Renewable Energy Certificates and Carbon Offsets Strategies to - - PowerPoint PPT Presentation

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Renewable Energy Certificates and Carbon Offsets

Strategies to Negotiate Offsets and Structure REC Transactions

T d ’ f l f

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific WEDNES DAY, APRIL 20, 2011

Today’s faculty features: Keith M. Casto, Partner, Shook Hardy & Bacon, S an Francisco Christopher B. Berendt, Of Counsel, Drinker Biddle & Reath, Washington, D.C.

The audio portion of the conference may be accessed via the

Adam C. Raphaely, Director, Environmental Markets, Karbone Inc., New Y

• rk

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Tradable Renewable Energy Credits (TRECs) in California Credits (TRECs) in California

Keith M. Casto

What is a What is a Tradable Renewable Energy Credit?

• “A certificate of proof, issued through the

Western Renewable Generation Information System (WREGIS), that one megawatt-hour of System (WREGIS), that one megawatt hour of electricity was generated by an Renewable Portfolio Standard (RPS)-eligible renewable energy resource and delivered for consumption energy resource and delivered for consumption by California end-use retail customers.”

5

The Basics of TRECs (T d bl R bl E C dit ) (Tradable Renewable Energy Credits)

• The “green” attributes of power generation, can be

separated off from the power itself. separated off from the power itself.

• This would be traded and reattached to other forms of

power which help those entities fulfill their green power energy requirements. energy requirements.

• The credit is produced at the time of energy production.
• And is “cashed in” or removed from the market once

purchased allowing the buyer to claim to have promoted purchased, allowing the buyer to claim to have promoted the corresponding volume of electricity from renewable energy sources.

• The purpose of TRECs is to reduce costs and greatly
• The purpose of TRECs is to reduce costs and greatly

increase flexibility for those entities with RPS compliance

• bligations, by allowing them to procure power at lower

costs while also meeting their RPS compliance

6

g p

• bligations.

Development of TRECs in California p

• 2006

– Passed in 2006 by the California Legislature, SB 107 required at least 20% of total electricity sold to retail required at least 20% of total electricity sold to retail customers be from eligible renewable energy sources by December 2010. – April 2006 – The California Public Utilities Commission April 2006 The California Public Utilities Commission (CPUC) initiated proceedings to define what constitutes a REC.

• 2007

– CPUC determines that RECs generated from renewable systems belong to the system’s owner. – September 2007 – California Legislature passes AB September 2007 California Legislature passes AB 1613, which authorized the CPUC to require that IOUs buy excess power from combined heat and power systems.

7

Development of TRECs in California

• 2008

– CPUC determines that an REC is “a certificate of proof, issued through the Western Renewable Generation issued through the Western Renewable Generation Information System (WREGIS), that one megawatt-hour

• f electricity was generated by an Renewable Portfolio

Standard (RPS)-eligible renewable energy resource and delivered for consumption by California end-use retail customers.” – October 29, 2008 – CPUC proposed creating TRECs as h i t t ti ll d t d i a mechanism to potentially reduce costs and increase flexibility for entities with RPS compliance obligations. – November 17, 2008 – Governor Schwarzenegger issues Executive Order S 14 08 which along with E O S 21 09 Executive Order S-14-08, which along with E.O. S-21-09 (passed in Sept. 2009), increase the target from 20% to 33% of renewable energy sources by 2020.

8

Development of TRECs in California

• 2009

– California Legislature passes SB 14 and AB 64 which together authorize investor-owned utilities (IOUs) to use together authorize investor owned utilities (IOUs) to use TRECs for RPS-compliance purposes and limited out-of- state RPS purchases of RPS-qualified MWh which could be eligible as TRECs. – October 2009 – Governor Schwarzenegger vetoes both bills, largely because they discriminate against out-of- state RPS power.

