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REC Markets and Trading 101
Peter Toomey
Manager, Environmental Markets
Iberdrola Renewables, Inc.
2011 WSPP SPRING OPERATING COMMITTEE MEETING
BANFF, ALBERTA | MARCH 21, 2011
Iberdrola Renewables - Assets and Customers
February 15, 2011
Wind projects owned or controlled
Thermal generation
Biomass cogeneration
Mountain View III 22.44 MW owned
SDG&E
Dillon 45 MW owned
SCE
High Winds 162 MW PPASMUD, Merced, Modesto
Palo Alto, Alameda, SCPPA
Shiloh 150 MW ownedPG&E, Palo Alto, MID
Pleasant Valley
144 MW PPA
LADWP, Anaheim,
Glendale, Burbank,
UAMPS
Twin Buttes
75 MW owned
Public Service
Co. of CO (Xcel)
Colorado Green
81 MW owned
(162 MW project)
Public Service Co.
of CO (Xcel)
Lempster
24 MW owned
Southern NH
University
Elk River
150 MW owned
Empire Dist. Electric Co.
Dry Lake63 MW owned
Salt River Project
1 - Klondike III a
76.5 MW owned
PG&E
2 - Hay Canyon
100.8 MW owned
Snohomish PUD
3 - Klondike
24 MW owned
BPA
4 - Klondike III
223.6 MW owned
PG&E, PSE, BPA,
EWEB
5 - Star Point
99 MW owned
Modesto Irrig. Dist.
6 - Klondike II
75 MW owned
PGE
7 - Big Horn
199.5 MW owned
Modesto, Santa
Clara, Redding
8 - Big Horn II
199.5 MW owned
Modesta, Santa
Clara, Redding
9 - Pebble Springs
98.7 MW owned
SCPPA
1 2 3
4 6 5 8
Peñascal 202 MW ownedCity of Antonio,South Texas Electric Co-op
Barton Chapel120 MW owned
Locust Ridge
26 MW owned
PPL Energy Trust
Locust Ridge II
102 MW owned
PPL and many others
Casselman
34.5 MW owned
First Energy
Maple Ridge 1
115.5 MW owned
(231 MW project)
NYSERDA
Maple Ridge II
45.4 MW owned
(91 MW project)
NY Power Authority
Rugby149.1 MW ownedMissouri River Energy Services
Farmers City 146 MW owned
Providence Heights
72 MW owned
Streator Cayuga Ridge
300 MW ownedTVA
Peñascal II 202 MW ownedBTU (City of Bryan, Texas)
7
WINDPROJECTS
WECC – Western Electricity Coordinating Council
MISO – Midwest Independent Transmission System Operator
SPP – Southwest Power Pool
PJM – Pennsylvania New Jersey Maryland Interconnection
ERCOT – Electric Reliability Council of Texas
NYISO – New York Independent System Operator
NEPOOL – New England Power Pool
Simpson Biomass 43 MW
SMUD
Electric Power Markets
Klamath Cogen
536 MW
Klamath Generating
100 MW
WINDPROJECTS
1
4 3 6 85 7
2
9 10 11 12
1 - Buffalo Ridge 50.4 MW owned
NIPSCO
2 - Buffalo Ridge II 210 MW owned
NIPSCO
3 - MinnDakota 150 MW owned
Northern States Power (Xcel)
4 - Moraine 51 MW owned
Northern States Power (Xcel)
5 - Moraine II 49.5 MW owned
Northern States Power (Xcel)
6 - Elm Creek 99 MW owned
Great River Energy
7 - Elm Creek II 148.4 MW owned
Great River Energy
8 - Trimont 101 MW owned
Great River Energy
9 - Flying Cloud 43.5 MW owned
Alliant
10 - Winnebago 20 MW owned
DairlyLand Power
11 - Top of Iowa II 80 MW owned
Madison Gas and Electric, Wisconsin Public Power
12 - Barton 160 MW owned
NIPSCO, WI Public Power, Ino, WE Energies
Dry Lake II65.1 MW owned
Salt River Project
4,634 MW of Operating Wind Assets
Presentation Objectives
1. Basic overview of RECs and REC Markets
2. Provide “flavor” for these markets from a transactional perspective
3. Stimulate questions and conversation
…Please interrupt me if you have questions, comments, etc.!!!
