October 2006

Carbon: Tipping Point or Urban Legend?

by Roger Feldman  --   Bingham, Dana L.L.P.
(originally published by PMA OnLine Magazine: 2006/10/27)
 

There’s been so much talk about “tipping points” that it’s time for a contrarian view. Call it: “From counterculture to Perhaps Counterintuitive”:

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.

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:

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.

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.

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.

Stir in the conveyance of renewables tax credits. Contemplate the dollar value impact of carbon trading. And the result is a heady brew.

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.

But is that wisdom only an “urban legend” in the green ghetto?

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”.

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.

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. 

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.

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.

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.

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.