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What makes energy Green? And can it be traded?

Virginia Gewin

As oil prices rise, climate warnings pile-up, and fears over energy security mount, many are looking harder than ever at the future of renewable energy. But how can governments best encourage the use of "green" energy? The Ecosystem Marketplace takes a look at what is being done in this regard around the world, focusing specifically on tradable renewable energy credits; a market some believe will one day become a bustling — and possibly even global — environmental market.

As oil prices rise, climate warnings pile-up, and fears over energy security mount, many are looking harder than ever at the future of renewable energy. But how can governments best encourage the use of "green" energy? The Ecosystem Marketplace takes a look at what is being done in this regard around the world, focusing specifically on tradable renewable energy credits; a market some believe will one day become a bustling — and possibly even global — environmental market. Coursing through the world's energy grids, one electron looks, feels, and acts pretty much like another. In an age of climate change and rising oil prices, however, all electrons are not created equal. The way in which electrons are 'created' actually matters a great deal to both the environment and the economy. Green, or renewable, energy sources create electrons without many of the associated ills — pollution, waste and risk — that plague more traditional sources of energy. Consequently, millions of industrial and residential consumers are now showing they are willing to pay more for green power sources such as wind, solar and biomass. Governments, too, are coming onboard. Driven by an increasing fear of economic and ecological fall-out from global warming, rising crude oil prices, the Kyoto Protocol, a need for energy security, and the potential for job creation, governments around the globe now boast policies designed to foster the development of renewable energy markets. But while voluntary and compliance markets in Europe, Australia and the United States all share the same goal — the commercialization of renewable energy — they vary widely in design and detail. Their differences, as much as their similarities, lend insight into the early successes and slumps of renewable energy markets worldwide.

Europe

Meeting Kyoto requirements in an effort to reduce global climate change has now become the primary driver of renewable energy development in Europe. The European Union has, as a whole, set a goal of 20% of energy needs from renewables by 2020. To date, Germany, Spain, and Denmark have used fixed tariffs to fuel the lion's share of Europe's renewable energy development. By guaranteeing an energy sales price and coupling it with a purchase obligation, fixed tariffs in these countries have successfully created a stable (essentially government-guaranteed) market. As a result, Germany now has a renewable electricity generation capacity of more than 40,000 Gigawatt hours — enough to service all of New Zealand for one year. For wind, government incentives of 5-6 Eurocents/kilowatt hour were twice as much as production costs, generating a profit and encouraging development of new sources. For solar, incentives were much higher — around 60 Eurocents/hour — given the higher cost of producing solar. The Netherlands, meanwhile, has used tax exemptions instead of fixed tariffs to stimulate a robust voluntary renewable energy markets. So many people have responded to these tax exemptions, however, that in order to meet demand, Dutch utilities have had to import green electricity from outside the country in recent years. This practice, because it was deemed unsustainable, has since led to a policy overhaul — increasing supply side incentives while reducing incentives designed to create demand. "Germany focused on supply and didn't care if anyone wanted to buy it," says Rolf Wustenhagen, Vice Director of the Institute for Economy and the Environment in St. Gallen, Switzerland. "The Dutch focused on demand and didn't care about supply," he adds. Regardless of their initial approach, the challenge for all European countries is now the same: to sustain the markets they have created in a cost-efficient way. While the German market has been stable for 15 years, some argue that the fixed price system is pricey, and growing more so, since renewable energy generators have no incentive to innovate. Production costs for renewable energy undoubtedly will drop as technology advances, the argument runs, but generators — because they are supported by government tariffs — are unlikely to drop their prices accordingly. Thus, the protected market in Germany threatens to lead to energy production that, while environmentally efficient, is economically inefficient. Other countries, such as Denmark whose wind capacity also grew mightily on a tariff, are looking to a different mechanism — called a renewable energy credit (REC) — to maintain public support for renewables while avoiding monopolies and keeping costs down. RECs — also known as tradable renewable certificates, or green tags — represent the environmental attributes of a unit of electricity generated from renewable fuels. In a typical REC scheme, the government determines a renewable energy target and then allocates responsibility for meeting it to the energy suppliers under its jurisdiction. Utilities then can meet their respective targets by either generating green energy themselves, or by buying RECs from elsewhere. One important attribute of this system is that it allows the RECs — essentially the "greenness" of the renewable energy" — to be sold separately from the electricity itself. Thus, RECs are flexible and can easily be traded on regional scales, encouraging the most efficient development of renewable resources. But RECs do have their drawbacks: "While the target is an efficient mechanism in the diverse patchwork of cultures and resources in Europe, the target per se is not necessarily the most efficient strategy, nor politically the most acceptable," according to Rick Sellers, Head of the International Energy Agency's Renewable Energy Unit.

