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The Green Controversy

Who should have "green tag" ownership under power purchase agreements, the buyers or the sellers?
Fortnightly Magazine - November 1 2002

Who should have "green tag" ownership under power purchase agreements, the buyers or the sellers?

A legal controversy is brewing in the electric industry over who should reap the financial benefits of the green characteristics of power plants, under existing power purchase agreements (PPA).

Many of those PPAs were entered into well before there was any intrinsic value to the renewable resources generating the power sold under those contracts, other than that created under the Public Utility Regulatory Policies Act of 1978 ("PURPA") 1 and analogous state laws. In fact, the PPAs ignore any environmental commodity produced by these plants separate from energy and capacity.

The debate has continued to heat up as states adopt renewable portfolio standards 2 and fuel disclosure laws, 3 while the environmental attributes of green power-"green tags" as they are sometimes known-are becoming increasingly valuable in their own right as tradable commodities separate from their associated power.

Now, not surprisingly, the buyers and sellers of the power under those agreements are arguing that the financial benefits of the plants' environmentally friendly attributes belong to them.

Although there is no decisive answer on the ownership of these green tags, one thing is certain: With the upswing in state laws requiring renewable energy sources and the development of a retail green power market, this issue must be resolved.

The ability to meet attribute reporting requirements and to offer green power programs rests on the ability to claim possession of environmentally friendly attributes. As more reporting requirements and green power programs evolve, more entities will be faced with the need to know which attributes are truly theirs to claim and report. Ultimately, the decision may come down to competing policy considerations between increasing renewable energy resources and lowering consumers' electric bills.

PURPA Unwittingly Sets the Stage

PURPA requires electric utilities to purchase energy and capacity that is made available from a "qualifying facility" 4 (QF) under the statute. Facilities can qualify as QFs in a number of ways, including one that requires 75 percent or more of the facility's total energy input from biomass, waste, renewable resources, geothermal resources, or a combination thereof. 5 Many QFs have the desirable green characteristics that are at the center of the debate between purchasers and sellers. Indeed, many of the power purchase agreements giving rise to this debate were entered pursuant to PURPA.

Under PURPA contracts, utilities must pay a QF a purchase price for its energy and capacity that does not exceed the "incremental cost to the utility of alternative electric energy." 6 As defined under PURPA, the incremental cost to the utility, or its "avoided cost," equals the cost to the electric utility of the energy that the utility would generate itself or buy elsewhere, had it not bought such energy from the cogenerator or small power producer as required under PURPA. 7

Proponents of allocating environmentally beneficial attributes to the QF generators under PURPA contracts argue that the statute does not contain any language directing that such attributes-unbundled from energy and capacity-are to be included in, or priced into, a