• 2010

– March 11, 2010 – CPUC issues the “2010 TREC Decision,” authorizing renewable energy credits for li ith C lif i RPS bli ti th h compliance with California RPS obligations, though placed some limitations, including a limit on IOUs including a 25% cap on an IOU’s RPS MWh purchases.

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D l t f TREC i C lif i Development of TRECs in California

• 2010 (continued)
• April 12, 2010 all three IOUs (PG&E, SCE, SDG&E) file a

Joint Petition for modification of the TREC Decision, seeking to change the definition of an REC-only and bundled transactions among other requests bundled transactions among other requests.

• April 15, 2010 – Independent Energy Producers Assoc.

(IEP) files a similar Petition seeking to have the CPUC adopt a presumption that transactions using firm adopt a presumption that transactions using firm transmission qualify as bundled transactions.

• May 6, 2010 – CPUC stays the 2010 TREC Decision and

places a moratorium on any further commission p y approvals until controversy sorted out.

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D l t f TREC i C lif i Development of TRECs in California

• 2010 (continued)
• June 2010 – When CPUC was originally to decide on the

June 2010 When CPUC was originally to decide on the TREC Decision and accompanying Petitions, but legislation was circulating the California Legislature (SB 722) may have trumped CPUC’s actions, so nothing was done at this time. – August 25, 2010 – during final days of Legislature, CPUC President Michael Peevey issues a Proposed Decision th t ld h th IOU f 25% t 40% that would change the IOUs cap from 25% to 40%. – October 2010 – CPUC President Peevey issues a second Proposed Decision that would have changed the cap from 25% to 30% just a day before the decision cap from 25% to 30% just a day before the decision conference was to be held.

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D l t f TREC i C lif i Development of TRECs in California

• 2010 (continued)

– October 25, 2010 – Commissioner Grueneich issues an Alternative Proposed Decision which would have denied b th P PD lift th t d li i t both Peevey PDs, lift the stay, and eliminate an expiration date for the TREC cap and price cap. (Due to procedural rules, this pushes the decision conference until December 2010) until December 2010). – December 2010 – decision conference was held, none of the Proposed Decisions were adopted, and the term ended (ending the terms of two Commissioners including ( g g Grueneich)

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D l t f TREC i C lif i Development of TRECs in California

• 2011

– January 7, 2011 – CPUC President Peevey revises his prior Proposed Decision and essentially adopts a more t i ti TREC i il t th G i h PD restrictive TREC program similar to the Grueneich PD. – January 13, 2011 – CPUC rejects the Joint Petition filed by the three IOUs as well as IEPAs Petition, adopts the 2001 Peevey PD/2011 TREC Decision and lifts the stay 2001 Peevey PD/2011 TREC Decision and lifts the stay and moratorium imposed in 2010. – January 13, 2011 – CPUC implements SB 695, which requires the CPUC to treat Electric Service Providers requires the CPUC to treat Electric Service Providers (ESPs) the same as IOUs and subject to the same requirements and limitations. – April 12, 2011 – Governor Brown signs Senate Bill 2

13

p , g (SBX 2), which affects the 2011 TREC Decision caps.

Governor Schwarzenegger’s Executive Order S-14-08 Executive Order S-14-08

– Required all retail sellers of electricity to serve at least 33% of their load with renewable energy by the year 2020 2020. – Created need to substantially evolve state’s development

• f wind, thermal, solar, geothermal, and other “RPS

Eligible” energy projects. g gy p j – Sought to accelerate this development by streamlining siting, permitting, and procurement processes. – Issued 2 directives:

• (1) existing Renewable Energy Transmission Initiative

(RETI) will identify renewable energy zones that can be developed with little environmental impact, and

• (2) California Energy Commission (CEC) and

California Dept. of Fish and Game (DFG) will collaborate to expedite review, permitting, and

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licensing process for proposed RPS-eligible renewable energy projects.

Governor Schwarzenegger’s Governor Schwarzenegger s Executive Order S-21-09

• Directed California Air Resources Board (CARB) to adopt

regulations increasing California’s RPS to 33% by 2020.

