Duke Energy Progress agreed to purchase $1.2 billion in generating assets from North Carolina Eastern Municipal Power Agency; ABB won a $400 million order that would create the first electricity...
Before You Build It: Think Green
The complex financial analysis that has driven renewable energy investment has become the standard for assessing all potential electric generation investments.
Most of the federal tax credits that apply to renewable-electricity production facilities are scheduled to sunset at the end of 2008, but active debate over extensions is ongoing. 9 Renewable portfolio standards are being actively modified and expanded in some states, in proposed form in yet other states, and a national platform actively is being pushed by a large contingent in Congress. 10 On the carbon limitation front, in addition to the potential creation of new regional programs, or expansion of RGGI, there are several national frameworks that have been proposed in Congress, which means that even in those markets where there are no clear plans for regional or local carbon restrictions, the potential for a national greenhouse-gas platform needs to be structured into the economic model.
What this discussion illustrates is that to perform optimally an economic analysis of a generation investment, a potential investor will face a unique set of challenges. The potential investor must understand the federal, state, and local tax incentives, and have the ability to make valuation adjustments to account for the legislative uncertainty associated with those benefits. In addition, an investor will require valuations of renewable energy credits produced or forfeited based on a generation-source choice for every applicable jurisdiction subject to a renewable portfolio standard. Further market expertise and prognostication will be necessary to incorporate the impact of carbon restrictions, as well the impact these programs might have on the forward price of electricity. The ability to successfully draw upon each of these individual proficiencies, however, likely will not provide optimal efficiency in performing the overall economic analysis; to achieve a truly effective economic analysis, each of these individual considerations must be analyzed in an integrated and dynamic process.
As If This Wasn’t All Complicated Enough
All of this ignores the role of voluntary markets. The Chicago Climate Exchange has become an increasingly robust national trading platform for voluntary carbon offsets. In several states, voluntary renewable energy credit markets also have become more active, with a variety of consumers purchasing renewable energy credits as a method for proving that their electricity is from a renewable source despite their buying pooled electricity directly from the grid. These voluntary markets highlight yet another important distinction in the value propositions and economic analysis between traditional generation and these new renewable and alternative generating facilities, namely, the role of the growing public perception that carbon-neutral energy generation and use, i.e., the idea of “green” energy, is important and, therefore, has measurable value. While this value is not necessarily a determinative factor in project economics, public perception will play an increasingly important factor in the valuation of generation facilities. Additionally, to the extent that non-stakeholders are allowed access to the markets for renewable energy credits or carbon offsets, the increased demand for those instruments will continue to further have a direct impact on their value.
This analysis is further muddied by several other factors. The assorted regulatory structures governing the distribution and sale of electricity in the various jurisdictions, as well as the growing costs and challenges associated with