Presentation Outline
What is a Renewable Energy Credit?
The RPS markets.
Basics of buying and selling.
REC Price Overview.
Focus on California.
General REC market observations.
Questions?
What is a REC? – the basics
•NO SINGLE DEFINITION – defined by governing institution (state, non-profit, etc.)
•Synonymous with Green Tag, Green Certificate, Tradable Green Certificate , etc.
•Intangible commodity embodying environmental attributes of renewable energy
oAttributes include offset emissions, reduced water use, env. claims, etc.
•1 MWH of electricity is granted 1 REC (there are exceptions)
•Tracked and traded separate from physical electricity, generally via:
oElectronic tracking systems (i.e. WREGIS, PJM GATS, etc.)
oPaper attestation
•Purpose:
•Ease of tracking ownership of environmental attributes
•Provide incremental revenue stream to renewable sources
•Two primary sources of demand
oCompliance market (i.e. State RPS programs)
oVoluntary market (Green-e, utility green pricing programs, etc.)
What is a REC? - Sample Definition
“Renewable Energy Certificates” or “RECs” means all right, title and interest in
and to Environmental Attributes. “Environmental Attributes” means any and all
certificates, credits, benefits, emissions reductions, environmental air
quality credits, and emissions reduction credits, offsets, claims, and
allowances, howsoever entitled, resulting from the avoidance of the emission of
any gas, chemical, or other substance attributable to the generation of the
specified energy by the Specified Resource, but specifically excluding only the
wind production tax credits. One REC represents the Environmental Attributes
made available by the generation of 1 megawatt-hour (“MWh”) of specified
energy by the Specified Resource
From Iberdrola Renewables “one-off” REC contract:
What is a REC? – key variables
•In theory, any facility can generate RECs
•The question is whether those RECs will be marketable
•Three fundamentals of REC market eligibility:
oResource eligibility
oGeographic eligibility
oCommercial operation date (COD) eligibility
•Additional variables:
oBiomass fuel requirements
oVintage/flexibility mechanisms
oEnergy delivery rules
o Tiers, carve-outs and multipliers
oHow is the REC tracked?
Resource
Commercial Operation
DateGeography
REC eligibility can be complex. Know the rules!!!!
State RPS Markets – The Patchwork
29 states + D.C.
8 states with nonbinding goals
State RPS State RPS Goal
HI40% - 2030
(Includes existing)
MT
15% - 2015
NV
25% - 2025CA
33% -
2020
AZ
15% - 2025
CO
30% - 2020 (IOU)
10% - 2020
(Muni/Coop)
NM
20% - 2020 (IOU)
10% - 2020 (Coop)
TX
5,880 MW - 2015
IA
105 MW
MN
25% - 2025
Xcel: 30% - 2020
WI
10% -
2015
IL
25% -
2025
NY29% - 2015
PA8% - 2020
„Tier 1‟
MA 15% - 2020
ME
10% - 2017 “New”
VTLoad growth by 2012
20% - 2017
WA
15% - 2020
OR
25% - 2025 (LG)
5-10% - 2025 (SM)
NH23.8% - 2025
NC
12.5% - 2021 (IOU)
10% - 2018 (Muni/Coop)
MO
15% - 2021
VA15% - 2025
ND
10% - 2015
SD
10% - 2015
UT
20%- 2025
OH12.5% -2025
Updated December 2010
MD 20% - 2022
DE 20% - 2019
NJ 22.5% - 2020
CT 20% - 2020
RI 16% - 2020
DC 20% - 2020
MI
10% - 2015
Detroit Ed: 600MW – 2015
Consumers: 500MW - 2015
KS
20% - 2020
*peak demand capacity
WV25% - 2025
OK
15% - 2015
LA
350 MW - 2015
There is also a national voluntary market, with some regional preferences.
