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<title>October 2006: Carbon: Tipping Point or Urban Legend?</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>
October 2006</u></b></p>
<p align="center"><font size="6"><b>Carbon: Tipping Point or Urban Legend?</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>006/10/27)<br>
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<p ALIGN="LEFT">There’s been so much talk about “tipping points” that it’s
time for a contrarian view. Call it: “From counterculture to Perhaps
Counterintuitive”:</p>
<p ALIGN="LEFT">Let’s begin with the headline story: “Hush children what’s
that sound, everyone look what’s going down…” It’s the carbon revolution…the
tipping point...the bicoastal axis squeezing the CO2 out of America.</p>
<p ALIGN="LEFT">First, California passed a bill requiring greenhouse gas
emission reduction by 25% by 2020 using market-based compliance mechanisms,
i.e. some type of cap and trade announced to follow. Its scope extends to
purchases of power from long distance non-compliers, so that its reach
cannot be evaded. Lists of acceptable measures follow:</p>
<p ALIGN="LEFT">Then the announced plans of California and the Eastern
states (RGGI) to form an integrated joint carbon trading market came out.
Grave acknowledgments of future potential with acknowledgement of the
possibility of delays by traders. Knowing nods of coming Federal programs by
trend setting pundits. Prudent stockpiling of potentially future eligible
credits by large emitters.</p>
<p ALIGN="LEFT">Reflex response: The merchants power entrepreneurs, always
seeking the cutting edge of change, perceive a chance to reemerge as
“cleantech” powerhouses, riding new external revenue streams from carbon and
other environmental credits to the heights to which they were once powered
by PURPA and then open access.</p>
<p ALIGN="LEFT">Here they stand today: Turbo-charged in their expectations
by the parallel further emergence of more and more Resource Performance
Standards, and concrete indication that the mechanisms for standardization
of RECs trading was in sight. Further intrigued by the possibility that such
standard contracts might contain embedded within them a mechanism to
transmit embedded carbon credit sales as well.</p>
<p ALIGN="LEFT">Stir in the conveyance of renewables tax credits.
Contemplate the dollar value impact of carbon trading. And the result is a
heady brew.</p>
<p ALIGN="LEFT">Bubbling up from this brew is the new “commonly acceptly
wisdom”: carbon savings will be the new metric for evaluating power
initiatives. Green breakthroughs in new technologies and energy efficiencies
validated through rapid roll out of new carbon aggregation strategies will
be pioneered by merchant power.</p>
<p ALIGN="LEFT">But is that wisdom only an “urban legend” in the green
ghetto?</p>
<p ALIGN="LEFT">Possibly every sober analyst of the national power scene are
focusing on an entirely different act of power industry dynamics. The
emergence of the next capacity crisis in power is in sight. Pace Energy
Services singles out for attention in the regard the metropolitan centers of
eastern PJM and California. The very heart of new “carbon country”.</p>
<p ALIGN="LEFT">Of course power has always been the subject of boom and bust
cycles — QFs, followed by EWGs, followed by IPPs (which unfortunately for
the marketplace were not built on solid long term contracts and were further
buffeted by rising gas prices. Each has provided merchant opportunity. </p>
<p ALIGN="LEFT">This time could be different. This capacity availability
opportunity is joined by the rapidly expanding recognition on the part of
observers like the New York Times that the fervor for deregulation is waning
rapidly, as the interim retail caps are coming off consumer prices. With
deregulation’s demise, much of the impetus for the competitive supply by
IPPs, filling in the gaps left by divesting utilities. Returning to center
stage are large central station facilities owned by utilities or their
successors. That would be the very parties whose coal plants’ aspirations
and continued operation could be contained or diverted by initiatives like
California. Also the very parties who would begin flogging the non-polluting
attraction of nuclear power. <br>
<br>
Pace suggests that historical capability of the utility industry to meet the
expected need for 130 GW of new generation is well within the proven
capacity of the industry. By its estimates, 30 GW of that requirement could
come from renewables. But that does not tell you by whom it will be
produced. In Pace’s judgment, regulated and public facilities - not IPPs -
are becoming the once and future system devices again. Concern of
policymakers with reliability only serves to exacerbates the concern that
the old great utility wheel horses, using historic fuel mixes, do their job
again — especially since rapid growth of transmission seems elusive. This is
an issue which has been a bugaboo for many merchant renewable producers.</p>
<p ALIGN="LEFT">So, inevitably the question arises: how forcefully can the
new carbon metric be applied when many of the trends in the marketplace tend
at least toward the diminution of its relative clout. Supporters of
distributed renewables (i.e. merchants) thus face a more problematic
environment than the public policy pronouncements arising out of concern
with global warning could seem to portend. </p>
<p ALIGN="LEFT">The need for carbon control is clear. But, whether it will
be leaping over the “tipping point” or become an urban legend is a question
to which merchant developers must be closely attuned.</p>
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<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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