Future Energy

In Defense of Carbon Offsets

                                                

                                        Source: Carbon Markets Global Limited

After Doubling in Size in 2007 Do the Carbon Markets Need Defending?

Neal Dikeman at ALT Energy Stocks posted an informative interview on the topic of Carbon Offsets with Marc Stuart of EcoSecurities plc this past week (see Carbon Offsets Work-Will the Mainstream Media Ever Get It?).  If you have any interest on climate change, the regulatory regime that is emerging to address it and the rapidly growing industry that is the result, the interview will make for interesting reading.

EcoSecurities  (Lon AIM: ECO) was one of the first firms created to generate and monetize greenhouse gas emissions reductions and in particular, carbon offsets (and one of the few publicly traded today).  The company is primarily known for being one of the largest developers of Clean Development Mechanism offset projects, a US$7 billion market in 2007.  And Marc Stuart is one of the founders of the firm so he speaks with some authority on the subject of offsets.

Neal Dikeman on the other hand, introduces the interview with a mini-diatribe against laymen and media, asking if they will ever get it, i.e. understand the carbon markets.  He's apparently concerned that questions remain about the "additionality" of credits, in other words, the regulatory and public concern that credits of significant value are being handed out for projects that would have taken place anyways. 

Mr. Dikeman also suggests that the level of oversight and protection against scamming the offset system, i.e. the validation and verification processes, may be too much.  In his words, "leading certification firms and carbon project developers have been dealing with the details behind those questions for years."

Well, actually, no they haven't.  These markets are for the most part less than five years old.  While talked about in exhaustive detail in many rounds of national and international meetings beginning with creation of the Kyoto Protocol back in 1997, it wasn't until the emergence of the European Emissions Trading System (ETS) in 2005 that any real market was available to gain real practical experience in developing offsets.  (Yes I know there were lots of pilot schemes developed between 1997 and 2005 to gain experience.  I was involved in many of them.  However, all were very small and not a little unreal.)

So this is still an emerging market with not a lot of certainty about it and media and members of the public are right to be sceptical at this stage. 

The CDM market has had some hiccoughs, including the flurry of HFC-23 reduction projects, primarily in China, which Mr. Stuart acknowledges has been adjusted so that no one can build plants simply to develop an associated offset project(suggesting that that is exactly what happened).  Voluntary offset markets are also rapidly emerging (but much smaller-estimated at under US$300 million in 2007) but present some of their own issues.  Many of the forest and tree planting based credits that are being sold will not actually remove the carbon (or create the credit) for years to come, if they are still standing, something that not all who buy understand and that many who sell don't explain.

So I repeat, some scepticism is still warranted in these early days.

That being said, carbon markets and carbon offsets are here to stay.  As governments become more focused on addressing climate change and reversing the growth of greenhouse gas emissions, the carbon market provides a very powerful tool for reducing emissions for the least-cost.  I agree with Messrs. Dikeman and Stuart (and many, many others) that they offer tremendous opportunities for investors, project developers and entrepreneurs for the future. 

The World Bank released its annual survey of the Carbon Markets earlier in May (see State and Trends of the Carbon Market 2008, May, 2008).  The report confirmed the doubling of the carbon markets in 2007, to a total value of US$64 billion.  Most of this value is associated with the ETS (US$50 billion) but as noted above, the CDM markets are not insignificant and the voluntary offset markets, while small, are growing rapidly.

To-date, most of this activity has been associated directly or indirectly with the ETS.  As the U.S., Japan, Canada and Australia begin to implement trading systems and tie those systems into a global carbon market expect EcoSecurities and its peers to get much bigger and much more active.

In some earlier posts, I identified some of the publicly traded funds, companies and others that provide investors with a window on the carbon markets - if they think they're up for the risk and uncertainty that are associated with an emerging commodity and market.

• see Carbon Markets and the New Energy Commodity, November 26th, 2007; and
• see Carbon Funds and Other Offsets Investors, December 20th, 2007.

