Arbitrage This...

January 25th 11:41Am Chicago, IL Sunny & Cold

I recently spoke with one of the largest corporate REC purchasers in the US for 2006. He told me that for his purchase he didn't really take into consideration the CO2E displaced by the purchase. As I said in my last blog; I'd like to quickly discuss a common error made when purchasing green power (RECs). The assumption is that the lowest cost/MWh is the best deal for a nationwide product. This idea is also coupled with the preference for wind and small hydro. Most corporate buyers like the idea of solar as well, but when they see the price tag they make like a first time high end car buyer and slowly drift away from any purchase. However, a common approach is to designate 1% of the purchase to consist of solar RECs. As for pricing. I'm hearing that most corporate purchases are for wind and are priced between $3.50 & $4.50/MWh. That's not bad. Now, biomass is usually $0.25 - $0.35 less expensive. LFG or biogas can be even less than that. Small hydro is a crap shoot because you generally find it in small clumps. Because its small. Which, if you have the right connections can mean that you can get it quite cheaply.

Now, its important to understand that when you are buying a REC, unless you are doing it to support the local renewable utility provider or energy independence, you are probably doing it to support climatechangeglobalwarmingearthdaygreensustainablemotherearth. You're doing for the worldwide environmental benefits. If that is the case; then you should be considering the CO2e emission displacement factor associated with the purchase. This is essentially how much of a difference the marginal MWh that you are purchasing is making to the grand scheme of things. The GHG protocol and EPA generally suggest that NERC subregion or power pool be used to determine the current grid mix of your facility level consumption of power. This can be even further pinpointed if your utility (like mine; Com Ed) publishses its actual generation mix. This is usually organized by percentage of type of generation (coal, nuclear, natural gas, renewables, etc). That mix translates into an average lbs CO2/kWh value. The average emission factor in the United States is around 1.5 lbs/kWh as of the most recent EPA eGrid report (2004 data - released 12/06). That translates to .679 metric tonnes per MWh of electricity consumption. So, the average nationwide REC displaces about .679 tonnes of CO2.

Now, the last price of a tonne of carbon in Europe (an EUA) was right around 15 Euro (I cant find the EURO text symbol). EUH07 last trade was $1.3007. So, 2008 vintage Co2e was worth a whopping $19.51. So, initally anyone who knows anything about trading and arbitrage....which guest lecturer Wikipedia will quickly explain:

"In economics, arbitrage is the practice of taking advantage of a price differential between two or more markets: a combination of matching deals are struck that capitalize upon the imbalance, the profit being the difference between the market prices. When used by academics, an arbitrage is a transaction that involves no negative cash flow at any probabilistic or temporal state and a positive cash flow in at least one state; in simple terms, a risk-free profit. A person who engages in arbitrage is called an arbitrageur. The term is mainly applied to trading in financial instruments, such as bonds, stocks, derivatives and currencies."

Thank you Wikky. So, 1 MWh of average wind generation in the United States displaces .679 tonnes of carbon (there are more complications that I wont get into yet, frankly because I'm not your consultant....yet) Wind is priced around $3.50. So, .679 tonnes divided by $3.50/MWh comes to $5.15 per tonne of CO2 displaced.

Now, like I said...this is a complicated subject but.....$19.51 - $5.15 = $14.36. I think the guys at GE Financial Services have read that little blurb on Wikipedia, huh? Maybe thats why they're buying up as much wind as they can get their hands on. Until next time, you better check your tonnage before you purchase your RECs.