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<title>March 2007: Tip-In Point</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 align="left"><b><u><br>
</u></b><u><b>March 2007</b></u></p>
<p align="center"><font size="6"><b>Tip-In Point</b></font></p>
<p><strong>by Roger Feldman --
</strong><b>Andrews Kurth, LLP</b><strong><br>
</strong><font face="Arial" size="2">(<em>originally published by PMA OnLine
Magazine: 2008/01/05</em>)<br>
</font><span style="font-size: 10.0pt; font-family: Palatino; color: black">
</span></p>
<p class="MsoBodyText" align="left" style="text-align:left">In our
electronic trendy society, supposed “tipping points” where there are said to
be basic societal changes, come and go too quickly for good public policy as
well as for entrepreneurial innovators, capital investors and companies --
both utility and industrial -- all trying to adapt their strategies to the
political winds. Andy Warhol, the late social philosopher, once said that
in the future everyone will have fifteen minutes of fame; the fear is that
in an energy context this will come out sounding like this: “Renewables and
Conservation -- that’s so ‘70s.” Are we at such a tipping point? Well, it
is certainly March Madness at least. In a single week Silicon Valley
proclaimed on the front page of the paper that clean technology to combat
climate change is the next big VC boom, the <u>Times</u> lauded the
environmental activist groups which used the web and worked with Goldman
Sachs to influence the resource plan shape of the TXU takeover bid; <u>The
Wall Street Journal</u> headlined a giant windpower land gamble in Texas by
several multinational corporations, and -- to make us all nervous -- Al
Gore’s Oscar celebrity hosts declared themselves 100% carbon neutrals and
wind-powered, although they themselves owned no windmills.</p>
<p class="MsoBodyText" align="left" style="text-align:left">Well folks, it’s
not a tipping point but a bubble unless these developments actually work to
solve problems. We have to recognize, for openers, that there are three
different types of proposed solutions to relatable but different energy
problems of our day.</p>
<p class="BodyText05SS" align="left" style="text-align: left; text-indent: -.25in; margin-left: .5in">
1.<span style="font:7.0pt "Times New Roman""> </span>
Promotion of renewable energy resources as: (a) a domestic supply source for
stationary and mobile sources (<i>i.e.</i>, for “energy security”), (b)
near term enlarged electricity requirements (<i>i.e</i>., resurgent
post-deregulation “need for power”), and (c) as a source of reductions of
all hydrocarbon uses (“global warming reduction”).</p>
<p class="BodyText05SS" align="left" style="text-align: left; text-indent: -.25in; margin-left: .5in">
2.<span style="font:7.0pt "Times New Roman""> </span>
Promotion of a combination of: (a) technical energy efficiency (<i>e.g.</i>,
CHP), (b) economically reduced energy efficiency (<i>i.e.</i>, demand
response reduction), and (c) moral (voluntary) suasion, to achieve similar
objectives, while controlling rate increases through either utility
practices or improved energy efficiency patterns.</p>
<p class="BodyText05SS" align="left" style="text-align: left; text-indent: -.25in; margin-left: .5in">
3.<span style="font:7.0pt "Times New Roman""> </span>
Promotion of mandatory environmental “cap and trade” global warming
“schemes” which trigger response efforts using not only energy renewables
and energy efficiency, but also technological breakthroughs aimed at
pollution reduction (and possibly ancillary commercial uses).</p>
<p class="MsoBodyText" align="left" style="text-align:left">Here, though, is
the March Madness “tip-in point”: what is proposed can’t be said to be a
“solution” unless it operates through a market mechanism that “monetizes”
the consequences of these strategies in a way which demonstrably stimulates
results in energy patterns.</p>
<p class="MsoBodyText" align="left" style="text-align:left">In the vacuum
left by the Federal government on these matters -- which may perhaps be a
good thing in terms of allowing regional-specific mixed use of energy
efficiency and renewables to achieve such solutions -- we have seen 23
states develop different types of Renewable Energy Credit programs (and
several separate voluntary Certificate programs emerge) and we have seen 8
states following Texas to develop standards as well for Energy Efficiency
Reduction Credits (for which some analogous voluntary programs are
emerging).</p>
<p class="MsoBodyText" align="left" style="text-align:left">Both renewable
and energy efficiency programs require utilities to meet certain performance
standards and purchase shortfalls in defined needed energy or efficiency
compliance, as the case may be, from third-parties (or pay penalties).