• Provided additional guidance to state regulators about how

t hi 33% i t to achieve 33% requirement.

• Allowed renewable energy imported from “resources and

facilities” in states throughout the Western Interconnection, power grid in the western part of the U S to count towards power grid in the western part of the U.S., to count towards RPS target.

• RPS will apply to all load serving entities, including IOUs,

publicly-owned utilities (POUs) direct access providers and publicly owned utilities (POUs), direct access providers and community choice aggregators.

15

CPUC’s Definition of a REC

• CPUC adopted definition of a REC: “A certificate of proof,

issued through the Western Renewable Generation Information System (WREGIS), that one megawatt-hour of electricity was generated by an RPS-eligible renewable energy resource and delivered for consumption by California end-use retail customers.” (CPUC Decision 08-08-028). D i i l ifi d th t REC i l d “ ll bl d

• Decision clarified that RECs include “all renewable and

environmental attributes associated with the production of electricity from eligible renewable energy resource, including any avoided emission of pollutants to the air, soil, or water; any avoided emission of pollutants to the air, soil, or water; any avoided emissions of carbon dioxide, methane, nitrous

• xide, hydrofluorocarbons, perfluorocarbons, sulfur

hexafluoride, or any other greenhouse gases that have been determined by the United Nations Intergovernmental Panel

• n Climate Change, or otherwise by law, contribute to the

actual or potential threat of global climate change, and the reporting rights to these avoided emissions such as Green

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reporting rights to these avoided emissions, such as Green Tag reporting rights.”

How the “Delivery” of Energy is defined by the California Energy Commission (CEC) the California Energy Commission (CEC) for In-State Facilities

• For RPS compliance, electricity is deemed delivered if either:

– Generated at a location within state, or – Scheduled for consumption by California end-use retail customers as .

• Electricity generated by facilities located in-state or having

their first point of interconnection to WEC transmission system in-state satisfies California RPS delivery requirements requirements.

• Electricity may be delivered into California, at different time

than when RPS-certified facility generated electricity per Cal. Public Resources Code § 25741(a) Public Resources Code § 25741(a). – Delivered electricity may also be generated at a different location than that of RPS-certified facility.

17

How the “Delivery” of Energy is defined by th C lif i E C i i (CEC) the California Energy Commission (CEC) for Out-of-State Facilities

• To count generation by out-of-state facilities for RPS

compliance, RPS-certified facility must enter power purchase agreement (PPA) with a retail seller, procurement entity, or third party third party.

• PPA must include both RECs and electricity generated by

facility as bundled commodity, and matching quantity of electricity must be delivered to in-state market hub (a k a a electricity must be delivered to in state market hub (a.k.a. a “zone) or an in-state point of delivery (a.k.a. a “node”) which is located within California.

• After the CEC compares amount of RPS-eligible electricity

p g y generated by the RPS-eligible facility in a calendar year with the amount of electricity delivered into California for same period, lesser of the two amounts will count as RPS-eligible t

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procurement.

The “2010 TREC Decision” March 2010 The 2010 TREC Decision – March 2010

• CPUC issued its final decision allowing LSEs, including

IOU ESP d it h i t t b i IOUs, ESPs and community choice aggregators to begin procuring tradable RECs to satisfy applicable RPS mandates.

• Gave LSEs greater flexibility by allowing “unbundled”
• Gave LSEs greater flexibility by allowing unbundled

renewable contracts and by allowing purchases from out-of- state providers.

• Decision classified most out-of-state transactions as REC-

Decision classified most out of state transactions as REC

• nly and thus subject to the 25% cap, regardless of whether

transaction was designed to transfer only a REC without underlying energy or whether California utility sought to purchase both energy and RECs in an integrated (bundled) transaction, but did so from a generator whose first point of interconnection lies outside of any California balancing authority

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authority.

