD’s ongoing transactions with CCX.

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