Energy Exchange

California’s landmark clean energy bill AB 32 received a big boost today from the San Francisco California Superior Court in the case Citizen’s Climate Lobby et. al., v. California Air Resources Board.

The Court’s decision offered unequivocal support for the legality of the offsets portion of AB 32’s cap-and-trade program, a huge shot in the arm for momentum going into the second greenhouse gas allowance auction on February 19th. Similarly, by finding that the state’s offset program is in alignment with AB 32, a bright green light has been given for further investment in projects aimed to reduce pollution both in California and outside our borders.

In this suit, EDF joined as an official party to assist the State of California’s defense. Also joining in the defense was a collection of entities including The Nature Conservancy, the Climate Action Reserve and a collection of business interests. This broad spectrum of support for AB 32 shows that offset investments can deliver on multiple levels for the state.

First, offsets create new opportunities to fund upgrades and pollution reduction in sectors, including agriculture, forestry and industrial gases, that may not otherwise be covered under mandatory emissions limits. Pollution reduction in these sectors enables a greater overall response to climate change, which means positive impacts on the climate and human health.

Second, allowing high quality offsets ensures that a diversity of cost-effective pollution reduction projects can qualify for cap-and-trade compliance. This reduces overall program costs while maintaining the environmental integrity of the program.

As more projects and ideas develop under the AB 32 offsets program, California will be better able to transition to a low-carbon economy. In short, the decision of the Superior Court has authorized the continuation of a program that will be an integral part of California’s climate change goals, spur investment in a clean economy, and maintain California’s position as a leader in the fight to combat climate change.

Wyoming Outdoor Council’s lead attorney on air quality

EDF and Wyoming Outdoor Council are teaming up to protect air and water quality from oil and gas development in the Cowboy State. One of the first efforts in this partnership surrounds strengthening air quality regulation for the oil and gas industry in Pinedale, WY where persistent ozone pollution threatens the health of local residents. EDF’s Natural Gas Media Director, Lauren Whittenberg, recently sat down with Bruce Pendery, Wyoming Outdoor Council’s lead attorney on air quality issues, and Jon Goldstein, EDF’s Senior Energy Policy Manager, to learn more about this partnership.

Lauren Whittenberg: Can you tell me about the pollution problems in Pinedale?

Bruce Pendery: Well, first and foremost, this pollution is a public health issue. Monitoring of air quality in the Upper Green River Basin in western Wyoming near Pinedale started to show dangerous levels of ground level ozone pollution in 2006. Ground level ozone (also known as smog) is created by a complicated interaction between two different forms of air pollution, oxides of nitrogen and volatile organic compounds. Oil and gas development in the Pinedale area is the main source of both. Since the problem was identified, the Wyoming Outdoor Council has been heavily engaged with regulators, local citizens and industry to seek a way to reduce this harmful pollution to protect the local citizens and gas field workers.

LW: What problems does ozone pollution cause?

Jon Goldstein: Ozone is a toxic air pollutant widely known to cause a host of respiratory problems. Exposure to ozone pollution, even in low concentrations, can cause serious health problems, including permanent damage to the lungs. To address some of these concerns, EPA introduced rules – for the first time – that established federal emission standards for natural gas well sites, as well as tightened existing standards for other aspects of gas processing and distribution. EPA’s clean air measures are important to reduce air pollution from the oil and gas sector. It’s also interesting to note that EPA – in part – based these federal standards on state level rules that have been in place in Wyoming for several years. However, a big opportunity exists to further strengthen federal and state regulations and reduce air pollution for communities dealing with poor air quality.

LW: What is the plan to address this harmful pollution?

BP: On January 10, the Wyoming Department of Environmental Quality (DEQ) announced its plan to address air pollution issues in the Pinedale area’s Upper Green River Basin. This plan is based on recommendations the department received from the Upper Green River Basin Air Quality Citizens Advisory Task Force,  a broad group of local citizens, elected officials, oil and gas industry and environmental representatives brought together by the department. I served on this task force and helped formulate the ten consensus recommendations we provided to the DEQ.

LW: What were the recommendations?

BP: These are very practical, common sense efforts to reduce emissions from oil and gas operations. Things like monitoring, investigating and plugging leaks from faulty oil and gas production equipment, reducing emissions from produced water tanks and ponds, and developing legal efforts to better regulate existing sources of pollution.

LW: You mentioned that these recommendations were “consensus.” What does that mean?

