Thursday, April 19, 2018

California Cap-and-Trade and Offset Credit Programs

by Ben Grayson

Cap-and-Trade Program
California’s cap-and-trade program took effect in 2012. The rules, set by the California Air Resources Board (ARB), apply to electric power plants, industrial plants and fuel distributors that emit 25,000 tons of “carbon dioxide equivalent” per year. Once the total cap on emissions is determined, it is split into allowances, which determine an entity’s compliance obligations. A compliance obligation is equivalent to the quantity of allowances or offset credits a facility is required to surrender to the ARB by a specified deadline. Between 2015 and 2020, the cap declines 3% annually. The cap is set to decline at a faster rate between 2021 and 2030, incentivizing entities to become more efficient. Beginning in 2018 the California, Quebec and Ontario cap-and-trade programs linked together, creating a single marketplace for auctioning and trading emission allowances and offsets.

Emission allowances are distributed through free allocations or quarterly, sealed bid auctions. Electric utilities, industrial facilities and natural gas facilities were initially given free allocation of allowances but those free allocations decline over time. ARB also allocates free allowances to certain energy-intensive trade-exposed industries based on how much of their product (not GHG emissions) they produce in California. Investor-owned utilities must sell free allowances and redistribute funds to its rate-paying customers. In 2012, the price minimum was set at $10 per allowance and the price maximum at $40, each increasing 5% annually over inflation in each ensuing compliance period. In 2021, a hard price ceiling will be determined and an unlimited supply of allowances will be available at that price.

At auction, bidders must place orders for the number of emissions allowances they seek to purchase in terms of “lots.” Lots represent 1,000 allowances. Bidders must also submit the “vintage” year they are bidding for, which corresponds to the compliance phase for which the allowances will be used. Auctions are conducted by filling bids from highest to lowest until either all allowances are sold or the reserve price is reached. This price becomes the auction settlement price paid by all successful bidders. The settlement price is defined as the higher of the next highest bid above the floor price or the last highest bid that clears.

When receiving allowances, an entity may bank or hold onto those allowances for future use with no expiration date. However, the program creates holding limits based on an entity’s annual allowance budget. Holding limits restrict the maximum number of allowances banked at a given time.

Offset Credit Program
California also offers an offset credit program, which can be used in conjunction with the cap-and-trade program. Offset credits are tradable compliance instruments, representing verified greenhouse gas (GHG) emission reductions or removal enhancements. They are issued to offset projects made in sectors and through sources not covered by the cap-and-trade program. Offsets are sold through these private, non-regulated entities through bilateral purchase agreements to regulated entities through the ARB rules and offset protocols.

The ARB has adopted six Compliance Offset Protocols (“protocols”) to date: U.S. Forest Projects, Urban Forest Projects, Ozone Depleting Substances Projects, Livestock Projects, Mine Methane Capture Projects and Rice Cultivation Projects. The holding limit that applies to the number of allowances a regulated entity may bank for future use does not apply to offset credits, but those entities regulated under the cap-and-trade program may only use offset credits to fulfill up to 8% of their GHG emissions compliance obligation for a respective compliance period. This 8% cap applies through 2020. Between 2021 and 2025, regulated entities are only allowed to meet 4% of their emissions compliance obligation with offset credits. Beginning in 2021, at least half the offsets used for compliance must come from projects that directly benefit California. Between 2026 and 2030, the cap increases to 6% of total compliance obligation.

Once regulatory requirements are satisfied and the project successfully completes verification, registry offset credits may be issued to the offset project by an Offset Project Registry. A registry offset credit is a credit issued by an Offset Project Registry for a GHG reduction or removal enhancement. These credits signal where a project exists in the compliance process and are not compliance instruments under the cap-and-trade program. Once the offset project has been issued registry offset credits, the Offset Project Operator may request the issuance of ARB offset credits. These credits act as the tradeable compliance instruments that can be used in the wider cap-and-trade program. Upon successful review, issued registry offset credits can be cancelled on the Offset Project Registry and re-issued as ARB offset credits, useable under the cap-and-trade program.

Wednesday, February 14, 2018

Saudi Arabia Ramping Up Renewable Energy Investments

By Vincent El Hayek

Early last year Saudi Arabia announced a national renewable energy program with the goal of supplying 10% of its power demand with renewable energy by 2023. Recently, the head of Saudi Arabia's Renewable Energy Project Development Office, Turki Mohammed Al Shehri, announced that Saudi Arabia is planning to tender up to $7 billion of renewable energy projects this year as efforts to reach the 2023 goal start to ramp up.

Tuesday, February 6, 2018

JinkoSolar to Build US Manufacturing Plant

Two weeks after the Trump administration’s unveiling of a 30% tariff on imported solar cells and modules, JinkoSolar (U.S.) Inc. (JinkoSolar) is planning to open a manufacturing plant in the US. Reports indicate that JinkoSolar is the company behind a plant under negotiation in Jacksonville, Florida.  The company announced in a press release its signing of a master solar module supply agreement for 1.75 gigawatts of solar modules to an unnamed US counterparty and that it would be constructing a manufacturing plant in the US in connection with the agreement.   The board of JinkoSolar had previously authorized the construction of a US manufacturing plant, but had not provided any further details. 

