Law and the Environment : Environmental Lawyer & Attorney : Foley Hoag Law Firm : Boston, Washington D.C.

Despite the relatively low clearing prices in the Regional Greenhouse Gas Initiative’s (RGGI) seventh auction of CO₂ credits on March 10^th -- $2.07 for 2009-2011 allowances, and the auction floor price of $1.86 for 2012-2014 allowances – cumulative RGGI proceeds to be used by the 10 participating states for renewable energy, energy efficiency and low-income energy assistance programs now total $582.3 million.

As reported in today’s announcement of the auction results, this half billion dollars is being funneled into state-run programs that make investments in energy efficiency, accelerate the deployment of renewable energy, and, at the bottom line, create thousands of jobs. In the report, RGGI highlights success stories from regional companies in sectors such as energy audits and weatherization, and the US Department of Energy’s statistic that every million dollars invested in building weatherization creates more than 50 jobs in installation and another 10 to 20 jobs in the production of energy efficient building materials.  Also notable for Massachusetts is DOER Commissioner Phil Guidice’s statement that energy efficiency programs funded in part by RGGI are expected to create or maintain nearly 4,000 jobs in Massachusetts in the coming three years.

This auction was RGGI’s first in 2010, and the first to offer new years’ allowances for sale. Participation increased in both auctions, perhaps as a result of the green shoots of the new economic recovery. 

Participation in the auction of 2010 vintage allowances, which may be used to cover CO₂ emissions from power plants in the first compliance period of 2009-2011, was robust, with 51 entities submitting bids to purchase 2.3 times the available supply of 40.6 million allowances. The clearing price of $2.07 is up from December’s low of $2.05, even though this auction offered 40.6 million allowances for sale, a significant increase from the prior two auctions offerings of roughly 28.5 million each. Eighty-five percent of the 2010 vintage allowances were purchased by entities regulated under RGGI or their affiliates.

Participation also increased in the auction of allowances to be used in RGGI’s second control period (2012-2014). Although Wednesday’s auction marked the second time that supply outpaced demand for these allowances, the quantity of allowances for which bids were submitted increased 31% from December’s Auction 6 of 2012 vintage allowances. Ninety-eight percent of the 2.1 million 2013 vintage allowances offered for sale sold to nine generators regulated under RGGI at the $1.86 mandated auction floor price. As with the unsold allowances from December, the additional allowances may be sold at future auctions, or a state may choose to retire them. 

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Congress moved one step closer to adopting a federal renewable electricity standard ("RES") with the narrow passage of the American Clean Energy and Security Act by the House.  Twenty-nine states already have adopted some form of renewable energy portfolio standard, but a federal RES is widely thought to be important for creating a national renewable energy and energy efficiency market.  The House RES establishes a national compliance obligation overseen by the Federal Energy Regulatory Commission (“FERC”) under which large retail electricity suppliers (“Suppliers”) are required to invest in renewable energy and energy efficiency. For each compliance year, a Supplier must calculate its total volume of electricity sales during that year and then submit to FERC a sufficient number of federal renewable electricity credits (“Federal RECs”) and demonstrated annual electricity savings to meet the RES goal for that compliance year. Up to 25 percent (or 40 percent, upon a state’s request) of a Supplier’s RES obligation may be met through electricity savings rather than Federal RECs. The trade-off, however, is that the incentive to develop and deploy new renewable energy capacity may be diluted by allowing efficiency measures to count toward the RES goal.

The RES passed by the House would not preempt state programs with stricter compliance targets, meaning that the federal program would preserve to some extent the patchwork of state standards. If Congress does pass a federal RES, leveraging the resulting business opportunities will thus require an intimate understanding of how both federal and state programs work and, perhaps more importantly, how they interact.

For more details on the RES, please take a look at our recent client alert.

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Thinking about how to take advantage of funding for energy efficiency retrofits from the federal stimulus package, state-level programs like Massachusetts’ Green Communities Act, or even utility-funded programs?  You should also think about whether your actions will create another income stream – offsets under the Regional Greenhouse Gas Initiative (RGGI) – and whether taking funds will prohibit the creation of offsets when the project is finished.

