There is now quite an array of options for purchasing renewable energy, as summarized in Table 1. Like most power purchase agreements, buying renewable energy is complicated by the variety of existing state electricity regulations. However, purchasing renewable energy is further complicated by the uncertainty associated with the fungibility of RECs and the immaturity of the REC markets.One of the interesting features of the renewable energy markets today is that they can serve such a broad span of corporate needs. Today these markets are attracting companies looking for everything from socially responsible investments to bolster their image to physical or financial hedges for volatile fuel and electricity prices.
Of course, many customers in these markets have multiple interests. For example, nationwide or regional businesses that want to make a commitment to renewable energy may want to consider working with multiple green energy marketers to utilize more than one of the options presented. A business might consider purchasing a fraction of its energy through a long-term, fixed-price contract, and then offsetting another portion (or the remainder) of its electricity with a forward purchase of RECs. In this way it would have both hedged its future energy purchases, but also offset its emissions while directly promoting the development of new renewable generation. A hybrid portfolio of the models presented could help a business benefit financially whether future energy prices decline or increase. Buying these various products in both short- and long-term contracts would allow the business to make portfolio adjustments according to future energy prices and help insulate the client from uncertainty in these emerging markets.
Which of these options proves to be the most lucrative will depend on the stability of future fossil fuel-generated electricity prices, the future incorporation or omission of RECs into emerging national carbon markets, the success of new and existing renewable energy generators, and future regulation with respect to renewable portfolio standards. Currently about half of the U.S. states have RPS; if more states adopt these standards, then of course this will increase the demand for RECs.
However, fungibility of RECs across state lines will become more and more of an issue. Currently, RECs from other states can be purchased to satisfy RPSs in most states, but RECs that are generated in-state are usually given some preference (e.g. in Colorado by 1.25 times).35 As more states adopt RPS measures, and the market for RECs grows, it seems likely that the market for arbitraging locally generated for nationally generated RECs could grow.
Future changes in the regulatory environment and new insurance products may make the forward purchasing of RECs and the contract for differences more appealing to potential commercial clients. There is a huge opportunity for the insurance industry to protect clients against uncertainty surrounding the future generation of RECs. Insurance for this product may change the current lack of Green-e certification for forward-purchased RECs and instigate a myriad of new renewable energy developments.
Another insurance product that would help develop the contract for differences is protection against the uncertain generation of electricity when the spot price is above the strike price. Since customers currently only receive money from the wind farm when electricity is generated by the farm and concurrently the spot price is above the strike price, customers assume a great deal of risk that the wind will not blow when the spot price is higher than the strike price. Providing insurance for the generation of electricity at this time would assuage customer fears and provide a more convincing argument of the financial benefits of the contract for differences.
The case for selling renewable energy, whether as power or RECs, into the commercial and industrial markets seems likely to grow over time. The broad range of products offered today is testimony to the innovative nature of a young and vibrant market. Increasing fungibility across state lines and adoption of RPS measures in additional states will add depth and liquidity to the existing markets. Finally, as corporate and individual consciousness of climate change issues grows, the pressure to capture the benefits of RECs as greenhouse offsets is also likely to grow.
1
Craig Hanson, The Business Case for Using Renewable Energy, Corporate Guide to Green Power Markets, World Resources Institute, Dec. 2005.
2
The Green Power Market Development Group, World Resources Institute, available at http://www.thegreenpowergroup.org/.
3
Sales Representative, Sterling Planet, Aug. 3, 2006. Also, Andrew Aulisi and Craig Hanson, Developing ‘Next Generation’ Green Power Products for Corporate Markets in North America, Corporate Guide to Green Power Markets, supra note 1, at 3.
4
Sales Representatives, Sterling Planet and NativeEnergy, Aug. 3, 2006.
5
Steve McDougal, Senior Manager of Business Development, 3 Phases, Personal Interview, Aug. 4, 2006.
6
In the U.S., Green-e, a REC certifier that strives to protect customers and avoid double-counting of these RECs, evaluates the MWh generated to be sure that they are derived from approved renewable sources. Canada's Green-e equivalent, Terrachoice, evaluates renewable generation facilities and certifies them with its Ecologo. RECs sold from the U.S. to Canada must have been generated at an Ecologo-certified facility; Canadian RECs purchased by entities in the U.S. are Green-e certified if the generation facility that produced the MWh is Ecologo-certified. The future of trading between the U.S. and Canada depends on the regulatory environment. British Columbia, Alberta, and Ontario are considering renewable portfolio standards that would value RECs. However, the new Canadian administration may not honor the Kyoto Protocol, which would decrease value for RECs. (Dan Lieberman, Director of Clean Energy Policy and Lead Green-e Certifier, Center for Resource Solutions, Personal Interview, Aug. 16, 2006.)
7
Dave Matthews Band Supports Environment, WebWire, Internet Press Release Resource, July 11, 2006, at http://www.webwire.com/ViewPressRel.asp?SESSIONID=&Id=16497.
8
Luke Cartin, Environmental Coordinator, Vail Resorts, Personal Interview, Aug. 4, 2006.
9
Green Power Network, U.S. Department of Energy's Office of Energy Efficiency and Renewable Energy, at http://www.eere.energy.gov/greenpower/financial/archives.shtml.