(Given the rapid growth of the market, I'll have to update these lists someday soon.)

If you are interested in following the development of the carbon markets, you may also want to look at some of the following sources:

• Point Carbon offers some different daily news and informations services;
• Carbon Finance and Environmental Finance, sister publications focus on the emissions markets in monthly magazines (available online as well); and
• ClimateBiz offers an online news and information source thats updated weekly.

There are many other news and information services focused on carbon markets but Mr. Dikeman's interview with Marc Stuart is a good place to start and the other sources I've provided should satiate any appetite for more information.

Enjoy.

New, Clean Life for Old Coal Plants?

                                     

                                      Source: www.webbaviation.co.uk

Drax Power Station (UK) Combines Renewable Biomass With Coal

Britain's Guardian newspaper announced yesterday that Drax power station, the UK's largest, had begun a project to replace up to 10% of the coal the plant uses with biomass (see Drax's £50M renewables project throws biomass into coal mix, Guardian, May 19th).  After testing cofiring up to 2-3% biomass for several months, the company signed an agreement with Alstrom (EPA: ALO) to construct a US$98 million biomass processing facility that would allow up to 1.5 million tonnes of biomass to be used per year, replacing 1 million tonnes of coal and saving up to 2 million tonnes of CO2 emissions.

Drax is operated by the Drax Group plc. (LON: DRX).  The 4,000 MW power station in north Yorkshire supplies 7% of the UK's power.   

While this is not a first, I was unable to find other examples of co-firing with biomass on this scale.  Not unlike Drax testing 2-3% co-firing for several months, other utilities have run trials.  For example, in 2006, Alliant Energy completed a test burn of switchgrass co-fired with coal at its Ottumwa Generating Station in Iowa (see Switchgrass Burn Test Proves Hopeful, Renewable Energy World, June 19th, 2006).   

The Guardian article qoutes Drax's CEO who describes co-firing biomass and coal as the "forgotten" renewable.  No doubt in the rush to embrace Carbon Capture & Storage (CCS) technology even the coal industry has not paid a lot of attention to what appears to be a relatively low-tech, incremental approach.

CCS offers a high cost, long term solution to managing the carbon risk associated with coal fired power.  If it ever works for widespread implementation, it is some ways into the future.  Co-firing biomass appears to offer an interim step that could be implemented at relatively low cost.  As noted above, Drax indicates that it will be spending only US$98 million for this initiative.

With all of the coal-fired generating plants in the world today, a simple, low-cost solution such as co-firing could be great first step towards managing carbon emissions.

U.S. Electric Power Emissions

Who is the Cleanest U.S.  Power Producer?

Two weeks ago CERES, a Washington based NGO released its sixth report benchmarking the air emissions of the 100 largest electric power producers in the U.S. (see Benchmarking Air Emissions, May 2008).  Using 2006 emission data, CERES together with its partners, Natural Resources Defense Council, PSEG and PG&E Corporation, examined power producers' emissions of SOx, NOx, CO2 and Mercury.  The report ranks electric power producers by their power output and by their emissions rates for each of the four target pollutants.

If you are interested in the sustainability of the energy companies you invest in, the CERES report provides a huge body of data to be mined.  With that in mind, I looked for some simple ways to slice and dice their information in ways that would help me understand the relative regulatory/environmental risk associated with each power producer.

My interest is in investing so the so my first step was to extract the cooperatives and government owned generators, which reduced the list by more than a third.

Step two was to look at CO2 emissions.  What I was interested in here was the emissions rates achieved by each generator, i.e. the kilograms of CO2 produced per megawatt of  electricity generated.  Arguably, the risk each company faces is related to the additional costs per MW it will face in future rather than its absolute level of emissions.

So, if you are as concerened about the future impacts of greenhouse gas regulation as I am, who would you want to invest in?  The table below provides the ten least carbon-intensive U.S. electricity producers in 2006.

