Uncertainty hinders trading potential

North America's atmosphere of uncertainty over climate change policy has not stopped industry from seeking good deals and valuable experience in emerging voluntary carbon markets. But until the weight of political commitment comes to bear, wind power producers are going to find it difficult to tap into the substantial new source of revenue that greenhouse gas emissions reduction trading is expected to bring.

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While the potential is great for North American wind producers to capture some of the environmental value of their power in greenhouse gas emissions trading markets, in practice the rules need to be worked out before wind gets a decent chance for serious participation

North America's atmosphere of uncertainty over climate change policy has not stopped industry from seeking good deals and valuable experience in emerging voluntary carbon markets. But until the weight of political commitment comes to bear, wind power producers are going to find it difficult to tap into the substantial new source of revenue that greenhouse gas emissions reduction trading is expected to bring. "In North America, there are very few jurisdictions that will actually allow you to earn allowances or credits from wind at this point," says Marc Stuart of EcoSecurities, an international consulting company that works with clients involved in the carbon market. "If there is a transaction occurring it's essentially a bilateral transaction between consenting adults. Essentially it's a buyer beware market, and therefore the pricing you'll see on that kind of thing is pretty low."

At C$1-5 per tonne, says John Keating of Calgary's Canadian Hydro Developers, the price is too low for his company to become an active player in the market. Canadian Hydro sells power from merchant wind and run-of-river hydro plants into Alberta's spot electricity market. Because it has not, by default, sold anything beyond the energy, argues Keating, the company is documenting and retaining the environmental attributes associated with the power. Although "right now, they are very much an intangible," Keating foresees a day when they will make a significant contribution to Canadian Hydro's bottom line.

"We don't want to give them away. At today's prices we might as well bank them and wait. They have value and will have more value with time, assuming that something along the lines of the Kyoto Protocol gets ratified," he says. "There has to be value created by creating a demand for the product, and there's no demand for the product now because there's no legal requirement to have it."

TransAlta Corporation, Canada's largest independent power producer and one of its leading greenhouse gas emitters, is also one of the most active companies trading in the private, voluntary emissions market. Bob Page, TransAlta's vice-president of sustainable development, says it is "very, very definitely" time to put some political direction behind the transactions that are taking place. "The market is not as firm as it would be if clear policy was in place," says Page.

A new period

There are indications the situation is about to change. Despite mounting opposition in recent weeks from Canadian industry, the federal government steadfastly maintains it will ratify Kyoto, and plans to release a policy statement on implementing the protocol within weeks. And although the US withdrew from the protocol last March, President George Bush has proposed a voluntary domestic plan to cut emissions in proportion to economic growth.

"After a long period of discussion I think we're going to be entering into about 12 or 18 months of pretty clear political action," says Page. "This has to strengthen the emissions trading market enormously. Once companies are facing the fact that they have to either get credits or change technology, in so many instances it's much cheaper to get the credits, at least in the short term. Trading will firm up very quickly."

Bush's proposal, though derided by environmentalists and economists for making no attempt to actually reduce America's gross emissions, has reopened the emissions debate in the US, says Stuart. "The one thing that is overlooked in the Bush announcement, and this is a real crossing of the Rubicon, is that this is the first time the conservative Republican wing of the party has said that we do have to do something about emissions. That is going to be very difficult to back down from," he says.

Ultimately, says Stuart, it will be Congress that sets the US's greenhouse gas emissions policy. "We don't know exactly how that will end. It would seem unlikely it would be more conservative than it currently is."

Practical hurdles

Even with a political commitment to reduce greenhouse gases, however, wind power will still need to overcome some significant practical hurdles to its ability to compete in carbon trading markets. One of the reasons wind has not been a major player in the voluntary market, says Stuart, is the difficulty in quantifying the reductions that actually take place when wind flows onto the grid. Credit production will be "highly, highly differentiated" depending on the different electricity supply mixes in different jurisdictions and the complexities will take time to sort out.

"Most of the emissions transactions you are seeing in North America are probably a little bit more robust than the offset type of transaction you see from wind power. What you're seeing is methane capture reductions from landfill, for example, something that's really demonstrable, where you can physically measure the flow and destruction of the greenhouse gas," he explains, "as opposed to pumping a bunch of wind power onto the grid and assuming a particular offset number which could be off by a fairly substantial percentage," depending on the energy source being replaced.

