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Before You Build It: Think Green

The complex financial analysis that has driven renewable energy investment has become the standard for assessing all potential electric generation investments.

Fortnightly Magazine - October 2007

based on the specifics of that program, and the retail seller likely would be able to buy the REC and the power separately, which should lead to more natural market dynamics for both the electricity and the credit. REC transactions are evolving, and in some markets, like Texas, are far more mature than in others. These varied approaches to REC programs can make cross-border power sales potentially tricky. These programs also will include an alternative compliance payment device for those retailers that do not hold adequate RECs at the tolling date. These are typically priced around $50, but can be significantly higher for solar-specific requirements that some states have adopted. There exists, however, a great deal of uncertainty about most of the characterization, treatment and ownership of RECs in many jurisdictions.

2. The term “carbon” has been used throughout this article interchangeably with greenhouse gases as it represents the greenhouse gas most directly linked to electricity production; the limitation programs discussed herein are regulating all greenhouse gases.

3. The most substantial, and therefore most likely to be integrated into an economic model of the tax benefits, are the federal production tax credits, and energy credits, §45 and §48, respectively, of the Internal Revenue Code.

4. The California RPS is one of the most aggressive standards established, requiring that 20 percent of all electricity sold in California be derived from a renewable source by 2010, rising to 33 percent by 2020.

5. California is active in multiple carbon initiatives; the primary program was mandated by California A.B. 32, The Global Warming Solutions Act, but the program was not defined. Gov. Schwarzenegger publicly has stated that joining RGGI might be the best way for California to establish a greenhouse-gas cap-and-trade program. The state is a member of the West Coast Governors Global Warming Initiative, as well as a program with the United Kingdom to design a market-based cross-border carbon emissions platform. Pursuant to California A.B. 32, California will begin adoption of greenhouse-gas emissions limitation regulations by Jan. 1, 2011.

6. The RGGI program will create a regional greenhouse-gas cap-and-trade program that will be administered on a state-by-state basis. It is only one of several regional programs looking at the challenge of carbon emissions, but it is highlighted here because it is the only current program with established timelines for putting a regulatory framework into place; the other programs, including Powering the Plains, the West Coast Governors Global Warming Initiative, and Midwest Greenhouse Gas Emission Registry are much less clearly developed.

7. In addition to these potential sources of value or financial support for a non-traditional generation project, both the RPS and carbon-restriction regimes likely will have a direct impact on the cost of producing electricity with a traditional generating facility, and may have a significant impact on the valuation model associated with constructing and financing such a plant.

8. A carbon cap-and-trade program will not necessarily provide direct tangible assets to a renewable energy producer as an RPS might. The programs typically only award offsets to a project that is operated with a lower