4. Project Legal Documentation
4.1 Overview
Every clean energy project is unique in certain ways. As has been discussed earlier, a fully standardized approach is not possible nor should one be attempted. Legal issues are complex, and the costs of errors or omissions potentially high. For almost every size of project and no matter what the position of your party, some sort of legal documentation will be required; for projects larger than household level, legal counsel will be required to tailor a legal strategy appropriate to the project. As has also been discussed, legal issues differ based on the type of clean energy project you wish to develop; some of the legal considerations specific to different types of clean energy projects have been outlined in the section 3 (Legal Issues Specific to Categories of Clean Energy Projects).
There are no fine lines between categories of legal documents, and many documents are either closely linked or even integrated into one another. For example, green leases can span legal categories ranging from real property issues to operations and maintenance to energy performance contracts. A power purchase agreement may include an interconnection agreement, net metering regulations, and provisions for trading environmental attributes. Installation issues might be subsumed under an operations & maintenance agreement or an energy performance contract.
Many legal documents in a clean energy project are not exclusive to such projects; these include documents such as incorporation agreements, lease agreements, employment contracts, etc. In keeping with RETScreen's vision of lowering transaction costs, the documents described and linked to in this chapter are examples of less well-known agreements, those more specific to clean energy projects, or those whose development may entail higher transactional costs.
Here, then, are the general legal categories your lawyer will need to consider:
Every clean energy project is unique in certain ways. As has been discussed earlier, a fully standardized approach is not possible nor should one be attempted. Legal issues are complex, and the costs of errors or omissions potentially high. For almost every size of project and no matter what the position of your party, some sort of legal documentation will be required; for projects larger than household level, legal counsel will be required to tailor a legal strategy appropriate to the project. As has also been discussed, legal issues differ based on the type of clean energy project you wish to develop; some of the legal considerations specific to different types of clean energy projects have been outlined in the section 3 (Legal Issues Specific to Categories of Clean Energy Projects).
There are no fine lines between categories of legal documents, and many documents are either closely linked or even integrated into one another. For example, green leases can span legal categories ranging from real property issues to operations and maintenance to energy performance contracts. A power purchase agreement may include an interconnection agreement, net metering regulations, and provisions for trading environmental attributes. Installation issues might be subsumed under an operations & maintenance agreement or an energy performance contract.
Many legal documents in a clean energy project are not exclusive to such projects; these include documents such as incorporation agreements, lease agreements, employment contracts, etc. In keeping with RETScreen's vision of lowering transaction costs, the documents described and linked to in this chapter are examples of less well-known agreements, those more specific to clean energy projects, or those whose development may entail higher transactional costs.
Here, then, are the general legal categories your lawyer will need to consider:
4.2 Real Property
In order to develop a clean energy project, a project developer will first need to identify an appropriate geographic area to locate the project, a process known as siting. This process will determine factors such as availability of the resource, access to the electric grid (if applicable), impact on neighbours, environmental impacts, and prior commitments of the land.
Then, the developer must gain legal control over the proposed project site. This usually means acquiring interests in land, whether by purchasing the land, leasing it (which could include an option to purchase), or obtaining easements. Outright purchase normally provides the maximum amount of security and rights over the project land, but is also usually the most expensive option.
A real property agreement will address major issues such as the duration of the agreement, compensation, the scope of the land subject to the agreement, permitted uses of the land, property-related taxes, assumption of liabilities, assignment of contract rights by the developer, liens and encumbrances on the land, termination of the agreement, remediation of the land, and dispute resolution.
Other real property issues that may be applicable:
Real property issues are normally less important to EE projects (with the exception of Green Leasing, described below), because such projects are most often undertaken on existing lands and buildings.
Sample Real Property Agreements
In order to develop a clean energy project, a project developer will first need to identify an appropriate geographic area to locate the project, a process known as siting. This process will determine factors such as availability of the resource, access to the electric grid (if applicable), impact on neighbours, environmental impacts, and prior commitments of the land.