Another challenge wind faces is the design of the trading system itself, a point driven home last year when Ontario released a first draft of its cap and trade emissions trading scheme for NOx and SO2 in the province's electricity sector specifically excluding zero-emission generators like wind turbines. Because the emissions reductions wind creates come from fossil fuel generation, the danger is that the credits could be claimed twice, by the wind producer and by the fossil fuel generator whose output, and thus emissions, were reduced.

Intense industry lobbying eventually led Ontario to create a set-aside pool of the NOx and SO2 allowances for renewables. It is a strategy the wind industry will have to pursue when Canada and the US eventually formalise their national emissions trading schemes, which both Stuart and Andrew Pape-Salmon of Canada's Pembina Institute expect will follow the cap and trade model. "I think the Ontario case serves as an excellent case study for how we would handle it on the national level," says Pape-Salmon.

Rules to be worked on

But simply earning a place in such a trading scheme may not be enough, warns a new report on credit trading from the US's National Wind Coordinating Committee (NWCC). Wind could be hurt by unfavourable rules for earning credits, it says, pointing to the US's acid rain SO2 trading program, which set the rate at which wind could earn allowances so low that actual participation was not feasible.

Conflicting claims to ownership of wind's so-called "indirect" emissions reductions will also have to be sorted out. "We need to do some work on that," says Pape-Salmon, who is also a director of the Canadian Wind Energy Association. "The simple answer to that is whoever makes the emission reduction happen should retain ownership."

Ownership is an issue that is already complicating some emissions reduction transactions for wind. In British Columbia, BC Hydro's call for 5.5 million tonnes of CO2 offsets has brought the issue into sharp focus. To buy a wind-generated offset, says BC Hydro's John Duffy, the utility will have to be assured that any claims a displaced fossil fuel generator has to the reduction have been settled (Windpower Monthly, March 2002). Without rules, the issues must be settled in each individual contract.

Jason Edworthy of Calgary's Vision Quest Windelectric, which has claimed and sold emissions reductions generated by its Alberta wind facilities, says trading today will help define the formal markets of the future. "The rules and regulations now are that if you've done your homework and you've got a credible background for it and a standard that the players in the industry are currently accepting, it's going to be very tough for someone to go after that."

Canada's wind industry, he points out, has been active in helping develop that background. One of the first trades registered under Canada's Greenhouse Gas Emission Reduction Trading pilot was the sale of CO2 offsets generated by Vision Quest wind turbines to the federal government. The industry also participated in a government-sponsored study examining how to quantify emissions and emissions reductions on the Alberta grid. With an official Kyoto-based trading system unlikely to start in Canada before the beginning of the protocol's commitment period in 2008, says Pape-Salmon, it is important that wind stay involved.

Get involved

"Between now and then, the importance of these bilateral trades is immense. The wind industry really does need to get involved in this," he says. "We're in the game right now, and I'd like to see us continue."

While carbon markets remain immature and may not offer a lot of near-term potential, agrees Stuart, it's important wind producers begin to lay the groundwork now. "You want to start getting public utility commissions to recognise the emissions performance that wind has, and help protect any value you or your energy off-taker may be able to get from that. Make sure the paperwork is done," he advises. "You certainly don't want to just leave it on the table."

The amount of value that North American wind producers will ultimately be able to extract from carbon offsets is also going to depend on how well the Kyoto and non-Kyoto worlds eventually mesh. The Pembina Institute's Robert Hornung argues that Canada's trading system will be linked with international emissions trading. With the US, responsible for about 25% of the world's total greenhouse gas emissions, out of the Kyoto reductions market, supply could significantly outstrip demand and drive the price down.

"If the price signal isn't very strong internationally, the price signal isn't going to be very strong domestically, and that might mean not a very strong push for renewables," says Hornung.

Finding ways to ensure emissions trading systems are compatible is not only going to be important for Canada, whose economy is highly integrated with the US, but for other countries as well, says Page. "Any long term plans that don't co-ordinate between the Kyoto world and the non-Kyoto world are not going to be that effective."

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