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Cap & Trade is Already Here – Part I
Posted by Walt Vernon on July 12, 2010 at 7:19pm
As the U.S. Senate continues to grapple with ways to conclude some kind of meaningful energy and emissions reduction scheme that will satisfy enough political interests to allow it to pass, other regulations and systems are already filling that void.
Other posts on this blog have discussed the concept of Renewable Portfolio Standards (RPSs). These RPSs are laws passed by various states obligating the utilities inside their boundaries to derive some portion of their energy supply from renewable sources.
In 2006, California passed the most aggressive of such standards requiring at least 20% of the state’s electricity to come from renewable sources by the end of 2010. And, Governor Schwarzenegger has issued an Executive Order requiring the utilities to derive 33% of their energy from renewable sources by 2020. For many reasons, most parties inside California have concluded that the utilities will not quite make the 2010 goal, but the legislature provided some safety valve provisions so that the utilities can still claim compliance if they achieve the goal by 2013.
If the utilities can’t meet the requirements through energy they generate themselves, they have some options. First, they can buy renewable power from outside the state. Second, they can buy Renewable Energy Credits (RECs) to meet some of their needs.
RECs are financial instruments created by an entity that generates units of renewable energy. If the owning entity sells the energy as “renewable” then the buyer of that energy gets credit for buying the renewable energy. The “credit” for buying the renewable energy can be expressed as bundled RECs—bundled because the buyer is buying both the energy and the “greenness” of it. This distinction between the energy itself and the greenness of the energy is important because it would be possible for the owner of a renewable energy generation source to sell the energy to one party, and the greenness to another. In this case, the greenness would take the form of unbundled RECs—that is, the greenness has been unbundled from the energy itself in terms of how the two are being sold. This unbundled REC is very similar, but with important differences from what is known as a Carbon Offset (to be discussed in another blog post).
So, for a hospital, if it has installed an on-site renewable energy source, and, IF IT HAS RETAINED ownership of the RECs, it can then choose to consume the green energy, but also to sell the unbundled RECs to somebody else, say the utility, to generate additional income. This ability to sell the RECs allows additional revenue streams to help pay for the installation of the system in the first place. And, it is why installers often want to retain ownership of the RECs when they do a Power Purchase, or other similar, agreement. On the other hand, the hospital will have to be careful about their claims relative to their consumption of “green energy” because they are selling the greenness to someone else.
Hospital owners who pursue on-site renewable energy plants will do well to study the potential value (together with associated transaction costs) from the RECs their system will produce, and to think about how they want to deal with the ownership of those assets. NOT doing so is sure to leave money on the table from this newest form of Cap (of fossil fuel generation) and trade (of RECs) markets.
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