The plant under negotiation in Jacksonville with an unnamed foreign manufacturer, code-named “Project Volt,” is projected to cost $410 million and is expected to create 800 new jobs.  The Jacksonville City Council has approved $24.2 million in incentives for Project Volt, part of a $53 million incentive package from the city and state to entice the foreign manufacturer’s investment in the plant.   JinkoSolar has not confirmed that is the company behind Project Volt.

According to PVTech, the top-ten module suppliers by shipment volume in 2017 were all based in China and South Korea.  Previous attempts by large foreign manufacturers to establish plants in the US have been unsuccessful due to the inability to compete with imported modules.  The supply chain in the US is generally seen as less competitive with high operating costs. 

JinkoSolar is expected to produce modules in the US using tariff free imported cells, taking advantage of the 2.5 gigawatt quota included in the Trump’s administration tariff announcement.  Accounting for the 30% tariff on modules for the first year, the US modules are expected to be less expensive than modules made in Asia.   

Credit Suisse noted to investors that “JinkoSolar’s strategy to build U.S. module-manufacturing makes sense near term as U.S. modules will cost 15%-5% less compared to imported modules under tariffs through 2021, firm supply contracts protect downside if import-tariffs are withdrawn prematurely, and higher U.S. margins provide cushion against growing oversupply and lower margins in the industry.”  Additionally, JinkoSolar expects to take advantage of a “Made in America” premium on its modules upon expiration of the tariffs.

Thursday, January 25, 2018

Trump Administration Announces Tariffs on Imported Solar Cells and Modules

The Trump administration unveiled four-years of tariffs on imported crystalline-silicon solar PV cells and modules, announcing a 30 percent tariff for the first year. The tariff will step-down 5 percent each year and the first 2,500 megawatts imported each year are exempt from the tariff.  

The administration’s decision on Monday follows the U.S. International Trade Commission’s (ITC) recent remedies recommendation on imported solar cells and modules. The ITC had previously found “substantial injury” to the domestic solar cell and panel manufacturing resulting from foreign imports.  In its remedies decision, the ITC commissioners were divided, releasing three different remedies proposals to President Trump.

Tuesday, January 9, 2018

New Startup Applying Blockchain to Renewable Energy Financing

By Vincent El Hayek

In what seems to be a first, WePower Ltd., a European startup, is aiming to finance the development of renewable energy projects across Europe using a blockchain powered platform. The company aims to fill what they view as structural problems in the manner in which renewable energy projects are currently financed that are depressing investment in the sector. In effect, WePower is looking to open up the project financing of renewable energy projects to the general public.

The WePower platform will allow energy producers to issue "energy tokens", each one of which represents a commitment to produce 1 Kw of energy in the future. A person or potential investor can buy tokens from a renewable energy project and either use the energy or sell the token. The purchase price of the tokens will be at below market rates. Further, .9% of the energy produced by energy projects on the platform is given to holders of tokens in a form of "dividend" that increases the value of the token. If the investor does not use the energy corresponding to the tokens the investor holds when the energy is produced, or does not sell the token, then the energy is automatically sold to the wholesale energy market and the investor receives the energy price in either fiat or crypto currency.

Besides just opening up renewable energy project financing to the general public, WePower claims that because everything on their platform is done via smart contracts, the transaction costs for each financing will be significantly lowered.

At the moment WePower is still rolling out its platform; however, they claimed in October to have already started working with a 1000 MW solar plant in Spain and to have a pipeline of renewable projects ready to be financed in Spain, Germany, Italy, Greece and Portugal. According to WePower, the company's platform has been cleared by European regulators and they are currently working with the Governments of Estonia and Lithuania. WePower has also recently been accepted into the Startupbootcamp track in Australia, one of world's biggest startup accelerators.

WePower is hoping to roll out its platform across Europe over the summer of 2018. To finance their expansion plans, an initial coin offering (roughly, the cryptocurrency world equivalent of an initial public offering) is planned to occur in February. It is still too early to know if the WePower platform will be successful, but successful or not, it is likely just one of the first of many applications of blockchain technology to the project finance and renewable energy fields.



Monday, December 11, 2017

State of Massachusetts Awards $20 Million for Energy Storage Projects

by Ben Grayson
The State of Massachusetts recently awarded $20 million worth of grants to 26 energy storage demonstration projects. The awards are an extension of the state’s June announcement that called for a 200 megawatt-hour energy storage target for the state’s three electric distribution companies to achieve by 2020. According to the Massachusetts Clean Energy Center, the projects will add 85 megawatt-hours of storage capacity to the state’s 7 megawatt-hours of storage currently installed.

Tuesday, November 28, 2017

16 Projects Awarded PPAs in Mexico's Third Power Auction

With an average price of $20.57 per MW of clean energy (MWh + clean energy certificate), the Mexican independent system operator (CENACE) announced the official results of the third long-term power auction. The average price of energy and clean energy certificates in this auction is almost 40% lower than the average of $33.47 obtained in the 2016 second long-term power auction.