Controversial Aspects of the Controversial Aspects of the “2010 TREC Decision” – March 2010

• Decision included 3 controversial components:

– (1) CPUC limited use of TRECs by three large California IOUs (PG&E, SCE, SDG&E) for RPS compliance t th 25% (th ) f l RPS purposes to no more than 25% (the cap) of annual RPS procurement obligations. – (2) 25% cap applied to REC-only contracts, which are defined as “any contracts that do not meet the criteria for defined as any contracts that do not meet the criteria for being a “bundled” transaction. – (3) CPUC did not exempt pre-TREC Decision contracts from being placed in the REC-only category thus those from being placed in the REC only category, thus, those pre-TREC contracts are classified as REC-only and count towards the 25% cap.

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H “B dl d” i D fi d How “Bundled” is Defined

• “Bundled” transactions are those that are either when:

– (a) generator’s first point of interconnection with the grid is within a California balancing authority, or

• California Independent System Operator (which is

state’s largest balancing authority) does extend beyond state lines, but not very far. (b) RPS li ibl i d i ll t f d t – (b) RPS-eligible energy is dynamically transferred to California balancing authority (either through dynamic scheduling or through pseudo-ties).

21

Fallout from the TREC Decision The Joint Petition The Joint Petition

• Joint Petition by PG&E, SCE, & SDG&E (filed April 12, 2010)

sought to: sought to: – Revise criteria for determining what transactions are bundled transactions and what transactions are for RECs only. – Apply criteria only to contracts that are submitted for pp y y Commission approval after the effective date of the decision. – Eliminate temporary limit on use of TRECs for RPS compliance obligations by large utilities (or at least, apply it t ll RPS bli t d l d i titi d th t th to all RPS-obligated load-serving entities and ensure that the temporary limit terminates at the end of 2011). – Expand rules for “earmarking” TREC contracts. Remove requirement that new standard terms and – Remove requirement that new standard terms and conditions set out in the 2010 TREC Decision be added to RPS procurement contracts that have been submitted for CPUC approval.

22

pp

Fallout from the TREC Decision Fallout from the TREC Decision IEP’s Petition and the Stay & Moratorium

• Independent Energy Producers Association’s (IEP) Petition

(fil d A il 15 2010) ht t (filed April 15, 2010) sought to: – Revise criteria for determining what transactions are bundled transactions and what transactions are REC-

• nly transactions proposing revisions different from
• nly transactions, proposing revisions different from

those suggested in the Joint Petition. – Expand review of least-cost best-fit methodology for RPS bid evaluation and set time for its completion bid evaluation and set time for its completion.

• May 6, 2010 – CPUC stayed 2010 TREC Decision and

placed a moratorium on any further Commission approvals of placed a moratorium on any further Commission approvals of contracts for RECs to be used for RPS obligations.

23

The Three 2010 Proposed Decisions (PDs) p ( )

• Peevey’s August PD contemplated:

– Raising the cap in the 2010 TREC Decision on TREC use from 25% of the RPS target to 40% of the RPS target. g g – “Grandfathering” in contracts predating the TREC Decision so that the contracts would be classified as “bundled” and would not count against the raised cap. – Together these changes would free up significant space for utilities to purchase RECs from out-of-state producers.

• Peevey’s October PD contemplated:

Th h A PD h ld b – The same as the August PD except the cap would be set at 30% as opposed to 40%.

• Grueneich’s Alternative PD contemplated:

Eliminating expiration provision on 25% TREC usage cap – Eliminating expiration provision on 25% TREC usage cap and $50/REC price cap to ensure each provision exists indefinitely until superseded by decision by CPUC or California Legislature.

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g – Keeping RPS target cap at 25%.

Peevey’s January 2011 Proposed Decision Peevey s January 2011 Proposed Decision (a.k.a. the 2011 TREC Decision)

• January 7, 2011, Peevey again revised his PD, this time

proposing standards similar to Grueneich’s Alternative PD proposing standards similar to Grueneich s Alternative PD.