The RPS Markets - Complexity
Illinois
Pennsylvania
Providence Heights - 72MW
Locust Ridge II - 102MW
•RPS eligibility rules not always reciprocal
•Create regional price variation due to supply/demand characteristics
•Still oversimplification!
New Jersey
Ohio
PH RECs eligible for PA & NJ
LRII RECs NOT eligible for IL
LRII RECs eligible for OH
PH RECs NOT eligible for OH
Eligibility rules complex ,non-intuitive, and unstable!!!
RPS Markets – Recent Developments
•Various factors contributing to reconsideration of RPS policies
oRatepayer impacts, particularly during down economy
oLack of in-state projects (i.e. local economic development benefits)
oRealization that original design may be flawed
•Specific Examples
oConnecticut contemplating reduced RPS mandate
oMassachusetts recently mandated long-term bundled contracts
oNumerous eastern states considering off-shore carve-outs
MA, RI, NY, NJ, MD, DE, NC, VA
oMissouri (rulemaking) and Indiana (legislation) not going well
oBills introduced to restructure IL RPS by adding LTC component
oOngoing saga in California (will be discussed)
Buying and Selling RECs
•Almost exclusively a bilateral market
•Most sales are short-term (spot market – 3 years)
•Brokers play major role due to lack of transparency/market fragmentation
oEx. Evolution Markets, ICAP, TFS, Spectron, Amerex, etc.
•Efforts at creating exchanges have had very limited success
oEx. Chicago Climate Futures Exchange (CCFE)
•Regulated utilities often procure via RFP process approved by commission
•Widely varying creditworthiness among counterparties
•Contract standardization limited, though various efforts have been made
oABA/ACORE/EMA, ISDA, EEI
•REC title transferred via electronic tracking system; cash settled separately
oAll 6 regional tracking systems built by same company
oAPX, Inc., which was recently purchased by NYSE Euronext
Key deal terms
Term Description
Product What programs will the REC qualify for? Project specific?
Volume Are you selling a firm block, a unit contingent percent of output, etc.?
Price $/MWH
Vintage Do the RECs need to be generated during a specific time period?
Term Spot, multi-year, etc.
Delivery Will the RECs be transferred via a tracking system? When?
Payment Pre-pay vs perform?
Change in Law
Is buyer or seller subject to risk if there is a change in eligibility rules?
What if the RPS is voted down?
Default Provisions
Can seller provide replacement RECs? How are market damages
calculated?
•Characteristics of physical commodity/financial product (not a derivative)
•Somewhat unique in that value driven primarily by regulation
•Regulatory risk often at core of contract negotiations
Sample REC Confirm (NJ RPS)
Trade Date: March 21, 2011
Transaction Reference(s): ABC123
Seller: Iberdrola Renewables, Inc.
Buyer: New Jersey Utility Inc.
Product: New Jersey Class I Eligible Renewable Energy Credits (“RECs”)
Vintage(s): Reporting Year 2012 (i.e. June 2011-May 2012)
Contract Price ($/MWh): $5.00
Product Quantity: 50,000 RECs
Total Contract Price: $250,000.00
Facility: N/A
Eligible Renewable Resource Type: Any
Geography: Any
Delivery Deadline: July 15, 2012 via PJM Generation Attributes Tracking System (GATS)
*Many terms would be defined in the master, such as definition of NJ Class I REC, etc.
REC Price Overview
$-
$10.00
$20.00
$30.00
$40.00
$50.00
$60.00
Connecticut Massachusetts New Jersey Pennsylvania Texas Vol - National Vol - WECC
Historical OTC REC Prices - Select REC Markets
Current Price
*Prices are indicative and derived using broker information and simplified methodology. Near term vintages only.