Then, the developer must gain legal control over the proposed project site. This usually means acquiring interests in land, whether by purchasing the land, leasing it (which could include an option to purchase), or obtaining easements. Outright purchase normally provides the maximum amount of security and rights over the project land, but is also usually the most expensive option.
A real property agreement will address major issues such as the duration of the agreement, compensation, the scope of the land subject to the agreement, permitted uses of the land, property-related taxes, assumption of liabilities, assignment of contract rights by the developer, liens and encumbrances on the land, termination of the agreement, remediation of the land, and dispute resolution.
Other real property issues that may be applicable:
- Securing a right to purchase or lease land within a prescribed future timeframe through an Option to Purchase or Lease
- Obtaining a right to match the terms of purchase or lease to a third party through a Right of First Refusal
- Ascertaining the restrictions on an owner's right to use property by means of covenants on land
- Possessing a secure legal right to develop the land by ensuring title to the land
- Obtaining easements for adjacent parcels of land in order to create buffer zones
- Obtaining title insurance should title to the property fail or be called into question
- Conducting land surveys if title is uncertain, to preclude title-related questions, or if the value of the project is sufficient to justify undertaking a peremptory survey
- Understanding the various land-related permits and approvals that will be required (including land use permitting, conditional use permitting, environmental permitting, building and electrical codes), paying particular attention to the length of time needed to obtain the necessary permits (discussed in more detail in section 4.3, Regulatory and Permitting)
- Determining whether or not present zoning and land use permits the intended use, taking into account the difficulty of obtaining zoning exceptions
- Addressing subsurface mineral rights
- Addressing water rights (including subsurface)
- Ensuring access to the fuel source (solar, wind, etc.), either by verifying the existence of appropriate laws (i.e., California's solar access laws) or building relevant clauses into the real property agreement.
Real property issues are normally less important to EE projects (with the exception of Green Leasing, described below), because such projects are most often undertaken on existing lands and buildings.
Sample Real Property Agreements
4.2.1 Green Lease
Green leasing is a recent innovation in the commercial leasing process. A green lease is either a new lease or a modification to an existing lease that takes into account various environmental considerations. These provisions, usually formalized in an environmental management plan forming an integral part of the lease, include greenhouse gas emissions, energy consumption, water conservation, solid waste production and handling, the use of environmentally-friendly materials and products, environmental assessment, etc. Like a standard commercial lease, a green lease governs the relationship between landlord and tenant, but with an added environmental lens. The green leasing process, particularly with respect to modifications to existing leases, can be initiated by either the landlord or tenant (especially large tenants). The green leasing process can potentially relate to or be subsumed in many other project development steps, such as real property agreements; energy performance contracting; design, engineering, and construction; operations and maintenance; and environmental attributes.
Sample Green Leases
Green leasing is a recent innovation in the commercial leasing process. A green lease is either a new lease or a modification to an existing lease that takes into account various environmental considerations. These provisions, usually formalized in an environmental management plan forming an integral part of the lease, include greenhouse gas emissions, energy consumption, water conservation, solid waste production and handling, the use of environmentally-friendly materials and products, environmental assessment, etc. Like a standard commercial lease, a green lease governs the relationship between landlord and tenant, but with an added environmental lens. The green leasing process, particularly with respect to modifications to existing leases, can be initiated by either the landlord or tenant (especially large tenants). The green leasing process can potentially relate to or be subsumed in many other project development steps, such as real property agreements; energy performance contracting; design, engineering, and construction; operations and maintenance; and environmental attributes.
Sample Green Leases
4.3 Regulatory and Permitting
Regulatory issues are one of the most important categories of legal considerations a project developer will face. Regulatory issues involve obligations to a level of government to either perform an action or refrain from performing an action. Permitting is the formal approval process given by a level of government to allow the project developer to engage in an activity or action, ranging from construction of a facility to emitting greenhouse gases. Energy projects are subject to oversight from at least one level of government. In some jurisdictions, there is a multiplicity of regulatory structures under which the project could be governed, each with its own advantages and disadvantages.