10
Evolution Markets, Lenny Hochschild, Director, Environmental Markets, Personal Interview, Aug. 9, 2006.
11
Lori Bird and Blair Swezey, Green Power Marketing in the U.S.: A Status Report, 8th Edition, National Renewable Energy Laboratory, Oct. 2005, available at http://www.nrel.gov/docs/fy04osti/35119.pdf.
12
Tom Stoddard, Native Energy, Personal Interview, Aug. 8, 2006.
13
Dan Lieberman, Director of Clean Energy Policy and Lead Green-e Certifier, Center for Resource Solutions, Personal Interview, Aug. 9, 2005.
14
Tom Stoddard interview, supra note 12.
15
There are sometimes incentives in deregulated states for clients to switch energy providers. In New York, the state encourages customers to switch from their local utility to a distribution company (Disco) by exempting customers from sales tax on the electricity. Businesses that are currently served by the local utility could switch to a Disco that offers green energy purchases and apply the money saved through the sales tax exemption on the delivery of the electricity towards the premium for purchasing green energy. This incentive is enough to provide local RECs for 20 percent of the customer's electricity usage and national RECs for 50 percent of the customer's usage at New York's current sales tax rate of 8.625 percent. (Mike Forese, Sales Account Manager, Community Energy, Personal Interview, Aug. 15, 2006.)
16
Retail Green Power Purchase, Green Power Market Development Group, supra note 2.
17
Aulisi and Hanson, supra note 3, at 9.
18
In Colorado, Xcel WindSource customers waive the percentage of the fuel adjustment fee that they purchase in wind. During the winter of 2005–06 customers were saving money by purchasing wind energy and there was a waiting list to enter the program. However, Xcel is now considering adding this fuel adjustment fee back to WindSource customers’ bills, making wind energy always more expensive than conventional energy. See Steve Raabe, Steady Wind Means Pricier Power, Denver Post, Business, Aug. 7, 2006.
19
Bird and Swezey, supra note 11.
20
Clean and Green can currently offer these types of contracts from a new 30 MW wind farm (to be expanded to 100 MW by 2008) in New Mexico that it is helping to develop. (Jerry Demaron, CEO, Clean and Green, Personal Interview, July 31, 2006.)
21
Know Your Business Structure, Windustry, Aug. 2, 2006, at http://www.windustry.org/basics/06-business.htm.
22
Energy and Agriculture: Wind Energy in the Farm Bill, Windustry, July 6, 2006, at http://www.windustry.org/farmbill/.
23
New wind development can take advantage of the current production tax credit (PTC) of 1.9¢/kWh which expires Dec. 31, 2007. Projects initiated after that date will be subject to the future PTC. (Energy Bill Extends Wind Power Incentive Through 2007, American Wind Energy Association, News Release, July 29, 2005.)
24
Wind Energy Policy: Federal Incentives and Policies, Windustry, July 21, 2006, at http://www.windustry.org/resources/legislation.htm.
25
In regulated states, system owners will typically receive a rebate based on the size of the system and the RECs generated. In some restructured states like New Jersey and California, licensed green energy providers will install renewable energy on their facilities, feed this electricity into the grid, and finance, own, and operate the system. The green energy provider will sell the business that loans its facility space RECs and electricity at a long-term, fixed-price rate. Or, the facility can sell these RECs if there is a market for them at the time. Since solar RECs are more valuable than RECs generated from other sources, the building owner can work with the green energy provider to sell these RECs to utilities that offer their customers solar RECs or other renewable energy customers that prefer to purchase solar RECs. In California, 3 Phases has worked with Fetzer Vineyards in this type of agreement to install a 41 MW photovoltaic system on the roof of the vineyard's administration building, enhancing Fetzer's reputation for its commitment to renewable energy. (McDougal interview, supra note 5.)
26
Joe Barclay, Vice President of Procurement, Sterling Planet, Personal Interview, Aug. 17, 2006.
27
Green Mountain Energy serves the areas of Texas that are restructured. Only a few areas of the state like San Antonio and Austin are not restructured. Austin Energy offers a GreenChoice program that offers large customers like the Austin Independent School District fixed prices on energy for a set number of years.
28
Scott Martin, Director of Commercial Sales, Green Mountain Energy, Personal Interview, July 36, 2006.
29
Only electricity customers who switched to alternative service providers (ASPs) when California became restructured and have not yet changed their service back to their local utility are eligible to work with Three Phases. Customers whose buildings were constructed after April 2001 cannot now choose to work with Three Phases.
30
McDougal interview, supra note 5.
31
Angela L.J. Hwang and John S. Patouhas, Practical Issues in Implementing FASB 133, American Institute of Certified Public Accountants, 2001, at http://www.aicpa.org/PUBS/JOFA/mar2001/hwang.htm.
32
Aulisi and Hanson, supra note 1, at 11.
33
Hochschild interview, supra note 10.
34
Average Retail Price of Electricity to Ultimate Customers by End-Use Sector, by State, Energy Information Agency, Aug. 11, 2006, at http://www.eia.doe.gov/cneaf/electricity/epm/table5_6_b.html.
35
Colorado Incentives for Renewable Energy, Database of State Incentives for Renewable Energy, Dec. 6, 2006, at www.dsireusa.org.