JG: That is what is so encouraging about this effort. Each of the ten recommendations has the buy in of every member of the task force – a very broad group of local citizens and elected officials as well as industry and environmental groups like Wyoming Outdoor Council. These practical recommendations followed nine months of deliberations by the task force and six lengthy meetings.

That such a broad group could reach consensus on ten methods to improve local air pollution is a testament to their dedication. This hard work will be well worth it when these ideas are made a regulatory reality, and air quality issues in the region begin to improve.

LW: What’s next?

JG: This action plan is a key first step; the DEQ has offered an outline that, if implemented quickly and completely, will help put us on the path toward cleaner, healthier air. But now is a crucial time in this process. It is now up to the DEQ to make these ideas a reality and implement them through regulatory processes as quickly as possible.

And we aren’t stopping with these ten items. We have advocated for additional efforts to improve air quality, including better measures to monitor maintenance activities such as liquids unloading, extending the state’s strong Presumptive Best Available Control Technology (P-BACT) requirements throughout the ozone nonattainment area, and ensuring that existing and grandfathered emissions sources are controlled.

A lot is at stake. Inaction or inadequate action will not improve air quality or protect the health of local residents.

LW: How will Wyoming Outdoor Council and EDF keep this momentum going?

BP: We will remain involved in this process to ensure that the DEQ follows through as quickly as possible. We plan to be very active in the formal regulatory development and adoption processes that will kick off in the coming months. And we hope that all Wyoming citizens will stay involved in this effort. Wyoming has a strong history of leadership in regulating air emissions from the oil and gas sector. Our plan is to defend this hard-earned reputation and protect people and our air quality in the process.

LW: What other efforts are on tap in Wyoming?

JG: Because of both the strong regulatory tradition that Bruce mentioned, and Wyoming’s status as one of the largest sources of domestic oil and gas resources, Wyoming is one of our target states for EDF’s natural gas work. We are working on a number of opportunities to raise the bar on air and water quality regulations and also improve drilling protections on federal lands. This includes adoption of strong new federal rules around the venting and flaring of natural gas. You will hear more about these efforts in coming months, but we are very happy to have a partner as well respected and experienced as Wyoming Outdoor Council  to help us make them a reality.

LW: Thank you both.

California drivers and policy makers should be breathing an extra sigh of relief this week with the release of a new study by the California Electric Transportation Coalition (CalETC). The study, an evaluation of electricity use within the state’s Low Carbon Fuel Standard (LCFS), clearly shows that electrification benefits are on the horizon and oil industry funded analyses have yet again over-dramatized the difficulty of meeting one of the state’s landmark environmental laws.

In the study, CalETC shows that using electric passenger vehicles (both battery electric and plug-in hybrid vehicles), and electric off-road equipment (forklifts and trains), has the potential to generate a significant amount of creditable greenhouse gas reductions in the LCFS.

According to CalETC, three electrification solutions can cut up to 4 million tons of greenhouse gases per year by the year 2020, a significant portion of the total reductions required under the law. What’s more, since electricity as a fuel source costs one to two dollars per equivalent gallon less than gas and diesel, once the vehicles are on the roads and rails, the LCFS can actually save drivers a significant amount of money at the pump.

Prior industry reports on the LCFS like the one funded by the Western States Petroleum Association have lamented that compliance with the LCFS isn’t possible without oil companies going out of business or charging consumers significantly more at the pump. However, a plain reading of oil company cost analyses shows they purposely avoid consideration of the benefits of widespread deployment of alternative electric vehicles (EVs) in their research.

Not the first, probably not the last

Of course, this isn’t the first time industry cost estimates of environmental regulations, and specifically the LCFS, have emerged as highly suspect. For example, in September 2012, the non-partisan business group Environmental Entrepreneurs (E2) published a report showing how well positioned the US biofuel industry is to meet demand under the California standard – a direct counterpoint to recent oil industry estimates that say biofuels simply aren’t available.

In that E2 report, researchers found that 1.6 to 2.6 billion gallons of advanced biofuel will likely be produced in 2015, with increasing volumes thereafter, meaning LCFS compliance can be achieved solely through blending low carbon biofuels in the short, medium, and potentially long term. This blending will allow for compliance over and above what the electrification opportunities provide.

Similarly, for natural gas vehicles, the industry modeling of compliance scenarios assumes natural gas technologies won’t be sufficiently ready for widespread consumer use to be counted as a legitimate LCFS compliance opportunity. However, consistently low natural gas prices along with recent investments and R&D from companies like Chesapeake Energy Corp., Clean Energy, General Electric, Whirlpool and 3M have all been aimed at increasing the availability of natural gas as a fuel for passenger vehicles and heavy duty trucks.