The key regulatory issues from the perspective of the project developer include the existence of feed-in tariffs, net metering, market quotas (also known as renewable portfolio standards), competitive procurement processes for new generation, and licences granting permission for generation, transmission and sale of electricity.
Regulatory and permitting aspects pervade many stages of the project development cycle and are highly specific to legal jurisdiction. What is important to note is that first, numerous regulatory and permitting requirements exist for most clean energy projects and that legal counsel should be engaged to determine the particular issues for your project and jurisdiction; second, that in the vast majority of instances, compliance with regulatory and permitting requirements is mandatory; and third, that some regulatory structures, such as net metering and feed-in tariffs, may provide a positive financial benefit to the project.
Regulatory issues are one of the most important categories of legal considerations a project developer will face. Regulatory issues involve obligations to a level of government to either perform an action or refrain from performing an action. Permitting is the formal approval process given by a level of government to allow the project developer to engage in an activity or action, ranging from construction of a facility to emitting greenhouse gases. Energy projects are subject to oversight from at least one level of government. In some jurisdictions, there is a multiplicity of regulatory structures under which the project could be governed, each with its own advantages and disadvantages.
The key regulatory issues from the perspective of the project developer include the existence of feed-in tariffs, net metering, market quotas (also known as renewable portfolio standards), competitive procurement processes for new generation, and licences granting permission for generation, transmission and sale of electricity.
Regulatory and permitting aspects pervade many stages of the project development cycle and are highly specific to legal jurisdiction. What is important to note is that first, numerous regulatory and permitting requirements exist for most clean energy projects and that legal counsel should be engaged to determine the particular issues for your project and jurisdiction; second, that in the vast majority of instances, compliance with regulatory and permitting requirements is mandatory; and third, that some regulatory structures, such as net metering and feed-in tariffs, may provide a positive financial benefit to the project.
4.4 Power Purchase Agreement
The power purchase agreement (often known as a PPA) is perhaps the central legal document that will be required in a renewable energy generation project. It legally codifies the raison d'etre of the project, the profit-making mechanism, and is most often drafted by utilities.
A power purchase agreement is an agreement for the sale and purchase of electricity. Its basic terms include price, amount of electricity to be produced and purchased, measurement of electricity, point of delivery and transfer of title, and line losses. The agreement will also define damages for breach of contract, and for new plants, will allocate risks for delays in construction. Renewable electricity power purchase agreements also typically include provisions for interconnection, allocation of other environmental attributes (such as renewable energy credits), and allocation of risks with respect to intermittency and qualification for tax credits. Power purchase agreements may also contain provisions for equipment leasing and financing as well as site lease (in cases in which the facility is located on the buyer's land).
A power purchase agreement can range from less than 10 pages to well over 100 pages. It can be a stand alone agreement with provisions only for the sale and purchase of electricity, or it can subsume other documents such as interconnection and transmission.
Sample Power Purchase Agreements
The power purchase agreement (often known as a PPA) is perhaps the central legal document that will be required in a renewable energy generation project. It legally codifies the raison d'etre of the project, the profit-making mechanism, and is most often drafted by utilities.
A power purchase agreement is an agreement for the sale and purchase of electricity. Its basic terms include price, amount of electricity to be produced and purchased, measurement of electricity, point of delivery and transfer of title, and line losses. The agreement will also define damages for breach of contract, and for new plants, will allocate risks for delays in construction. Renewable electricity power purchase agreements also typically include provisions for interconnection, allocation of other environmental attributes (such as renewable energy credits), and allocation of risks with respect to intermittency and qualification for tax credits. Power purchase agreements may also contain provisions for equipment leasing and financing as well as site lease (in cases in which the facility is located on the buyer's land).