• This PD:

– Lifted the stay and moratorium, and reinstates the 2010 TREC Decision TREC Decision. – Capped the TREC MWh that may be included for RPS compliance to 25%. – Effectively designated almost all contracts with out-of-state Effectively designated almost all contracts with out of state RPS generators as involving TRECs and thus subject to the TREC cap.

• (This effectively overruled the CEC’s policies on the

eligibility of out-of-state generators to qualify for participation in the California RPS program.) – With only limited “grandfathering,” reclassified RPS contracts with out of state generators that had been approved as

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with out-of-state generators that had been approved as “bundled” into TREC transactions.

State of TRECs in California After 2011 TREC Decision

• Use of TRECs by IOUs and ESPs to meet RPS obligations limited

at 25%, which will expire on December 31, 2013. – IOUs: if an IOU TREC contract was approved before March 11, 2010, the IOU can use deliveries from that contract even if its deliveries exceed the usage cap. If this occurs, the IOU must bank the TRECs for a future year. ESPs: If an ESP TREC contract was signed before January – ESPs: If an ESP TREC contract was signed before January 13, 2011, the ESP can use deliveries from that contract even if deliveries exceed the usage cap, and must also bank them.

• All TRECs must be associated with RPS-eligible energy

g gy generated on or after January 1, 2008 and be tracked in WREGIS to be used for RPS compliance.

• RECs from bundled contracts currently delivering or scheduled to

d li RPS li ibl ld b b dl d d t d d deliver RPS-eligible energy could be unbundled and traded separately from associated energy, subject to exceptions.

• Only RECs retained in WREGIS active sub-accounts for three

calendar years or less could be used for RPS compliance

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calendar years or less, could be used for RPS compliance.

State of TRECs in California After 2011 TREC Decision TREC Decision

• Only TRECs for which an IOU pays $50 or less per TREC are

allowed for RPS compliance, which will expire on December 31, 2013. 2013. – All non-IOUs will negotiate rates between buyer and seller and are based on the market.

• California Energy Commission (CEC) determines whether a

gy ( ) TREC contract will satisfy RPS delivery rules.

• RECs are tracked using Western Renewable Energy Generation

Information System (WREGIS).

• Status of “grandfathered” TRECs:

– All generation delivered before March 11, 2010 will be considered bundled for all RPS-obligated retail sellers. All ti d li d ft M h 11 2010 dl f – All generation delivered after March 11, 2010, regardless of when associated contract was approved, will be classified as TREC or bundled pursuant to classification scheme for all RPS-obligated retail sellers.

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g

April 12, 2011 – C lif i ’ S t Bill 2 (SBX 2) California’s Senate Bill 2 (SBX 2)

• Continues requirement that California retail electric providers

procure 33% of their retail energy sales from eligible renewable p gy g sources by 2020.

• Mandates that retail electric providers meet their RPS

compliance obligation through procurement of eligible renewable i 3 tf li t t t i energy resources in 3 portfolio content categories. – Minimum of 50% procured from in-state and in-state equivalent products. Maximum of 25% from unbundled RECs – Maximum of 25% from unbundled RECs. – Remainder from firmed and shaped products that provide incremental power.

• These %’s remain in place until 2017 when in-state and in-state

These % s remain in place until 2017 when in state and in state equivalent is raised to 75%, and maximum from unbundled RECs drops to 10%, with the remainder being from firmed and shaped products.

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April 12, 2011 – California’s Senate Bill 2 (SBX 2) California s Senate Bill 2 (SBX 2)

• For out-of-state generators, RPS-eligible generation form an out-

g , g g

• f-state project that is “scheduled . . . into a California balancing

authority without substituting electricity from another source” qualifies as an “in-state product.” I t d d t bl t f t t j t th t h fi – Intended to enable out-of-state projects that have firm transmission rights and the corresponding right to schedule and deliver power into California to qualify for the most advantageous of the three portfolio categories as effectively advantageous of the three portfolio categories as effectively an in-state bundled sale.

