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<title>March 2005: Smashing the Green Atom</title>
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<p align="left"><font face="Arial"><strong><small>About The Author:<br>
<br>
</small></strong><span lang="X-NONE" style="color: black"><font size="2">
ROGER FELDMAN, Co-Chair of Andrews Kurth LLP Climate Change and Carbon
Markets Group has practiced law related to the finance of environmental and
energy projects and companies for 40 years. In particular, he has analyzed
and executed a wide variety and substantial value of project financings. He
chairs the American Bar Association’s Committee on Carbon Trading and
Finance, serves on the Board of the American Council for Renewable Energy,
and has been a senior official in the Federal Energy Administration. He is
a graduate of Brown University, Yale Law School and Harvard Business School.</font></span></font></p>
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<img src="../images/feldman.gif" alt="Washington Viewpoint by Roger Feldman" border="0" width="375" height="75"><p><b><u><br>
March 2005</u></b></p>
<p align="center"><font size="6"><b>Smashing the Green Atom</b></font></p>
<p><strong>by Roger Feldman -- Bingham, Dana L.L.P.<br>
</strong><font face="Arial" size="2">(<em>originally published by PMA OnLine
Magazine: 2</em>005/05/05)<br>
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<p class="MsoNormal"><span style="color: black">The news from the Washington
Metro is not just of DeLays but of RECs. Senator Domenici recently announced
that consideration of some type of clean energy portfolio standard was a
concept which he would entertain as part of the new forthcoming Energy Act.
Earlier Democratic proposals in Congress for a 10% green Renewables
Portfolio Standard requirement by 2020 had foundered The Domenici approach
is to add clean coal and nuclear power to the definition of “renewables” on
the substantive grounds that these fuels have reduced harmful emissions as
effectively as their green competitors and to dub the amalgam “Generation
Portfolio Standards.” (There was also a suggestion of broadening
acceptability of the politically rebuffed“ Renewable Portfolio Standard” if
such inclusion was effected.)</span></p>
<p class="MsoNormal"><span style="color: black">If nothing else, the
Domenici proposal energized like thinking blue state minds on the need for
“green-peace”, if an RPS was really to benefit renewable technologies.
Attention on the emerging market for the related concept of “renewableenergy
certificates” (RECs) already had been focused by the issuance of a major
study on the subject by the National Renewable Energy Laboratory
(NREL/TP-620-37388) and a joint undertaking by the Emissions Marketing
Association/American Bar Association/American Council on Renewable Energy
([email protected]) to develop a standard industry agreement for
trading transactions for RECs (or “green tags”). Reflecting cognizance that
more and more of their members are being confronted with Renewable Portfolio
Standards’ requirements by States, in which they make retail sales, EEI has
also formed such a working group and elected to participate in the
committee.</span></p>
<p class="MsoNormal"><span style="color: black">Interest in RECs has been
fanned too because of its confluence - whether apparent or real - with the
still fragmented U.S. state efforts to deal with the global warming
consequences of CO2 emissions - some of which could be displaced placed by
renewables. Eliot Spitzer and several other State AGs have begun suing
utilities, demanding that they reduce such emissions. Senator John McCain
continues to carry the banner for carbon reductions.</span></p>
<p class="MsoNormal"><span style="color: black">For supporters of renewables,
it may seem to be a “What’s not to like?” situation. But three issues seem
likely to emerge which will cloud that conclusions: complexity, diversity
and economics.</span></p>
<p class="MsoNormal"><span style="color: black">RECs, like atoms, are not
the unified bodies their sponsors may have envisioned. In a brilliant stroke
of metaphysics (defining economic characteristics as tangible realities) the
commodity “electricity” has been split into its energy and its green (i.e.