A power purchase agreement can range from less than 10 pages to well over 100 pages. It can be a stand alone agreement with provisions only for the sale and purchase of electricity, or it can subsume other documents such as interconnection and transmission.
Sample Power Purchase Agreements
4.5 Energy Performance Contract
Energy performance contracts (sometimes known as energy management services contracts or energy services contracts) involve energy-saving capital and operational improvements to a building or industrial facility that will be financed through the cost savings resulting from improved energy performance. Energy performance contracts can be entered into for a range of energy-efficiency measures, such as completely retrofitting an airport's lighting system or installing a full range of energy efficiency measures in a large hospital or clusters of buildings at a university or military base.
An energy services company (usually known by its acronym, ESCO), is usually a private business that undertakes projects to make its customers' facilities more energy-efficient. It does this by developing and financing energy efficiency projects. The customer enters into an energy performance contract with an ESCO. These contracts, usually for a term of 7-10 years, are wide ranging and cover everything from conducting an initial energy audit and compiling a list of recommendations, to project development, construction, and installation to the assumption of technical and financial risks. The specific provisions of the energy performance contract will differ based on the market and leverage of the particular parties; however the following are typical elements of an energy performance contract:
Other legal documents related to energy efficiency projects run by ESCOs are an energy savings or performance guarantee, lease or purchase agreement for energy retrofits, and depending on the structure chosen, various finance documents.
A typical compensation modality for the ESCO is results-based contracting, wherein compensation is linked directly to the amount of energy saved. The basis of this arrangement is that the monetized equivalent of the energy savings should be enough to pay for the cost and profits of the project and the ESCO may guarantee this or else absorb the difference. After the term of the project is complete, all subsequent energy savings accrue to the customer. Thus, the preferred modality of operation of most ESCOs eliminates many of the barriers of project finance, discussed later in this chapter. Another finance option is to divide the cost of capital improvements and the resulting savings among the parties to the agreement, based on a financial analysis of the cost of the improvements and the expected cost savings.
Sample Energy Performance Contracts
Energy performance contracts (sometimes known as energy management services contracts or energy services contracts) involve energy-saving capital and operational improvements to a building or industrial facility that will be financed through the cost savings resulting from improved energy performance. Energy performance contracts can be entered into for a range of energy-efficiency measures, such as completely retrofitting an airport's lighting system or installing a full range of energy efficiency measures in a large hospital or clusters of buildings at a university or military base.
An energy services company (usually known by its acronym, ESCO), is usually a private business that undertakes projects to make its customers' facilities more energy-efficient. It does this by developing and financing energy efficiency projects. The customer enters into an energy performance contract with an ESCO. These contracts, usually for a term of 7-10 years, are wide ranging and cover everything from conducting an initial energy audit and compiling a list of recommendations, to project development, construction, and installation to the assumption of technical and financial risks. The specific provisions of the energy performance contract will differ based on the market and leverage of the particular parties; however the following are typical elements of an energy performance contract:
- an ESCO finances all or a part of the capital improvement
- achieves long-term cost savings
- achieves a guarantee for cost savings
- maintains consistent and reasonable levels of occupant comfort
- maintains consistent levels of building functionality
Other legal documents related to energy efficiency projects run by ESCOs are an energy savings or performance guarantee, lease or purchase agreement for energy retrofits, and depending on the structure chosen, various finance documents.
A typical compensation modality for the ESCO is results-based contracting, wherein compensation is linked directly to the amount of energy saved. The basis of this arrangement is that the monetized equivalent of the energy savings should be enough to pay for the cost and profits of the project and the ESCO may guarantee this or else absorb the difference. After the term of the project is complete, all subsequent energy savings accrue to the customer. Thus, the preferred modality of operation of most ESCOs eliminates many of the barriers of project finance, discussed later in this chapter. Another finance option is to divide the cost of capital improvements and the resulting savings among the parties to the agreement, based on a financial analysis of the cost of the improvements and the expected cost savings.
