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“Harmonizing” California’s TRECs with AB 32 Cap-and-Trade

by David Niebauer

Now that the California Public Utilities Commission (CPUC) has lifted its moratorium on the use of renewable energy credits (RECs or TRECs) by investor owned electric utilities (IOUs) for compliance with the State’s renewable portfolio standard (RPS), observers may ask themselves this logical question:  what is the future of RECs under Assembly Bill 32?

Assembly Bill 32, the California Global Warming Solutions Act, authorizes the California Air Resources Board (CARB) to establish a cap-and-trade mechanism designed to reduce the State’s greenhouse gas (GHG) emissions.  How will RECs and GHG allowances and offsets relate to one another?  Will one mechanism obviate the other or is there a place for both in the State’s overarching environmental initiative?

To answer these questions, we need to review some history and understand the roles of the various State agencies that are tasked with implementing the sometimes-conflicting legislative and executive mandates.

California’s Renewables Portfolio Standard (RPS) was established by the State legislature in 2002.  After various amendments, the law resulted in a requirement for the State’s IOUs to increase their sales of eligible renewable-energy resources so that 20% of their retail sales are derived from such resources by December 31, 2010.  According to the CPUC website, 2009 renewable energy procurement for the three IOUs in the state were as follows:  PG&E – 14.4%; So Cal Ed – 17.4%; SDG&E – 10.5%.

On September 15, 2009, Governor Schwarzenegger signed Executive Order S-21-09, which directed an increased renewable energy standard (RES) to 33% by 2020, made the requirement apply to all electric utilities (not just the three IOUs) and shifted the responsibility for implementing and overseeing the RES to the CARB.

However, the 33% standard was mandated by executive order, not by the legislature, which failed to pass a 33% RPS bill at the end of 2010.  Influential voices within the legislature opposed the expansion of the RES and have argued that CARB lacks the authority to proceed with RES adoption.  A 33% RPS bill is still pending in the legislature (SB 23)  which, if adopted, could pre-empt and/or modify the current CARB regulatory framework.

CARB is required by the legislature under AB 32 to regulate sources of greenhouse gasses to meet the State’s goal of reducing emissions to 1990 levels by 2020, and an 80% reduction of 1990 levels by 2050.

Renewable Energy Credits

The use of renewable energy credits to track RPS requirements has significant momentum.  The Western Renewable Energy Generation Information System (WREGIS) began operation in June 2007.  It is designed to track renewable energy generation in 14 western states and two Canadian provinces.  It is a system for authenticating WREGIS certificates for each REC, which are used to demonstrate compliance with RPS goals. One REC represents one megawatt-hour (MWh) of electricity generated from a renewable resource.

On January 13, 2011, the CPUC published its final rules on the use of TRECs, lifting a moratorium on its earlier decision.  In the final ruling, the State’s IOUs can procure TRECs to satisfy up to 25% percent of their RPS, with a $50/REC price cap. Both of these provisions expire at the end of 2013, when the CPUC “will consider modifying or removing those limitations all together.”

AB 32 to trump TRECs?

CARB’s resolution adopting the RES regulations directed the agency’s Executive Officer to monitor the ongoing CPUC proceeding on TRECs and to institute a rulemaking no later than 30 days after the CPUC issues a decision on the use of TRECs “to ensure the continued harmonization of the [RPS and RES] programs, specifically incorporating provisions related to [TRECs] for all regulated parties under the RES regulation.”

But what would this “harmonization” look like?  To answer this question we must look at the current framework of the State’s cap-and-trade mechanism.

Cap-and-Trade on the Way

On December 16, 2010, CARB adopted Resolution 10-42, approving the California cap-and-trade program.  The program takes effect January 1, 2012.  In the first phase, covered entities will include electricity generation, large industrial facilities that emit 25,000 metric tons or more carbon dioxide equivalent (MTCO2e) of greenhouse gases (GHG) per year, such as petroleum refineries, cement production facilities and food processing plants.  Phase two will begin in 2015 and will expand to cover all commercial, residential and small sources.

CARB will begin the program by issuing allowances sufficient to meet the capped amount.  Allowances will be reduced during the course of the program with the goal of eventually auctioning 100% of the allowance.

A facility can meet up to 8 percent of its annual GHG compliance obligation through offsets. An offset is a reduction or removal of GHG emissions by an activity (or facility) not covered by the Cap and Trade Program that can be measured, quantified, verified and approved by CARB.

CARB has set a minimum reserve price of $10/MTCO2e for auctioned allowances, but ultimately expects market prices for allowances to increase to $15-$30 by 2020.

What Might “Harmonization” Look Like?

First, it is important to understand the differences between a REC and a GHG allowance or offset.  RECs are designed specifically to encourage an increase in the use of renewable energy by electric utilities.  As noted above, one REC represents one megawatt-hour (MWh) of electricity generated from a renewable resource.  A GHG allowance or offset represents one MTCO2e.  Generating electricity from burning fossil fuels emits CO2e.  When coal is burnt, approximately one MTCO2e is produced for every MWh of electricity produced.  A combined cycle natural gas power plant will generate less than one-half the amount of MTCO2e for every MWh of electricity produced.

“Harmonization” will likely be governed by “ratepayer pain”.  Assuming that the State’s IOUs hit the 20% renewables mark established under the RPS, Executive Order S-21-09 will likely provide the framework to move to 33% by 2020.  RECs will be valuable in assisting energy generators to hit this mark.

When the GHG caps for the electricity generation sector are put into place, they will most likely take into account the “early adopter” status of the State’s IOUs.  In this way, we should avoid ratepayers from bearing an undue share of the burden of the environmental initiatives.  RECs will be used to satisfy the utilities’ new RES requirements while GHG allowances and offsets will be used to meet the emissions cap for the industry.  After 2020, when we have achieved our renewable energy goals, new goals can be implemented – whether they relate to renewable energy generation, GHG emissions or another achievable sustainability goal.