Trading Down Under

Australia bears out Sellers' point. So target averse was the country, in fact, that it refused to ratify the Kyoto Protocol. But even as she was turning her nose up at Kyoto, Australia also began to get serious about green energy. While Kyoto negotiations were underway at the national level, the Green Power market — a green pricing program set up by utilities for individual customers — was established in New South Wales in 1997. By simply allowing customers to choose between renewable energy service packages (at slightly higher prices) and traditional energy packages (at traditional prices), Green Power tapped into enough consumer demand to support a voluntary market in renewable energy. In order to foster green energy development still further, those behind Green Power subsequently mandated that 80% of the renewable energy sold on the market had to come from generators built after1997. Spurred by industry interest, the system ultimately went national in 2000. Green energy is now sold on the market at an annual rate of 450 Gigawatt/hr/yr and over 150 new approved renewable energy projects have been installed since the program's inception. "At the time Green Power was established, there was no other financial driver for renewable energy development in Australia," says Emily Firth, Program Manager at Green Power. That has since changed. In addition to backing Green Power, the Australian government now has established a self-imposed — some say meager — target of a 2% increase in renewable energy generation by 2010. This mandatory target, however, applies only until 2020. To meet this target, the Australian government requires all energy retailers to purchase more renewable energy each year, but allows them to comply through the purchase of RECs if they wish. Over 23 sources are approved by parliament to generate RECs in Australia — 1 certificate is equal to 1 megawatt-hour, and can be transacted in the voluntary markets or regulatory compliance markets. "There was concern that when you have a voluntary market and introduce a mandated one, that one [market] would fall out," says David Rossiter, Australia's Office of Renewable Energy Regulator. Fortunately, Green Power and the target-driven, REC market have been able to sidestep this problem, says Rossiter, because they have different target audiences. Specifically, the mandated program is aimed at the wholesale retailers (of which there are only 55-60 identified large buyers), while Green Power is aimed at small businesses or individual households. In fact, the two mechanisms now work in synergy since any over-generation from Green Power can be sold back into the commonwealth market. Through these two markets, Australia has easily met or over-achieved its annual goals for the past several years. "The level of compliance is high because industry participants are keen to be seen as green," says Rossiter. But, there is no incentive to increase development. And, given the sunset clause, sustaining the market becomes the next big policy issue. Increasing the targets is one option, but, as Rossiter observes, such a move is unlikely to garner industry support. "We are meeting Kyoto targets, so why increase the target?"