• In theory, prices should equal marginal cost less energy price
• In practice, driven by short term supply/demand balance
• Regional variation, but most markets have trended lower recently
• Conventional wisdom is that in short-term, markets well supplied
• Lack of long-term liquidity due to market design/regulatory uncertainty
• Prices below reflect markets that “trade” – not value embedded in PPAs
• WARNING - Transparency limited due to low liquidity/high volatility
California – RPS Overview
•One of strongest programs in nation, but…
•Has come to define regulatory uncertainty
•Constantly under review for better part of last decade
•Three parallel RPS regimes currently relevant
oSB 107: law of the land (20% by 2020)
oExecutive Order 2-21-09: CARB/AB32 (33% by 2020)
oSBX 1-2:pending (33% by 2020)
SB 107
• Original RPS
• Passed in 2002
• 20% by 2020
• Applies to IOUs
• Administered by CEC/CPUC
• Law of land
E.O.
• Signed in 9/2009
• 20% by 2010
• 33% by 2020
• Linked to AB 32
• Administered by CARB
• Rulemaking in progress
SBX 1-2
• Sitting in Assembly
• 20% by 2013
• 33% by 2020
• Would be prevailing program
• Likely to pass soon
California RPS – REC/TRECs
•Role of REC/TRECs is a long unsettled issue in CA
•First, pending tracking system and CPUC rulemaking
•Significant political pressure to limit imports to spur in-state projects
•Interminable rulemakings, hearings, re-hearings, etc. ensued
•Nonetheless, key issues are:
oWhat counts as an unbundled TREC transaction?
oWhat percentage of RPS compliance can be met with TRECs?
•Recent CPUC decision comes to a different conclusion then pending legislation
•CARB rulemaking could come to entirely different conclusion as well.
•Pending legislation, if enacted, would prevail
California RPS – REC/TREC Issues
Recent CPUC Decision (1/13/2011)
• 25% cap on use of TRECs for RPS compliance by IOUs
• Also created $50/REC price cap
• Caps expire 12/31/2013
• TRECs essentially defined as everything but a bundled transaction
o Still a requirement that an equivalent volume of energy is delivered annually
• Bundled transaction defined as a transaction where either:
1. The RPS eligible generator’s first point of interconnection with the WECC
interconnected transmission system is with a California balancing authority,
or;
2. RPS eligible energy from the transaction is dynamically transferred to a
California balancing authority.
• No clear definition of dynamically transferred exists!!
• Existing contract grandfathered, but may count towards cap
California RPS – REC/TREC Issues
Pending Legislation (SBX 1-2)
• Increases RPS to 33% by 2020
• Creates 3 categories of RPS-eligible transactions (i.e. buckets)
• Buckets apply to all retail sellers of electricity
• Bucket 1
o Bundled transactions with projects interconnected with a CA BA
o Bundled transactions scheduled from unit directly to a CA BA
o Bundled transactions dynamically transferred into state
o Minimum of 50% by end of 2013, 65% by end 2016, 75% thereafter
• Bucket 2
o Firmed and shaped transactions providing incremental energy into CA
o Maximum of 50%, 35%, 25%
• Bucket 3
o Anything that isn’t in 1 or 2, including TRECs
o Max of 25%, 15%, 10%
• Still does not clearly define DYNAMICALLY TRANSFERRED
General Market Observations
•Defined by regulation and regulatory uncertainty
•In short term, have little impact on power prices per se
•Bimodal prices due to vertical demand curve (i.e. boom/bust)
oNotably, even in markets with banking and other flexibility mechanisms
•Dominated by short-term transactions, which limits hedge value for developers
oResult of power market structure and buyer risk aversion
•Trading/arbitrage opportunities emanate from:
o overlapping RPS eligibility, lack of transparency, regulatory inflection points
•Back-office nightmare due to lack of standardization/systems
•As developer, I would probably argue for enhanced design to stimulate LTC
Peter Toomey
Manager, Environmental Markets
1115 Broadway, 12th Floor
New York, NY 20016
(646) 770 - 1679
Questions?