In yet another analysis of LCFS compliance, it was found that “significant inaccuracies and faulty assumptions” led to the results of oil industry funded studies.

A first of its kind strategy whose time has come

California’s first-of-its-kind LCFS strategy for cutting climate change pollution from transportation fuel is designed to work alongside the state’s landmark cap-and-trade regulation between now and the year 2020, facilitating the transition of California’s transportation sector towards one which is lower carbon and is powered from an array of resources.

As Elisabeth Brinton, head of the Sacramento Municipal Utility District’s retail business, so aptly puts it, the California LCFS is “a great idea whose time has come.”

For more information about entities that support the California LCFS, (read here).

This morning two energy initial public offerings (IPOs) made their debut.  One of them was green and one of them was brown.  Unfortunately, the mainstream media missed the boat by characterizing the brown company as successful and the green one as a miss. We don’t see it that way.

The brown company is PBF Energy, a Blackstone-backed rollup of three refiners that were divested by Valero and Sunoco.  The company, like many refiners, is having its day in the sun as refining margins are currently wide due to technical market issues relating to the relative prices of Brent and WTI crudes.  The bottom line, however, is that demand for gasoline and diesel is unlikely to grow as CAFE fuel economy standards continue to tighten.

The second company, SolarCity, has been posting over 100% annual growth in solar installations since 2009.  Additionally, the company has been a leader in residential energy efficiency and EV charging stations, and has even begun to roll out a residential energy storage solution.

Unfortunately, SolarCity’s business model requires some complex accounting that ultimately hurt their valuation.  The vast majority of their solar photovoltaic (PV) installations are executed as leases or similar structures to take advantage of various tax incentives.  This reduces the accountants’ formulation of revenue, and also makes the business unprofitable.  As an example, imagine a solar company can construct a solar system for $16k and sell it for $20k, with $3k of overhead.  They would result in $20k of revenue, $4k of gross profit and $1k of net income.  Do that enough times and you have a pretty good business.

As a lease, however, they only recognize revenue as it is received through annual lease payments, which might be around $1500.  Assuming the $3k of overhead remains, then the company would post a loss of $1500 in year one.  Economically, this might be the same or better business, but through the eyes of an accountant, this is a harder pill to swallow as the profits must be realized over the long term of the lease.

SolarCity is a new concept for the public market: it is essentially the first high-growth cleantech company that relies on an equipment leasing model. Despite projected revenue growth, the solar IPO struggled to generate demand due to this complex accounting and priced well below the expected range. On the other hand, PBF priced at the middle of its range, and sold more shares than originally expected. Longer term, however, my money would be on the company with the meteoric growth rate.  So far today, the market seems to agree.  SolarCity is up 48% from its pricing while PBF Energy has gained less than 1%.

The results of California’s first ever auction for greenhouse gas (GHG) emissions allowances are public, marking the start of a new era for stimulating innovative solutions to combat climate change. Coincidentally, earlier today new atmospheric data was released by NOAA showing that 2012 is on pace to be the warmest year, eclipsing the mark set only two years ago.

By establishing a hard cap on emissions and creating a carbon price through a trading mechanism, California’s comprehensive GHG program complements, and is fine-tuned based on experiences from the world’s other climate change cap-and-trade mitigation programs. For example, lessons learned from the world’s largest cap and trade program in the European Union have shown that emissions of GHGs can actually decrease while the economy grows. Similarly, as shown by the Analysis Group’s report of the cap-and-trade program in the Northeastern United States, in addition to creating a strong signal for innovation, money generated through an auction can be invested in ways to cut GHGs even further.

Based on today’s results, California’s program is performing according to the expectations of economic experts and policy makers. The market price ($10.09) for credits that can be used in 2013 was slightly above the floor price of $10 dollars. Also, there were more bids for 2013 credits than credits sold, with 97% of allowances going to covered entities. Put simply, regulated businesses are taking this market seriously and believe they can cut greenhouse gas emissions even more cheaply than anticipated. This is a very good thing for California.

At the same time as the California carbon auction sold 23 million allowances for use starting in 2013, the market also sold 5.5 million allowances for use in 2015 and beyond. This is a clear signal that investors see this as a lasting program, and provides an important signal that the 9 billion plus dollars of clean tech investment made in California since 2006 has strong backing.

A California carbon price opens the door for cleaner energy and clean air, as we finally have an “official” cost of pollution. We are marching more resolutely than ever into an economically and environmentally sustainable future.