Sample Energy Performance Contracts
4.6 Design, Engineering, Procurement, Fuel Supply, Construction, Operations & Maintenance
Engineering, procurement & construction agreements (or EPC agreements; not to be confused with energy performance contracts) are agreements that provide the legal framework for the design and engineering of a clean energy system, procurement of equipment and materials, issues related to the actual construction of the project, and installation of clean energy capital equipment. All engineering, procurement, construction, and installation issues can be addressed in a single master agreement or in a series of individual contracts, the choice depending on the requirements and complexity of a particular project.
A fuel supply agreement is designed to ensure an uninterrupted source of fuel for an energy project, the absence of which could be financially disastrous. Fuel supply agreements are most relevant for clean energy projects that require a combustible fuel, such as biomass or landfill gas. Operations and maintenance (O&M) agreements codify the terms and conditions around commissioning, operation and maintenance of a clean energy project.
Many of the above noted issues, particularly the actual engineering, procurement, construction and installation can be dealt with in a single installation agreement. A typical installation agreement will address issues such as the scope of work, completion and start-up obligations, warranty obligations, and limitation of liability.
Construction, in particular, can be an especially risky area of project development. The experience and competence of the contractor with the technology employed, the contractor's financial health, ability to execute on time, price competitiveness, quality of work, etc. are all important issues.
Engineering, procurement & construction agreements (or EPC agreements; not to be confused with energy performance contracts) are agreements that provide the legal framework for the design and engineering of a clean energy system, procurement of equipment and materials, issues related to the actual construction of the project, and installation of clean energy capital equipment. All engineering, procurement, construction, and installation issues can be addressed in a single master agreement or in a series of individual contracts, the choice depending on the requirements and complexity of a particular project.
A fuel supply agreement is designed to ensure an uninterrupted source of fuel for an energy project, the absence of which could be financially disastrous. Fuel supply agreements are most relevant for clean energy projects that require a combustible fuel, such as biomass or landfill gas. Operations and maintenance (O&M) agreements codify the terms and conditions around commissioning, operation and maintenance of a clean energy project.
Many of the above noted issues, particularly the actual engineering, procurement, construction and installation can be dealt with in a single installation agreement. A typical installation agreement will address issues such as the scope of work, completion and start-up obligations, warranty obligations, and limitation of liability.
Construction, in particular, can be an especially risky area of project development. The experience and competence of the contractor with the technology employed, the contractor's financial health, ability to execute on time, price competitiveness, quality of work, etc. are all important issues.
4.6.1 BOT and BOOT Agreements
Under a Build-Operate-Transfer (BOT) or Build-Own-Operate-Transfer (BOOT) agreement, a contractor finances and constructs a facility, and then owns and operates the facility for a certain number of years allowing the project developer to recover the construction costs and realize a profit. At the end of the specified term, the developer transfers ownership of the facility to the site owner, often a government entity. Governments that lack either the financial ability or technical capacity to build and operate complex infrastructure projects can engage private firms under a BOT/BOOT structure.
Critical issues in BOT/BOOT agreements include the initial investment, quality and performance of the facility, term of the agreement, obligations to maintain the facility, the purchase price (if any) of the facility at the end of the term, and remedies in the event of a default, particularly by the developer.
Under a Build-Operate-Transfer (BOT) or Build-Own-Operate-Transfer (BOOT) agreement, a contractor finances and constructs a facility, and then owns and operates the facility for a certain number of years allowing the project developer to recover the construction costs and realize a profit. At the end of the specified term, the developer transfers ownership of the facility to the site owner, often a government entity. Governments that lack either the financial ability or technical capacity to build and operate complex infrastructure projects can engage private firms under a BOT/BOOT structure.
Critical issues in BOT/BOOT agreements include the initial investment, quality and performance of the facility, term of the agreement, obligations to maintain the facility, the purchase price (if any) of the facility at the end of the term, and remedies in the event of a default, particularly by the developer.