Increasingly there is a drum beat for regulators to treat utilities just as
well from a rate standpoint when they conform to these regimens as when they
use their own assets to produce power (so called “decoupling”).</p>
<p class="MsoBodyText" align="left" style="margin-bottom:0in;margin-bottom:.0001pt;
text-align:left">State proliferation has, in the case of each type of credit,
naturally led the product of mechanisms to achieve national fungibility of
the type in question. </p>
<p class="MsoBodyText" align="left" style="margin-bottom:0in;margin-bottom:.0001pt;
text-align:left">In the case of RECs, an industry working group, which I
co-chaired, released version 1.0 of a standard form contract for national
trading of renewable energy certificates (RECs), or “green tags.” The
document culminated a two-year effort by the working group, organized by two
American Bar Association Committees, the Environmental Markets Association,
and the American Council on Renewable Energy. The Agreement is designed so
that it can be used for RECs available in any state or non-profit REC
programs then in existence. The intention is that as people become
accustomed to using it in bilateral transactions to effect the buying and
selling of RECs, barriers between jurisdictions will erode and this, in
turn, will pave the way for a national marketplace in RECs that is
accessible to large and small players alike.</p>
<p class="MsoBodyText" align="left" style="margin-top:0in;margin-right:0in;
margin-bottom:0in;margin-left:.25in;margin-bottom:.0001pt;text-align:left"> </p>
<p class="MsoBodyText" align="left" style="margin-top:0in;margin-right:0in;
margin-bottom:0in;margin-left:.25in;margin-bottom:.0001pt;text-align:left">
<a href="http://www.abanet.org/environ/committees/renewableenergy/RECMasterContract.pdf">
http://www.abanet.org/environ/committees/renewableenergy/RECMasterContract.pdf</a></p>
<p class="MsoBodyText" align="left" style="margin-top:0in;margin-right:0in;
margin-bottom:0in;margin-left:.25in;margin-bottom:.0001pt;text-align:left"> </p>
<p class="MsoBodyText" align="left" style="margin-bottom:0in;margin-bottom:.0001pt;
text-align:left">Federal legislation under development for inclusion in the
Senate energy bill would follow a format of increased energy efficiency
obligations up to 1% per year for electric and gas providers. Utilities,
ESCOs, state and local government, and consumer equipment manufacturers
could be sources of efficiency “supply” or equipment, materials, and
practices that offer equivalent or superior performance with less energy
consumption. Credits can be aggregated for sale by third parties. (Note:
programs like “demand response” are generally considered “conservation”
rather than “energy efficiency,” and are not included.)</p>
<p class="MsoBodyText" align="left" style="margin-bottom:0in;margin-bottom:.0001pt;
text-align:left">Federal legislation for carbon is, of course, a major thrust of
this Congress in terms of national cap and trade standards and carbon tax
possibilities.</p>
<p class="BodyText05SS" align="left" style="text-align:left;text-indent:0in">
Whether the “monetization” solutions for renewable energy and efficiency and
carbon credits will produce the “solution” to the “problem” that will keep
clean tech from succumbing to the “15 minutes of fame” phenomenon in our
culture is critical. </p>
<p class="BodyText05SS" align="left" style="text-align:left;text-indent:0in">
Three key questions affecting the business and policy sustainability of the
monetization “tip-in” solution need to be answered. While they all may be
tried at once through some mixture of incentives, it is important to
consider the following questions:</p>
<p class="BodyText05SS" align="left" style="text-align:left;text-indent:0in">
1. Will the proposed programs be harmonious in operation in
producing mutually-supportive results, <i>e.g.</i>, optimum power production
at minimum environmental cost?</p>
<p class="BodyText05SS" align="left" style="text-align:left;text-indent:0in">
2. Do the proposed programs have the potential throw weight to
support the underlying national goals without encountering either major
pushback or requiring other affirmative government programs?</p>
<p class="BodyText05SS" align="left" style="text-align:left;text-indent:0in">
3. Are the economics of the program compelling enough -- even given
the economic subsidies which they implicitly require governments to pay --
to constitute sustainable public policies which can be relied upon to
support private business and thereby themselves continue to be sustainable?</p>
<p class="BodyText05SS" align="left" style="text-align:left;text-indent:0in">
In sum: Will there be a “tip in” to provide the Big Green Team with a
triumph in the March Madness of the energy world?</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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