The advent of such things as Praline Ice Cream and Coconut Cream Pie, these things go down in the pages of history as great accomplishments and everlasting feats of human engineering for the benefit of all, especially me. So it is with some trepidation that I now delve into the discussion of cap and trade programs. This too will go into the history books in many different ways, good, bad and ugly, but maybe not as sweet. I know this can be a touchy subject and in some areas a true battle of philosophy, but I am here once again to stir the pot so productive conversation may take place.
I was on the phone today with a colleague of mine and the topic came up of renewable energy credit or environmental attributes as called by many names, the creation of nonpolluting “green” tags from energy generation projects such as solar. In the course of the talk it became clear that there are still developer and/or integrators in the industry that do not understand the terms and the process possibilities. Also that the investment community is not as informed as they should be and as such are either placing no value or expecting high value on such attributes. If an investor is placing the value it becomes an Internal Rate of Return if the person is the developer they think they will have a better payday, well some may be true and some may not. It needs to be said that everyone involved needs to look at the contracts, all of them, that are involved the renewable energy credit (REC’s) can still be a thing of the wild west. Those that negotiate get, those that do not, d on’t get.
In the discussion was the review of Feed in Tariff projects for Investor Owned Utilities (IOU’s) utilizing the much loved and greatly used contract called a PPA (that is for another day altogether). In these type of contracts as they attach to the grid you most likely will find such additional contracts as interconnection agreements. It is the opportunity for the IOU’s to increase their Renewable Portfolio Standard compliance to use these REC’s for their benefit, so they will own these and utilize them for their benefit and as such the contacts will mostly if not always be written to place ownership in their collective bucket. In these cases it is simple they own them, no one else, so no one else can utilize them in their IRR or development cash flow. Now, all that being aid there is always room for negotiations and they can be written in other ways, but my experience and history tends to be in the favor of the IOU’s.
So, the next question came up. If the REC’s belong to the IOU can this be shown as a value in the spread sheet reflected as a lost income opportunity and thus be a “tax” deductible line item in the project cash flow and IRR speculation? Due to the fact that if the IOU has deemed them to have a certain business related value, can that value be traced back to the investor that took the risk on the project in the normal course of business? And as such increase the risk which in turn could increase the offset in the overall fiscal performance of the project.
The reason this may become a more directed discussion is that soon, 2013, the California market will have an active cap and trade program it may be as good as the East Coast system in the REGI states, maybe. Now I don’t necessarily want to get into the discussion of weather the cap and trade program, part of the AB32 legislation, is good or bad nor if the system is goo do or bad for business. I do know that a certain IOU has invested in certain finance companies for the purposes of owning the REC’s for themselves in the residential market. So the investment arms of the IOU’s see it as a business builder, it also has created finance opportunities for the not mentioned company to build more residential solar projects that otherwise would not have been built. So, maybe it is good for business. We will see over time. Now we have to determine how it all plays out in the overall renewable energy community and how we as an industry will adapt our projects, our fiscal responsib ilities and our overall models to reflect the coming tide of REC management.
I for one think it will spur any number of business opportunities for several areas of the industry not to mention the ability finance more projects and get more generation facilities up and running. I may even pimp myself out as a consultant in order to be part of the discussion and of course make a few coins in the process. My question is this, where do you see the process going? Where do you see the links being broken and in need of fixing? Where do you see the REC market growing? Will the Western States Collation get traction and drive the process or will industry leaders?
The discussion I had this morning ended with more questions than were answered and I am sure it will remain so for a while, at least until the mechanics are in place and the first REC’s are traded. In the meantime keep your ice cream out of the sun and your pie on a plate. They are best served with care and patience, enjoyment is in the tasting not just the making.