David Niebauer is a corporate and transaction attorney, located in San Francisco, whose practice is focused on financing transactions, M&A and cleantech.  www.davidniebauer.com

Voters Approve High-Speed Rail for California

By John Addison (11/11/08). California is moving ahead with an 800-mile high-speed train system serving Los Angeles, the San Francisco Bay Area, Sacramento, the Central Valley, the Inland Empire, Orange County and San Diego. High-speed trains will be capable of maximum speeds of 220 miles per hour, covering San Francisco to Los Angeles in 2 hours and 40 minutes. The system is forecast to carry over 100 million passengers per year by 2030.

California voters approved the bond measure that commits state funds of almost $10 billion only when matched by $10 billion of federal funds and another $10 billion of public-private partnership funds. Congress and the new president are likely to support matching federal funds for high-speed rail. In this tight economy, high-speed rail will get better results for less money than using federal funds to widen California’s freeways.

Last May, President-elect Obama said. “We are going to be having a lot of conversations this summer about gas prices and it is a perfect time to start talking about why we don’t have better rail service. … [I]t works on the Northeast corridor. They would rather go from New York to Washington by train than they would by plane. It is a lot more reliable and it is a good way for us to start reducing how much gas we are using.”

Public-private partnership funding is also likely, because the rail system will be profitable. Build-own-operate models are popular in transportation with those that are likely to bid on building the system and providing the equipment. The McKinsey Quarterly in February 2008 reported that the world’s 20 largest infrastructure funds now have nearly $130 billion under management.

Support for rail and public transportation is nationwide, not just in California. Voters across the country in 16 states approved 23 measures out of 32 state and local public transit ballot initiatives, authorizing expenditures approximating $75 billion. For example, in Los Angeles, a $40 billion measure passed that will finance new and existing bus and rail lines. In the Seattle area, people voted to expand commuter rail and express bus service and to create a 55-mile light rail system by approving $17.8 billion.

Will Californians park their cars and ride the rails? Last year, LA Metro carried 64 million riders. In the Bay Area, BART carried 104 million riders. The new California High Speed Rail will link both these systems and 25 multi-modal public transportation systems in total. The forecast of 100 million passengers per year by 2030 may be conservative.

Because the rail will be powered by electricity, it is valuable to look at the power sources. In California, by law, 20 percent of the electricity will be from renewables by 2010. By 2020, it must be at least 33 percent. California is subsidizing one million solar roofs that include net metering. Pacific Gas and Electric is installing 800 megawatts (MW) of utility scale solar photovoltaics (PV). For 20 years, Kramer Junction has been delivering 350 MW of concentrating solar power. Added megawatts of wind, geothermal, and biogas projects are being added. By law, utilities must be 33% renewable by 2020. With California’s implementation of greenhouse gas emission cap and trade, renewables are likely to be the low cost source of electricity by 2030.

Using renewable energy, California’s High-Speed Rail is likely to be zero emission before 2030, saving over 20 billion pounds of CO2 annually and over 12 million barrels of oil annually.

In addition to 160,000 construction jobs over the next two decades, high-speed trains will generate 320,000 permanent jobs by 2030, growing to 450,000 jobs in 2035, according to the business plan.

For the LA to SF travel, train fares are expected to be 50 percent of an airline ticket. In 2030 LA-SF travel is forecasted at high-speed trains will carry 45%, air transportation 26%, and the automobile 29% of the total transportation market between the two biggest metropolitan areas in California. This will keep intra-state air travel constant and avoid an airport overcapacity crisis.

California High-Speed Rail builds on the success of other systems around the world.

The 456-mile Northeast Corridor (NEC) which links Boston, New York and Washington D.C. is a successful rail corridor which is vital to the economy of the northeastern United States. It currently carries well over 200 million rail passengers. There are over 500 passenger trains per day in and out of New York City, 400 commuter trains, and 100 Amtrak trains.

Amtrak’s Acela service which operates on the NEC between Boston, New York City and Washington, D.C. is the only passenger rail service in the United States that approaches high-speed standards traveling at maximum speeds up to 150 mph on about 35 miles. In comparison with high-speed trains operating in Europe and Asia, the Acela service would be considered a conventional rail operation. For example, Acela trains make the 226-mile trip between New York and Washington D.C. in about 2.75 hours, traveling at an average speed of about 80 mph.

In years past, I conducted many workshops on the east coast. It was always faster and easier to take Amtrak from Washington D.C. to Philadelphia and on to New York, than to fly. The stations are conveniently connected to public transportation, rental car service, and car sharing.

For 40 years, Japan, has been the role model in high-speed rail. The entire Japanese high-speed train network of 1,350 miles currently carries over 335 million passengers a year.

In France the TGV network, consisting of over 1,160 miles of new interconnected high-speed lines, carries over 100 million passengers each year. Spain and Germany continue to expand high-speed rail. London to Paris can be pleasantly traveled in 2 hours and 15 minutes. Eventually most of the European Union will be seamlessly integrated.

Twelve countries around the world take advantage of high-speed rail – from the United States to China. Soon the number will be 20 countries as Mexico, Russia, and others add their systems.

Oil usage in the United States and many other countries has peaked. At the moment, this is largely thanks to drivers’ reacting to high oil prices and a recession by replacing solo drives with employer commute programs and public transportation. Oil usage is likely to continue declining as efficient multi-modal transportation systems are linked together with high-speed rail – a cool solution for a heating planet.

John Addison publishes the Clean Fleet Report and speaks at conferences. His book, Save Gas, Save the Planet, will be published on March 25, 2009.