4.6.2 Fuel Supply, Offtake, and Hedging Agreements
Used in projects requiring a purchase of fuel (such as cogeneration projects, biomass, biofuels projects), these sometimes critical documents ensure an adequate supply of fuel to power the plant, guarantee the purchase of the power produced, and manage the risk of fuel interruption or incomplete offtake. Offtake can often be covered under the terms of a power purchase agreement.
Used in projects requiring a purchase of fuel (such as cogeneration projects, biomass, biofuels projects), these sometimes critical documents ensure an adequate supply of fuel to power the plant, guarantee the purchase of the power produced, and manage the risk of fuel interruption or incomplete offtake. Offtake can often be covered under the terms of a power purchase agreement.
4.6.3 Tendering
Particularly in high value projects, project developers are often sued by unsuccessful bidders, thus exposing the developers to significant legal liability. Tender documents should be as complete and unequivocal as possible and should have clear language emphasizing the developer's prerogative and flexibility to choose the successful bidder within set parameters.
Sample Engineering, Procurement and Construction Agreements
Sample Fuel Supply and O&M Agreements
Particularly in high value projects, project developers are often sued by unsuccessful bidders, thus exposing the developers to significant legal liability. Tender documents should be as complete and unequivocal as possible and should have clear language emphasizing the developer's prerogative and flexibility to choose the successful bidder within set parameters.
Sample Engineering, Procurement and Construction Agreements
Sample Fuel Supply and O&M Agreements
4.7 Transmission and Interconnection
An interconnection agreement is an agreement between a power project developer and the local utility to secure a right to feed the generated electricity into the electric grid, through existing or new transmission lines. It is often incorporated into or closely linked to a power purchase agreement, and can also be integrated with provisions for net metering or feed-in tariffs. Normally, parties in an interconnection agreement agree to perform tasks necessary to modify the electrical grid to accept a new source of power (the utility) and to pay for the cost of the upgrades (the power producer). The interconnection agreement often covers both connection to the electric grid as well as transmission of electricity across the grid. In some cases, however, particularly where the transmission agent is different from the interconnecting utility, a separate transmission agreement may be required.
Transmission and interconnection are most applicable to utility-scale grid-connected clean energy projects. Certain types of cogeneration or distributed generation projects may not require interconnection and transmission agreements, but may still need to take account of interconnection standards and/or utility policies on interconnection. Further, small scale projects may be connected directly to the distribution system rather than the transmission system.
It is important to note that, particularly for smaller projects, the costs of interconnection can be relatively large compared to the revenues of the project, thus presenting a significant hurdle to the viability of the project. Some jurisdictions have addressed this issue by enacting clean energy friendly laws and regulations, such as requiring a dominant utility to pay certain costs of a clean energy producer's interconnection.
Sample Interconnection Agreements
An interconnection agreement is an agreement between a power project developer and the local utility to secure a right to feed the generated electricity into the electric grid, through existing or new transmission lines. It is often incorporated into or closely linked to a power purchase agreement, and can also be integrated with provisions for net metering or feed-in tariffs. Normally, parties in an interconnection agreement agree to perform tasks necessary to modify the electrical grid to accept a new source of power (the utility) and to pay for the cost of the upgrades (the power producer). The interconnection agreement often covers both connection to the electric grid as well as transmission of electricity across the grid. In some cases, however, particularly where the transmission agent is different from the interconnecting utility, a separate transmission agreement may be required.
Transmission and interconnection are most applicable to utility-scale grid-connected clean energy projects. Certain types of cogeneration or distributed generation projects may not require interconnection and transmission agreements, but may still need to take account of interconnection standards and/or utility policies on interconnection. Further, small scale projects may be connected directly to the distribution system rather than the transmission system.
It is important to note that, particularly for smaller projects, the costs of interconnection can be relatively large compared to the revenues of the project, thus presenting a significant hurdle to the viability of the project. Some jurisdictions have addressed this issue by enacting clean energy friendly laws and regulations, such as requiring a dominant utility to pay certain costs of a clean energy producer's interconnection.