  Least Carbon-Intensive U.S. Electricity Producers (2006)

Rank	Company	Symbol	2006 Emissions (Tonnes)	2006 Emissions Rate (kg/MWh)
1	PG & E	NYSE: PCG	216,031	13.0
2	Exelon	NYSE: EXE	5,204,720	68.2
3	El Paso Electric	NYSE: EE	768,884	240.0
4	Entergy	NYSE: ETR	15,263,130	265.4
5	Avista	NYSE AVA	1,193,025	305.9
6	Constellation	NYSE: CEG	8,493,229	347.0
7	FPL	NYSE: FPL	25,009,936	354.0
8	Sempra	NYSE: SRE	2,825,349	355.3
9	PSEG	NYSE: PEG	11,317,355	360.9
10	Calpine	NYSE: CPN	16,065,600	404.0

But CO2 is only one of four pollutants examined by CERES.  To try and develop an overall sense of the different power companies relative regulatory/environmental risks, I constructed a simple index.  I just added up the rankings each company had for each pollutant.  The result shows a lot of overlap with the list of the ten least carbon-intensive generators.

                        Least Emissions-Intensive U.S. Electricity Producers (2006)

Rank	Company	Symbol
1	PG & E	NYSE: PCG
2	El Paso Electric	NYSE: EE
3	Calpine	NYSE: CPN
4	Sempra	NYSE: SRE
5	Avista	NYSE: AVA
6	Exelon	NYSE: EXC
7	International Power	Lon: IPR
8	FPL	NYSE: FPL
9	Entergy	NYSE: ETR
10	IDACorp	NYSE: IDA

My index is pretty simple and doesn't take into account the different levels of risk that may be associated with particular pollutants, e.g. who really thinks CO2 is as undesirable as Mercury?  But it does cut thorugh all of the data to give me a starting piont for looking more closely at U.S. power generators.

By the way, who is the dirtiest power producer using my index?  Allegheney Energy (NYSE: AYE).

Nevada Geothermal Power Inc.

                                     

                                      Source: Infinilec Earth Friendly Energy

Its been a month since I last posted and if you have been trying to follow my blog at all regularly, you have my apologies.  With an independent consulting practice, three children and my wife's career, sometimes I just can't juggle fast enough.  One result of the break though is I have a list of things I'm interested exploring in the confines of this blog including developments in the carbon markets, more from my travels in Australia, sustainable oil and gas and last but not least, geothermal energy.

In the past, I haven't paid too much attention to geothermal or the companies using geothermal resources to produce power.  However, yesterday I had the opportunity to attend a breakfast presentation given by Brian Fairbank, the President and CEO of Nevada Geothermal Power Inc. (TSX: NGP).  The session was organized by the Pacific Energy Innovation Association here in Vancouver and was part of a series the Association has been offering on "Climate Change on the Radar Screen".

Nevada Geothermal expects to complete its first power plant at Blue Mountain in Nevada by the end of next year, i.e. 2009.  To-date the company has successfully negotiated a 20 year Power Purchase Agreement with Nevada Power, completed its environmental assessment (FONSI) and received approval for its Large Generation Interconnection Assessment for up to 75 MW.  The company has also reached an agreement for Ormat Nevada Inc. (Ormat Technologies, NYSE: ORA), a leading geothermal developer and equipment supplier, to supply and construct the power plant. 

And with US$140 million in construction financing underwritten by the Glitner Bank in Iceland and Morgan Stanley (expected to close by the end of May), the company appears to be on the downhill slide to becoming an established geothermal power producer.

Looking to the future, Mr. Fairbank was able to lay out a convincing pipeline of projects, including:

• Pumpernickel Valley, Nevada
• Black Warrior, Nevada
• Crump Geyser, Oregon

And he even suggested some potential projects in B.C. (but he was speaking to a Vancouver crowd).

The stock, which is traded on the TSX and the U.S. over the counter market, is today at $1.10, roughly the middle of its 52 week range (52 week high/low: $1.34/$0.66).  See below for a chart.

Nevada Geothermal remains a company without revenues for now.  However, from what I saw yesterday, it seems a company worth watching.