29

April 12, 2011 – California’s Senate Bill 2 (SBX 2)

• May potentially provide broad exemption from limitations on

transactions involving both firmed and shaped products and unbundled RECs for existing projects – Following existing and prospective RPS transactions are not subject to the limitations on transactions involving both firmed and shaped products and unbundled RECs:

• (a) RPS power from out of state resources that is being
• (a) RPS power from out-of-state resources that is being

sold to CA utilities in accordance with CPUC-approved power purchase agreements and will “supply electricity to California end-use customers”; and

• (b) “[N]early 7,000 megawatts of additional proposed

renewable energy resources located outside of California that are awaiting interconnection approval from the” ISO is procured by a California utility from the ISO, is procured by a California utility.

• These exemptions arguably grandfather all prior CPUC-

approved power purchase agreements.

• Full extent of scope of grandfathering of prior RPS transactions

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Full extent of scope of grandfathering of prior RPS transactions will not be known until CPUC issues rule construing specific statutory language of new law.

SBX 2 th 2011 TREC D i i SBX 2 versus the 2011 TREC Decision

• 2011 TREC Decision

R i 20% t

• SBX 2

R i 33% t

• Requires 20% procurement

from eligible renewable sources by 2010.

• California’s 3 largest IOUs
• Requires 33% procurement

from eligible renewable sources by 2020.

• California’s 3 largest IOUs

California s 3 largest IOUs limited to 25% cap on TRECs.

• Counted all transactions

California s 3 largest IOUs creates 3 categories of caps: 50%, 25%, remainder for 2013 and updated caps involving both firmed and shaped products or unbundled RECs to count against the 25% cap prior in 2017.

• Arguably grandfathers in all

prior CPUC-approved power purchase against the 25% cap prior to the 2011 Decision, regardless whether CPUC previously approved. power purchase agreements.

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C t t I f ti Contact Information

Keith M. Casto Shook, Hardy & Bacon LLP One Montgomery Suite 2700 One Montgomery, Suite 2700 San Francisco, CA 94104 Tel : 415 544 1980 Tel.: 415.544.1980 Fax: 415.391.0281 Email: kcasto@shb.com @

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Rene able Energ Certificates Renewable Energy Certificates & Carbon Offsets:

Federal Update and Transactional Best Practices

Christopher B. Berendt, Esq. Head of the Environmental Markets Group

Strafford Webinar Strafford Webinar April 20th 2011

Federal Update: RES CES

> Why CES?

Why CES?

– Something for everyone, budget neutral, goal not a mandate

with state flexibility, national market functionality, energy summer, “WWTHD” > What is Clean Energy? Watch your words … > Existing and New Unit Issues: Baseline, Compliance,

Origination Trading overall variance by technology Origination, Trading, overall variance by technology

> Preemption, Savings Clauses and the State RPSs

– Parallel market operations 1 MWh of Renewable

Generation = 1 REC and 1 CEC Generation = 1 REC and 1 CEC > Downward trend in Value Chain Competition: EECs

to be a future bite out of DSM?

Strafford: RECs and Carbon Offsets | April 20th 2011 34

Federal Update: Compliance Offsets

>

“Cap and Trade” not at least until after the election

>

Cap and Trade not at least until after the election …

>

Attempts to inject offsets into CES design unlikely to succeed

>

EPA CAA §111 NSPS “source boundary” issues and bubble & netting theory on the facility and sectoral level, what is a “ t ” ll ? “category” really?