RGGI, Inc. this week released model applications for offset projects which could create interesting incentives if implemented by each of the RGGI states. Unlike some of the offset provisions proposed under ACES, all of the RGGI offset categories are outside of the electric generation sector that RGGI regulates. The 5 categories of emission reductions that are eligible for offsets in RGGI include landfill methane capture and destruction; reductions in sulfur hexafluoride in the electricity transmission and distribution sector; sequestration of carbon due to afforestation; avoided methane emissions from agricultural manure management, and, most interestingly, reductions or avoidance in CO₂ emissions from natural gas, oil or propane in residential or commercial facilities due to energy efficiency in the building sector. 

RGGI has a notoriously strict stance on additionality which certainly shows in the application for energy efficiency offsets. To qualify, the applicant must certify that the project did not receive any funding or incentives from any state run programs or programs funded with RGGI auction proceeds. Given that a large portion of the money from RGGI auctions is being directed by the states toward energy efficiency improvements, being able to provide this certification may be difficult. The application also notes that any renewable portfolio standard (RPS) attributes generated by the offset project must be transferred to the state regulatory agency, rather than sold separately. 

Energy efficiency projects that can qualify for offsets are not necessarily complex. The types of energy efficiency projects that can qualify for offsets include:

• Improvements in the energy efficiency of combustion equipment that provides space heating and hot water, including a reduction in fossil fuel consumption through the use of solar and geothermal energy
• Improvements in the efficiency of heating distribution systems, including proper sizing
• Installation or improvement of energy management systems
• Improvement in the efficiency of hot water distribution systems, including reduction in demand for hot water
• Measures that improve the thermal performance of the building and reduce the building envelope air leakage
• Measures that improve the passive solar performance of buildings or utilize active heating systems using renewable energy
• Fuel switching to a less carbon-intensive fuel in combustion systems, including the use of liquid or gaseous eligible biomass (but not conversions to electricity).
  

On the other hand, the projects must achieve very high efficiency gains to qualify. Whole-building energy projects must be 30% above ASHRAE 90.1-2004 standards, and retrofit projects that commenced after January 1, 2009 must show that the energy conservation method they employ has a market penetration rate of less than 5%, although the market or class of buildings can be defined by the applicant. In addition, the baseline from which reductions in CO₂ are measured is based on a combination of the current building code and the actual equipment to be replaced, so not all of the gains from retrofits can be certified as offsets. 

If your summer home improvement efforts this year include upgrading to a state-of-the-art boiler, you didn’t take RGGI funds from the state to do so, and you are persistent enough to endure certification and verification of the reductions, you could qualify for up to 10 years of offset credits to sell to electric generators in the 10-state region. It is certainly something to think about.

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The competition between the states on who can move more aggressively in regulating greenhouse gases continues. Earlier this week, the Massachusetts Board of Building Regulations and Standards voted to approve a “Stretch” Building Code. The Stretch Code can be adopted locally by municipal option. Where adopted, buildings will have to be 20% more efficient than what would be required under the ASHRAE 2007 standard.

Since there was some ambiguity previously, let me be clear: I’m not a supporter of the stretch code. It’s one thing for states to regulate greenhouse gases in the absence of an active federal program. Even state and interstate programs, such as RGGI, should go away once a federal program is in place. To go the other way, and allow multiple programs within a state, is simply to let too many flowers bloom. Consistency is too important. 

There’s an element of “be careful what you wish for” here, but my view is that if a more stringent code can be cost-effectively achieved, then the Board could adopt that code for the entire state; if the standards in the Stretch Code cannot be cost-effectively achieved statewide, then they should not be allowed by local option.

The Stretch Code is important evidence that Massachusetts continues to pursue an aggressive agenda on climate change, notwithstanding the current economic slowdown. The element of competition among states should also not be underestimated.  Yesterday, New York City Mayor Bloomberg announced an agreement with 13 hospital systems to reduce GHG emissions by 30% over 10 years.  That’s a major commitment – and one that I’m sure will be noticed in Massachusetts and California.  

Any bets on how long it will take Ian Bowles at the Massachusetts Executive Office of Environmental Affairs to call MGH and BIDMC and see if they are willing to up the ante?

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We previously noted efforts by Massachusetts to require greater energy efficiency in new construction through revisions to the state building code. The Massachusetts Global Warming Solutions Act requires adoption of a more energy efficient code. Massachusetts is also pursuing an even more aggressive “Stretch” code, that municipalities would have the option of adopting.

