Physical green power transactions have developed directly out of the well-established markets for buying and selling conventional power. Except for the need to accommodate a few details specific to green power procurements, market actors are generally experienced and market structures are well-established.
Conversely, the green credit industry is still in its infancy, and as such remains subject to many of the flaws typical of an immature market. Deals tend to be bilateral, one-off, highly structured, and inefficient for both buyer and seller, with brokers capturing much more value than in more mature commodity markets. At the core, these flaws converge on one of the most pressing issues that participants in green credit markets face: the lack of efficient and transparent mechanisms for credible price discovery. The ability to address this issue head-on is a key value that the World Green Exchange brings to the green credit marketplace. The green power and green credit markets (together, the “green markets”) are most easily viewed as consisting of four distinct markets: - US Green Power. The market for domestic green power comprises public and private participants that seek to produce or procure green power, generally driven by factors that are based on social responsibility and political concerns, regulatory requirements, and/or economic considerations. Of the four green markets, green power is by far the most mature.
- US Renewable Energy Credits (RECs). REC markets are both regional and national. The regional markets are a result of regulations, typically at the state level, which create renewable energy portfolio standards (RPS) and use tradable RECs as a market mechanism to allow a more efficient means for power suppliers to meet regulatory requirements. Project developers/suppliers can sell RECs as a monetization of their commitment to create or sell energy from renewable sources. Each REC is roughly equivalent to one kilowatt hour of energy.
- US Greenhouse Gas (GHG) Compliance Units. Because the US is not a party to the first phase of implementing the Kyoto Protocol, operations inside the country are not subject to the Protocol’s GHG emissions caps. However, a national cap-and-trade program is likely in the future. The consensus opinion among those who follow the issue is that legislation will be enacted by 2009, with regulations going into effect sometime in 2011-2012. This would correspond with the end of Phase I of the Protocol, and suggests that the US may also be a party to a post-Kyoto international regime. In the meantime, ten Northeast states have formed the Regional Greenhouse Gas Initiative (RGGI), and will begin auctioning emissions allowances in late 2007. California has enacted legislation which was written to promote emissions trading as a cornerstone of achieving the required GHG emissions reductions. In addition, the Western Climate Initiative (WCI) has adopted a regional GHG reduction goal of a 15% reduction below 2005 levels by 2020.
- International GHG Compliance Units. The market for transactions involving international GHG compliance units is centered in Europe and, especially, in London. After a slow beginning during its initial decade, with market demand composed primarily of the voluntary activities of GHG emitters positioning for the possibility of future regulatory regimes, the “carbon market” entered a new era with the launch of the EU’s Emissions Trading Scheme (ETS) in early 2005. The EU ETS created a more robust market for GHG compliance units (equivalent to one metric tonne of CO2). Other international green commodities include government allowances such as European Union Allowances (EUAs), which are tradable in 25 EU member states through a system of national registries; to project-based compliance units known as Certified Emissions Reductions (CERs) generated from CDM projects, and Emissions Reduction Units (ERUs) generated from JI projects.
These four segments share several common characteristics – all of which World Green Exchange addresses: - The momentum to reduce harmful emissions and provide incentives for the development of renewable energy resources is growing every day.
- The idea that greening objectives are important is now widely accepted.
- The issue is moving out of the political arena and is now beginning to focus on market-based execution challenges.
- The pace of change is accelerating exponentially.
- There is a strong need for a market mechanism capable of delivering efficient transactions without sacrificing the need to meet the fragmented nature of the evolving market.
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