>

Let the States Cook? Existing Units under §111, mixed with a little §110 SIP theory, do we get an Ozone Transportation Coalition for Carbon? Sounds like RGGI or WCI….pre- p compliance issues…

>

WCI still on the launch pad, but the fighting over the honor of the first “named” forward contract in California was a good sign, CEQA gates… CEQA gates…

>

RGGI still not worth the transaction costs

Strafford: RECs and Carbon Offsets | April 20th 2011 35

Federal Update: CFTC / SEC & Dodd Frank

> The Nature of the Thing creates confusion > Avoiding clearing and collateral requirements

– 5 – 15 % collateral margins on primary market forward

5 15 % collateral margins on primary market forward contracts? > Exclusion from “Swap” definition is critical

– RECs and Offsets are Environmental Commodities / – RECs and Offsets are Environmental Commodities /

Instruments that physically settle, don’t confuse with standard derivative contracts built for hedging on DCMs

– Creative OTC forward agreements critical for project finance

g p j in the environmental markets > End-user focus not only on commercial and

compliance hedging, but project finance as well?

Strafford: RECs and Carbon Offsets | April 20th 2011 36

p g g, p j

New York | London | Istanbul

Karbone Market Structure and Opportunities for CA Opportunities for CA Renewable Energy Market

Market Overview Market Overview

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Portfolio Content Categories Portfolio Content Categories

Bucket 1. First Point of Interconnection with CA Balancing Authority (BA) OR h d l d f li ibl bl i t b l i OR scheduled from an eligible renewable energy resource into a balancing authority without substituting electricity from another source. Bucket 2. Firmed and shaped electricity products from eligible renewable Bucket 2. Firmed and shaped electricity products from eligible renewable energy resources providing incremental electricity and scheduled into a California balancing authority. Bucket 3. Unbundled eligible Renewable Energy Credits (RECs)

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Opportunities Opportunities

Firm Transmission will be at a Premium Firm Transmission will be at a Premium Dynamic Scheduling definition eased to ‘hourly balancing’ Dynamic Scheduling definition eased to ‘hourly balancing’ Power Marketers to assist in Firming and Shaping Power Marketers to assist in Firming and Shaping Compliance buyers should optimize by using all 3 buckets Compliance buyers should optimize by using all 3 buckets

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Liquidity Liquidity

• TRECs will be the most liquid product
• TRECs will be the most liquid product

– Demand will fall off in phases 2 and 3

• Firm and Shaped will prove popular with Power Marketers

– Ability to deliver bespoke power products to certain delivery points at a premium

• In State Structures will favor IOU/POU over ESP

– IPPs are reluctant to sell less than 10 years – Hard to get financing for any less – ESPs don’t hedge longer than 3 years into the future – Duration mismatch could cause difficulties/opportunities.

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New York | London | Istanbul

Adam C. Raphaely p y Director | Environmental Markets | Karbone Inc. 130 W42nd Street, 9th Floor | New York, NY 10036 T 646-616-0074 | C 917-361-1807 | i k b d aim:karboneadam www.karbone.com

P ti Ti Practice Tips: Use Project Theory for RECs and Offsets

> RECs and Offsets are “activity derived” commodities,

stemming from the environmental attributes created by a project by a project

> Project’s Attributes similar to real-estate “sticks in a

bundle”

> Single instrument vehicle for attributes becoming the

standard

Because you can does not mean you should compliance

– Because you can does not mean you should, compliance

stripped for voluntary, voluntary stripped for voluntary are all bad ideas …

– FTC Revision of Green Guides

Strafford: RECs and Carbon Offsets | April 20th 2011 43

– FTC Revision of Green Guides

Transactional Best Practices: Compliance RECs

>

Due Diligence Process

–

Primary or secondary market? Lets focus generally on Primary … Transaction appropriate for client goals? Deliverability / Certification obtained?

–

Transaction appropriate for client goals? Deliverability / Certification obtained? Certification for unit for life of strip? 2-4% brokerage fee depending, spot, forward or auction OTC, who takes title?

