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United States

Considering a national green power market

If wind power is to be driven by demand for renewable energy credits instead of demand for tax credits, serious thought must first be applied to how such a market is to work in practice and how it will dovetail with a carbon credit market

A growing groundswell of opinion in the US wind power business is beginning to consider whether replacement of the industry's fickle production tax credit (PTC) with a national market for trade in renewable energy credits (RECs) is an idea whose time has come. With the PTC once again due to expire at the end of a year, the advantages of a predictable long term market, with power retailers across the country required to demonstrate through the acquisition of RECs that a growing proportion of their sales comes from renewable sources of energy, are becoming increasingly more apparent.

To replace the support provided by the PTC, however, REC prices would have to rise significantly. Today, they typically hover around $5-8, with each REC representing one megawatt hour of power (previous story). Brent Alderfer from Community Energy, the US subsidiary of Spain's Iberdrola, sets the bar at $16 for RECs to compensate for loss of the PTC. Iberdrola is the world's largest wind power operator by far.

Disruption of the current REC market, however, could be substantial, warns Rob Harmon of the Bonneville Environmental Foundation, a pioneer in RECs trade. Currently there are two distinct categories of customer for RECs: those voluntarily buying green power and those required to buy credits to prove compliance with state laws mandating specific volumes of renewables in the supply mix. "If the PTC goes away and REC prices double, you will see a substantial reduction in the number of megawatt hours purchased in the voluntary market," Harmon says. "In the compliance market, what will happen is the price of projects will go up very significantly." As a result, the cost of complying with state mandates, colloquially referred to as renewables portfolio standard (RPS) laws, will go up significantly, he warns.

Harmon sees two possible outcomes. "One is that the price of electricity will go up for people, which means you haven't really gained anything -- your taxes might be a little lower but your electricity rates are higher," he says. "Or the utilities will fight back and say prices of projects are too high and therefore we won't comply with the RPS. And that will undermine renewable development."

For power retailers not complying with state mandates, penalties vary by state, but $50/MWh is typical. Some might decide that paying a penalty is the easier option, while several states have price ceilings that postpone the mandate should the cost of compliance start running too high.

For better or worse

"The devil is in the details of how a national RPS is structured," says Karlynn Cory of National Renewable Energy Laboratory. "If you have a national RPS, do you just say that the whole nation has to come into compliance? Or do you allocate it on a regional basis, saying this is what the Southeast has to meet and this is what the Northeast has to meet?" Cory believes that a national RPS could lead to a national REC market as opposed to the fragmented markets that exist today.

But it may just lead to confusion, says Ryan Wiser of Lawrence Berkeley National Laboratory. "The value of RECs already is wildly different from one market to the next. So it depends on what a national RPS is layering on top of. Is the national RPS in addition to state RPSs? Or are we talking about two separate instruments altogether?"

Wiser suggests that as demand for wind power rises, its costs will rise as developers move to less attractive resource areas that require increasing miles of transmission. "I think it's safe to say that greater competition for renewable electricity -- whether through national RPS, expanded state RPSs or otherwise -- would put at least some upward pressure on REC prices," Wiser says. "I'm not certain that's going to be a very strong economic pressure. But there is going to be some pressure."

Carbon trade too

Meantime, the outlook for federal carbon cap-and-trade legislation is reasonably promising. All three candidates for the US presidency favour some kind of system. But experts agree that a fight is brewing over who would gain the benefits -- the renewable energy faction for taking fossil fuels off the system, or the fossil fuel generators for emitting less carbon.

"Those interactions are still quite a muddle," says Wiser. "The broader renewables community doesn't yet agree on what the appropriate interactions are. But it comes down to whether any available emissions allowances that go to the generator must flow with the renewable certificate and be retired with the REC, or whether they can be sold separately."

While such problems must be sorted out before any value is attached, Harmon points to the RPS in Washington state, where all environmental benefits of renewable energy are bundled with the REC. "Does the owner of the REC get to make claims that they reduced CO2 emissions? In Washington state law, the answer to that question is yes," Harmon says. "But there are many other places where they're struggling with that."

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