United States

Not surprisingly, the US, Kyoto's biggest detractor, has no national target. However, the lack of a target does not mean nothing is happening. At the federal level, the US has experimented with both production tax credits and tariffs to jump-start the development of renewables. While production tax credits have helped grow wind projects in the US, the industry is subject to boom and bust cycles because the tax credits are renewed on an annual basis. "I feel strongly that the production tax credits are an excellent strategy for incentivizing a market, but given the uncertainty, it's better to not have anything," says Jan Hamrin, Executive Director of the San Francisco-based Center for Resource Solutions. In comparison, action on the state level has stimulated more solid growth. Eighteen states — with more on the way — have focused on using a REC market, currently valued at $140 million to meet individual state Renewable Portfolio Standards (RPS). Specifically, RPS laws ensure that a minimum amount of renewable energy is included in a state's energy portfolio. While individual utilities must purchase a certain amount of renewable energy under RPS guidelines, states allow the market to determine the price, thus maximizing competition among renewable energy projects and encouraging the development of new sources. At the moment, state governments decide who is responsible for obtaining renewable energy in the RPS system and they enforce penalties for non-compliance. Without this government protection of the tariff system, supply may not grow quite as fast, but some believe a more efficient and stable market will evolve. Government compliance is a tricky issue, however, because credibility is crucial to sustain demand. Given recent corporate scandals, consumers are understandably distrustful of energy traders, and want confirmation of the green power generated. As a result, regional tracking systems have been established to monitor and verify transactions (see Combining Markets, below, for more information).Although variations of these systems occur worldwide, they have been particularly crucial to the development of renewable energy markets in the US. These quasi-governmental systems help stabilize the markets and help diminish the importance of state borders. "That's one of the exciting aspects of renewable certificates — you can sell from wherever the best resources are available, and sell the environmental and social benefits anyplace," says Hamrin. (Click here for more on Combining Markets.) Although a national renewable energy market is a possibility — one that would instill market momentum, Hamrin is concerned that a national RPS might result in weaker targets by defaulting to the lowest common denominator, ultimately undermining state efforts. At the same time, says Jeff Burks, Director of Environmental Sustainability at PNM, New Mexico's largest electricity and natural gas provider, "We've got to avoid the temptation to require that renewable energy generation be developed in individual states without recognizing the economic and market advantages to develop renewables where they are most cost effective." Most damaging, says Burks, is that these types of policies help perpetuate the notion that renewable energy is significantly more costly than other energy sources. Finding the right policy mix to advance renewable energy development in the United States, it seems, remains as tricky as it is worthwhile.

Megawatt Markets Ahead?

One thing is clear: supportive government policies are important –if not essential– for the growth of renewable energy markets. While voluntary incentives help, nothing forces electricity generators to invest in grid upgrades and new renewable projects like a well-defined legal obligation. Still, government policies are on a steep "learning curve" and only in the initial phases of what promises to be an ongoing struggle to increase the use of renewables. Doubtlessly, policies will need to be adjusted from time to time if they are to foster continued growth. Evidence from around the world has shown, however, that most forms of government incentives have their drawbacks: some stymie innovation, some encourage demand for renewables without supporting the supply, and some do just the opposite. And, while single country or state policies encourage development, they can hinder the market as a whole. Given all these drawbacks, the market for renewable energy credits, or RECs, appears to be the choice du jour in encouraging competition, while stimulating the efficient development of renewables across a broader region. With RECs — as with greenhouse gases — political boundaries begin to look less important. Although environmental, economic, and political concerns appear to driving the policies to develop renewable energy at the state or local level, supporters anticipate that, in the future, national — and maybe even international — markets for renewable energy will eventually develop. Virginia Gewin is a Portland, Oregon based freelance science writer. Her work has appeared regularly in Nature and PloS Biology, among others. She may be reached at gewin@nasw.org Last updated: 3/18/05

COMBINING MARKETS In the US, there is a push to combine markets for renewable energy — such as the REC market — with the growing carbon markets. Proponents say this will help address regional environmental issues linked to carbon emissions, such as haze. State policies, they argue, need to recognize that electricity markets and the atmosphere don't recognize state boundaries, says Burks. The advent of renewable energy tracking systems can, and some say will, enable these and other markets to combine. Tracking systems for renewables — such as the Western US state's system called WREGIS — are key not only to the creation of a liquid market for RECs, but also to allow them to interface with carbon markets, says Hamrin. She explains that, because these markets are so abstract, tracking systems and verifiers are needed to make the commodity being sold a bit more tangible. "There are no 'green' electrons," she adds. The way a combined carbon/REC market might work, say the advocates, is something like this: The tracking system would still issue a REC with a unique serial number and put it in the account of the generator, where it could be sold or traded to somebody else — just like electronic banking. But if someone wanted to use the RECs for the carbon benefits, the serial numbers would be transferred from the renewable energy tracking system to the carbon registry books. Harmin and others argue, however, that an independent, third-party is needed to verify each transaction and ensure against "double counting". "All you need is one big ENRON," she says, "and it all goes down the drain."

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