Tom Stoddard, cofounder of carbon offset firm NativeEnergy, sent along the following response to a recent blog post by Auden Schendler:

Auden:

In your post entitled “Why Buying Cheap Energy Certificates Worsens Climate Change,” you take the position people shouldn’t buy what are now relatively inexpensive renewable energy certificates (RECs) because $2 per megawatt hour doesn’t drive new investments. NativeEnergy thanks you for reopening a subject that is confusing to many, and which continues to generate numerous questions. Pricing for renewable energy credits (RECs) is an important issue for those who want to see REC purchases drive construction of new projects, but it is not the only issue.

We also want to thank you for your appreciation of our “forward REC” approach to driving new project construction. We created NativeEnergy’s “Help Build” forward REC model nine years ago to give people and businesses who cannot or won’t make long-term purchase commitments an opportunity nevertheless to have their purchases be a necessary part of funding the implementation of new clean energy projects, through a one-time purchase of a share of their long-term REC output. This provides the project the financial equivalent of a higher-priced long-term contract, paid up front. This model has comprised the bulk of our business, and we are using it successfully to this day, as our supporters are now helping build the Greensburg Wind Farm.

Recently, in our role as a founding member and Co-Chair of the International Carbon Reduction and Offset Alliance, NativeEnergy has worked with ICROA members to incorporate our model into ICROA’s Code of Best Practice, through its provisions governing “sales in advance of verification.” The Voluntary Carbon Standard and Gold Standard value our Help Build model, and their staff have said that they encourage buyers to purchase long-term streams of carbon offsets up front as a means to finance new projects, although they will not issue the actual credits in advance of verification of the reductions. The Markit Registry for carbon offsets has created “Pre-Issuance Units” (PIUs) as a means to register essentially a placeholder for offsets sold in advance of verification, based on the expected quantities identified in the third party validation report. The PIUs are then cancelled upon verification of the reductions and issuance of the corresponding offset credits. This will be very helpful in NativeEnergy’s efforts to mainstream forward purchases.

Although folks at the Center for Resource Solutions and the US Green Building Council have repeatedly expressed their appreciation for our Help Build model’s power in driving new construction, they have not yet formally accepted our model in their Green-e Energy Certification and LEED programs. We regard this as unfortunate. When a group of people collectively fund the implementation of a new project, each is responsible for a share of what it produces over its operating life. We see no reason they shouldn’t be able to take credit for that.

Regarding your specific issue on REC pricing, investors in renewable energy and carbon offset projects make their investment decisions based on their long-term price views – preferably long-term views that are ensconced in a long-term contract. In the absence of long-term contracts, which are pretty much absent in the voluntary REC market, projects are vulnerable to market price swings. The significance of this is that the difference between $20 or $2 per REC is largely meaningless in the context of typical one or two-year purchases, as the National Renewable Energy Laboratory makes clear in this study (page 47 – even $50 per REC is not driving expansion, due to “a lack of long-term contracting.”).

So projects that in fact need REC revenues are implemented based on the investors’ long-term views of REC pricing. Market pricing fluctuates, but most investors reasonably expect a long-term rise, due to a combination of factors including Renewable Portfolio Standards, cap-and-trade, and voluntary market growth. That they are accepting $2 now does not mean that they weren’t banking on much more than that per REC on average over time. They’re simply taking what the market is willing to provide now. Depriving them of that $2 now would end up making them need, to preserve their overall return, more than $2 later, given the time value of money. For example, if they were banking on pricing rising to $12 per REC in year 10, replacing in year ten the $2 lost in year 1 would require a payment not just of $14 (the $12 banked on plus the $2 lost), but rather something close to $16. In that light, depriving them of that $2 now is counterproductive, not the other way around, as you suggest.

Your argument is essentially based on an assumption that if the project will take as little as $2 per REC, it really needs $0. For many projects, that is simply not the case. The low current pricing is, as one of the comments points out, simply a function of supply and demand. Your admonition not to purchase $2 RECs basically creates an argument that we should cease all demand for RECs until such time as that demand, despite its cessation, nevertheless grows, and grows large enough in relation to supply that it produces higher pricing. That won’t happen.

In any case, we think you’re aiming at the wrong target. Price, for a year, is for just one of twenty or so years of a project’s life. Your target should be length of contract. With longer contracts, you’ll see pricing go where you want it to, as the project investors will require higher pricing on a long-term basis. $2 per REC for one year doesn’t sway investment decisions, as you rightly point out. But $2 per REC per year for 20 years, or even just for 10, will get laughed out of the room by the investors, as they see price rising over time. Investors will require long-term contracts to duplicate their long-term pricing view – and so will require long-term contracts to be priced higher than current pricing. Of course whether those higher revenues are needed or just wanted is a matter for a separate debate on project-based versus performance-based additionality.

So, we appreciate your engagement on these important issues, and for your compliments regarding NativeEnergy’s Help Build model. We share your views on the importance of making REC purchases actually drive new projects. Rather than beating up on the result of supply and demand, perhaps we should clamor for those who are in the best position to shape the voluntary REC market to promote long-term contracts, and condition LEED points, Green-e Logo use and Green Power Partnership membership on entering into 10-year, or perhaps more realistically, at least 5-year contracts. After all, NativeEnergy’s Help Build model is really designed to make-up for what has been an unavailability of long-term customer contracts.