renewable source) elements. Following the pattern developed in the
environmental pollution field of creating markets for previously disdained
externalities by making their possession of value, “green tags” were first
voluntarily created for bundling with retail sales to make them “green” in
consumer eyes. Subsequently, State Resource Performance Standards created
mandates for which acquired“ Renewable Energy Credits” would serve to
provide compliance by utilities. Once green products and wholesale
compliance products can be marketed and have value, they can also be traded,
aggregated and sold as futures. The 2010 REC compliance markets are
estimated by NREL as $100-$300million for the “voluntary” markets for green
tags and $600million for RPS-fulfilling compliance markets. In supplier
constrained markets, such as New England, prices for RECs have gone as high
as $35-$49/MWH for new renewable energy sources.</span></p>
<p class="MsoNormal"><span style="color: black">But when an economic value
is founded on a theology (“internalization of economic externalities”) and
in the absence of Federal Uniform Standards; that theology is formulated
differently in the 50 American alchemical laboratories of democracy; is
monitored and accounted for differently in the several different emerging
regionally sponsored electronic data tracking systems being established, and
has the breath of Kyoto Zen breathed into it, the potential for confusion of
its definition is rampant. This confusion regarding the definition of RECs
is captured in this NREL assertion, whose institutional blandness obscures
the heated debate regarding its conclusion.“ A REC definition that includes
environmental attributes (insofar as Federal and State laws and regulations
have not taken specific attributes as a matter of law) is more credible and
more practical given policy precedent, difficulties in tracking the
separation of attributes, the possibility of consumer confusion in an
alternative definition were used, and the fact that the market has been
operating for a number of years under a definition that assumes
environmental attributes are included.” (emphasis added)</span></p>
<p class="MsoNormal"><span style="color: black">The definition is proposed
to minimize the confusions which manifests itself in the effort for
generators and marketers to color all renewable electrons as reward-winning
green for dollar purposes. Otherwise, this might not be the case for those
renewables located where RECs are sourced from areas</span><span style="font-family: ArialMT; color: white">i</span><span style="color: black">in</span><span style="color: black">
which emissions markets (such as CO2and NOx) are regulated by cap and trade
programs, and reductions of overall emissions are unlikely. Introduction of“
environmental attributes” into the RECs definition also stirs up divisions
among proponents of divergent green technologies- particularly those like
landfill gas,whose methane reduction of future carbon emissions, could
receive short shrift- and ire on the part of those who point out, a
renewable “green atom” may be ofgreater economic value if its true energy,
environmental and green statutory compliance components remain unbundled.</span></p>
<p class="MsoNormal"><span style="color: black">In the end, it’s about
“greengoods” as well as “green attributes”. Renewable energy developers need
a guaranteed revenue stream to finance new projects. Voluntary markets
generally provide insufficient firm markets; depending on the region,
compliance markets may still not provide sufficiently firm enough revenues.
It is for this reason that there has been a gradual proliferation of states
either requiring REC contracts as part of RPS statutes or establishing
special funds to create RECs markets. Private RECs trading systems need to
be judged by their ability to support private finance markets as well as by
the clarity and firmness of the arrangements they impose.</span></p>
<p class="MsoNormal"><span style="color: black">Legal work is required not
only to firm up RECs’ financing requirements, but to resolve questions such
as: ownership of RECs under PURPA and other regulatory programs;
opportunities for renewables to participate in emissions markets; and
compliance by RECs (with or with out disaggregated attributes) indifferent
states’ RPS requirements (whether or not generated in these states).
Similarly, seeking to reconcile trading conventions with security
requirements, so that transactions are fully bookable; deducting increments
of RPS requirements in some jurisdictions as part of tracking; reconciling
“green tag” objective voluntary definitions with RPS compliance definitions
in others - all are legal challenges just within the buzzing green, non-
“Generation Portfolio Standard” workshop</span></p>
<p class="MsoNormal"><span style="color: black">America’s Founding Fathers
split church and state (up to now, anyway). Can the green atom be similarly
split and accounted for, or absent Pax Domenici, is the market slated to
become just a “great green wreck”? One can only hope the solution is “E
Pluribus Unum.”</span></p>
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<p class="MsoBodyText" align="left" style="margin-bottom:0in;margin-bottom:.0001pt;
text-align:left"><font face="Arial" size="2">
<span lang="X-NONE" style="color: black">ROGER FELDMAN, Co-Chair of Andrews
Kurth LLP Climate Change and Carbon Markets Group has practiced law related
to the finance of environmental and energy projects and companies for 40
years. In particular, he has analyzed and executed a wide variety and
substantial value of project financings. He chairs the American Bar
Association’s Committee on Carbon Trading and Finance, serves on the Board
of the American Council for Renewable Energy, and has been a senior official
in the Federal Energy Administration. He is a graduate of Brown University,
Yale Law School and Harvard Business School.</span></font></p>
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