–

In regulatory markets both counsel and analyst should have a view for clients on market direction Deliverability and the dormant commerce clause

–

Deliverability and the dormant commerce clause

>

Don’t confuse a confirm for a contract, use ABA EMA ACORE Master to think about structure and fit …

>

Statutory Product Definition

–

Avoid disaggregation temptation even if allowed, use wide definitional net as backup

>

No Double Counting Clauses

>

Government Action

Sub divide risk of value impacts and total value destruction

–

Sub-divide risk of value impacts and total value destruction

>

Standard is Seller has change in law risk up to the Transaction and / or delivery date, thereafter bore by Buyer

>

Disclaimer of Warranties for Future Fitness and Off-ramps t ll d f t i if it d tifi ti

Strafford: RECs and Carbon Offsets | April 20th 2011 44

tolled from strip if unit decertification occurs

Transactional Best Practices: Voluntary RECs

>

Reputational? LEED Green Building? Government Agency

>

Reputational? LEED Green Building? Government Agency Compliance? Green Power Purchase Program? Consent Decree? Portfolio Permitting?

>

Do you need an carbon offset but are buying a REC?

–

REC works with Scope 2 GHG Inventory but not much else

–

Take “awards” with a grain of salt, do your due diligence, ask about the specific environmental instrument you will be taking physical delivery of … clear accounting and retirement records

>

Unless you want to stake a financing claim to a specific unit not

>

Unless you want to stake a financing claim to a specific unit, not much value in buying far forward today (“6/12/3”)

>

You can shop nationwide, but do you need local?

>

Green-e product standard supports clarity of claim p pp y

–

Utility / retailer power marketer specific RPS and Green Power Purchase Program issues, No double counting, reporting rights, “eligible” in primary and wholesale markets, stamped as “certified” in secondary and retail markets

Strafford: RECs and Carbon Offsets | April 20th 2011 45

Transactional Best Practices: Compliance Offsets

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California is the current focus for compliance offsets, RGGI silent

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ARB the “key master and the gate keeper” in compliance, CAR pre- compliance 2005 – 2014

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Final suite of compliance protocols uncertain, validation due diligence, verification, registry roles?

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No best practices domestically yet detailed due diligence required

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No best practices domestically yet, detailed due diligence required …

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Unique issues for project developers (project by project or aggregation) and naturals as they play in the primary market, the secondary market is a less risky place

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Primary Market: Allocate carefully the Regulatory Risk component of

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Primary Market: Allocate carefully the Regulatory Risk component of Delivery Risk

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Forward contract vehicle

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Understand your project and your role as offtaker or developer: pool, unit contingent or origination contingent? contingent or origination contingent?

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Transfer shifts to voluntary market if compliance play goes?

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Market pricing hard to access, LDs dangerous, floor on the voluntary market, mark only if volume is present

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Project cost tails hard to nail down, set limits

Strafford: RECs and Carbon Offsets | April 20th 2011 46

j

Transactional Best Practices: Voluntary Offsets

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Reputational? Consent Decree? Portfolio Permitting? Pre-compliance? p g p

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Part of a package?

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GHG Inventory, Carbon Disclosure Project, The Climate Registry?

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Do I need a REC but I am buying an Offset? Th Th A i Th A i C b R i t (ACR) th Cli t

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The Three Amigos: The American Carbon Registry (ACR), the Climate Action Reserve (CAR), and the Voluntary Carbon Standard (VCS)

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Choice of standards body is critical: huge differences in approach, applicability and client fit

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All about the “project story” make sure you capture it in contracting or risk embarrassment and worse …

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Walk your clients through the project cycle, help them understand encumbrances obligations rights and costs encumbrances, obligations, rights and costs

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Concluding: Consider special counsel for environmental markets transactions

Strafford: RECs and Carbon Offsets | April 20th 2011 47

Contact Information

Christopher B. Berendt 1500 K Street, N.W. Washington, DC 20005 (202) 230 5426 (Di t) (202) 230-5426 (Direct) (202) 230-5136 (Executive Assistant) Christopher.Berendt@dbr.com