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United States

Time to pay attention

Governments are beginning to realise that the more emissions they save, the more credits they have to sell on future carbon trading markets -- and that wind power can deliver those valuable credits. But an international market for trading carbon emissions does not yet exist. Vital for wind will be a system of identifying and accrediting the carbon credit attached to each kilowatt hour of power produced. The challenge for the wind industry today is to make sure that its product is ready and available to participate in emissions trading from the outset.

All of a sudden the academic link between more wind energy and less pollution is being demonstrated live in real world policies and projects. Climate change strategies, specifically in Europe (page 23) and Britain (page 14) this month, are expressly noting that more wind means less CO2 to worry about. The point is also being stressed by the Wind Powering America initiative (page 48). Even more importantly, governments are beginning to realise that the more emissions they save, the more credits they have to sell on future carbon trading markets -- and that wind power can deliver those valuable credits.

The reaction of the wind business to these political developments has been almost instantaneous. Nowhere is the link between more wind and less pollution more graphically demonstrated than in SeaWest's bid to raise finance for a major new wind farm in California by selling off the carbon credits attached to each kilowatt hour of output (page 22). The message is clear: a wind plant not only generates electricity, it offsets pollution. It is a message that seekers of carbon offsets, from hugely polluting industries to a tiny climate change trust in Oregon (page 23), will be delighted to hear.

An international market for trading carbon emissions, however, does not yet exist. Indeed, there is no properly defined market anywhere. In offering its carbon credits for sale, SeaWest is gambling that heavy polluters seeking to hedge their bets on future climate change policies are looking to buy carbon credits now, before their prices rise. That prices will increase seems inevitable, given the speed at which time is running out for the environment and for those trying to save it. The challenge for the wind industry today is to make sure that its product is ready and available to participate in emissions trading from the outset. Vital for wind will be a system of identifying and accrediting the carbon credit attached to each kilowatt hour of power produced. Fortunately the wind industry is well on the way to being prepared. On both sides of the Atlantic, policies for tradable renewables obligations (Renewables Portfolio Standards) already require identification of the "green credit" element of a wind kilowatt hour. Mechanisms for doing this are being, or have been, devised in several US states as part of Renewables Portfolio Standard (RPS) legislation, while in Europe work is ongoing, particularly in Britain (page 12).

As concepts, green credits and carbon credits are in the same family. Both have the advantage of minimising the cost of climate policies to consumers, and thus they attract political support. Both obtain monetary value because governments require polluters to comply with purchase obligations. These so-called "compliance markets" hold a bright future for wind power -- but only if they are constructed properly. If they are not, they threaten to be expensive and unworkable in practice, as our analysis of the progress of the RPS in seven US states makes clear (pages 42-47). Europe would be wise to take copious notes of experience there so far.

One of the many essential elements of a compliance market is the need for a very big stick as well as a nice juicy carrot. The bigger the stick, the cheaper the market product. High penalties for non compliance will make an RPS cheaper in the long run because their effect is to create a secure and certain market. Investors putting money into certain markets demand lower returns than when making a high risk investment, thus a high penalty does not increase the cost of renewables, as so many governments fear. It is this fear of handing renewables a blank cheque that is leading Britain into a no-man's land between market and subsidy. Its proposed cost cap, the "buy-out option," will effectively control the price of renewables, disabling market forces while adding to bureaucratic complexity because of the need to recycle the penalty levies within the system. The only reason that promoters of wind power should accept such a cost cap is because it is the only way of getting the RPS policy adopted -- but they must make sure the cap is high enough if wind is to get its much needed stable and predictable market.

Industry priorities

In the United States, getting such details of RPS legislation right in the individual states is currently the highest priority of the American Wind Energy Association (AWEA). Only Texas, so far, has fully implemented an RPS -- and though the percentage of renewables required is pathetically small, Texas is still one of the hottest markets for wind today. So given the huge potential that RPS markets could hold -- and that of the spin-off market in emissions trading -- AWEA's choice of priority is not hard to understand. What is hard to fathom is why, on both sides of the Atlantic, the American and European wind energy associations are so woefully underfunded. A handful of dedicated officials are trying to accomplish work for which a small army of legal experts and analysts is needed.

Wind companies are now making big money. If they want to continue doing so, they need to start paying close attention to what governments are up to. Now is the chance to make sure that the fine details of market rules and regulations are right for wind. The laws being passed today will govern competitive electricity markets for years to come -- including how much of those markets will be available for wind power.

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