Yesterday, Massachusetts took this green building message to Washington. The Environment Reporter states that Phil Giudice, Commissioner of the Massachusetts Department of Energy Resources, testified before the Senate Energy and Natural Resources Committee in favor of Congressional action to require states to require at least a 30% increase in energy efficiency over current standards. The 30% figure appears to be a minimum. Mr. Giudice stated that a requirement for a 50% reduction would be even better.

There is little doubt that there is a lot of the proverbial low-hanging fruit to be picked with respect to energy efficiency in buildings. It’s good to see Massachusetts taking its message onto the national stage.  At least this way, if such legislation is enacted, Massachusetts won’t be at a competitive disadvantage compared to other states whose codes currently do not require significant improvements in energy efficiency!

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Among energy efficiency advocates, “decoupling” is the word of the day. Last year, the Massachusetts Department of Public Utilities issued an order decoupling utility rates from sales volume, joining California on the front lines of this issue. The point of decoupling is to eliminate utilities’ rate-based incentive simply to sell more and more power, thus making it easier for utilities to get behind demand management measures.

Congress is now grappling with the decoupling issue as it considers whether to require that states implement decoupling as a quid pro quo for stimulus money related to energy efficiency and conservation. Last week, both the National Association of Regulatory Utility Commissions and the Industrial Energy Consumers of America sent letters to congress opposing decoupling provisions. 

With climate change lingering in the background, and with an increasing chorus saying that we have to act yesterday in order to prevent the worst impacts of global warming, there is going to be a lot of pressure on Congress to get this right, and to do so quickly, in order to maximize incentives for energy efficiency. Decoupling clearly seems right as a theoretical matter, but this is definitely a “devil is in the details” situation par excellence.  The decoupling issue might be better decided as part of comprehensive negotiations over a climate change bill than as part of hurried discussions over the stimulus package.

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That did not take long. When I first drafted the introduction to this blog, I included text inviting people to notify us if, God forbid, I made a mistake. The powers that be vetoed that language, apparently on the basis that it was not possible for a Foley lawyer to make a mistake.

Well, the blog’s been up for less than a week, and I have received my first such notice. In my post yesterday about the Governor’s announcement regarding changes to the state building code, I noted that developers would be concerned about a multiplicity of building codes in different municipalities. The Commonwealth’s MEPA director, Alicia McDevitt, correctly notes that municipalities will not be able to promulgate their own building code provisions regarding energy efficiency. There will be only two codes: the baseline code and the “stretch” code, which municipalities will be permitted to adopt at their option.  However, the municipalities will not be able to tinker with either code; they will have to choose between them.

I have revised the original post, but wanted to thank Alicia and invite everyone to tell me when I’m wrong if, God forbid, it should ever happen again.

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In Massachusetts, officials are continuing to try to walk the climate change walk as well as talking the talk. Today, Governor Patrick and Secretary of Environmental Affairs Ian Bowles announced a program to encourage installation of solar panels on roofs and big box stores and other commercial buildings with flat roofs that are larger than 50,000 square feet.

Initially, the program will be voluntary, but there is no question that this is part of a broader effort by the administration to make energy efficiency a central issue in building design and construction. It is of a piece with the issuance of the greenhouse gas policy issued by the Commonwealth’s MEPA office and the requirement recently imposed by the Department of Public Health to require consideration of energy efficiency in making determinations of need for health care facilities.

The Governor also announced today an effort to develop a "super-efficient energy code for consideration by the Board of Building Regulations and Standards as a local option for municipalities that want to reduce greenhouse gas emissions from development in their communities."  This would be beyond the revised version of the state building code that is required by statute to incorporate requirements in the International Energy Conservation Code.  This past year, developers successfully fought efforts that would have allowed communities to set their own energy standards in their building codes.  Hopefully, this new effort, which would allow communities to adopt what the Commonwealth is calling the "stretch" code, but otherwise not allow different codes in different communities, will prove more manageable. 

No doubt, the pace of incentives – and requirements – will only accelerate as the Commonwealth begins to implement the Global Warming Solutions Act over the coming months and years. Don’t blink or you’ll miss something.

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