Sample Interconnection Agreements
4.8 Environmental
Environmental considerations and related legal documents pervade clean energy projects. Much of the environmental burden is regulatory in nature, such as the requirements of an environmental impact assessment (EIA) at feasibility stage of a project. However, there are at least two types of specific legal documents that can be of particular importance to a clean energy project: emissions trading agreements and environmental attributes trading agreements.
Environmental considerations and related legal documents pervade clean energy projects. Much of the environmental burden is regulatory in nature, such as the requirements of an environmental impact assessment (EIA) at feasibility stage of a project. However, there are at least two types of specific legal documents that can be of particular importance to a clean energy project: emissions trading agreements and environmental attributes trading agreements.
4.8.1 Environmental Impact Assessment
Completing an environmental impact assessment is now a mandatory regulatory step for many types of new business venture, including clean energy projects. Most industrialized country (and many developing country) jurisdictions now have requirements for thorough environmental impact assessments as part of the feasibility study process. Typical issues addressed in an environmental impact assessment include:
Completing an environmental impact assessment is now a mandatory regulatory step for many types of new business venture, including clean energy projects. Most industrialized country (and many developing country) jurisdictions now have requirements for thorough environmental impact assessments as part of the feasibility study process. Typical issues addressed in an environmental impact assessment include:
- Air emission, effluent discharges, onsite hazardous materials
- Biodiversity, species migration patterns, bird nesting
- Population and settlement, noise and visual impacts
- Industrial health and safety
- Electromagnetic interference
- Public perception, acceptance and participation
- Environmental liability
4.8.2 Emissions Trading Agreement
Emissions trading involves the indirect reduction of greenhouse gases or other pollutants (including NOx and SOx) through the sale of a credit or permit to emit a defined amount of such pollutant. These credits can used by another entity and applied against a regulatory requirement to limit emissions, acquired for investment and later traded, or retired (not used). Emissions trading usually occurs in the context of cap-and-trade regulation which limits emissions of specified emitters. Where there is no regulation limiting greenhouse gas emissions, companies may also voluntarily undertake to reduce emissions and create "credits" that they may sell to any interested buyer.
Trading emissions credits is intended to provide companies greater flexibility in meeting regulatory obligations to reduce emissions of pollutants at a reduced cost. From a policy point of view, these programs are intended to achieve the desired level of emissions reduction at a lower overall economic cost because reductions can be achieved by firms that have the lowest marginal cost of abatement. For emitters that have a low marginal cost of reducing emissions, they provide an economic incentive to reduce emissions below the mandatory level than would otherwise occur under a traditional command-and-control regulatory regime, and to resell these credits to other emitters. For emitters with high abatement costs, purchasing emissions allowances provides a cost effective alternative to reducing their own emissions.
Emissions trading involves the indirect reduction of greenhouse gases or other pollutants (including NOx and SOx) through the sale of a credit or permit to emit a defined amount of such pollutant. These credits can used by another entity and applied against a regulatory requirement to limit emissions, acquired for investment and later traded, or retired (not used). Emissions trading usually occurs in the context of cap-and-trade regulation which limits emissions of specified emitters. Where there is no regulation limiting greenhouse gas emissions, companies may also voluntarily undertake to reduce emissions and create "credits" that they may sell to any interested buyer.
Trading emissions credits is intended to provide companies greater flexibility in meeting regulatory obligations to reduce emissions of pollutants at a reduced cost. From a policy point of view, these programs are intended to achieve the desired level of emissions reduction at a lower overall economic cost because reductions can be achieved by firms that have the lowest marginal cost of abatement. For emitters that have a low marginal cost of reducing emissions, they provide an economic incentive to reduce emissions below the mandatory level than would otherwise occur under a traditional command-and-control regulatory regime, and to resell these credits to other emitters. For emitters with high abatement costs, purchasing emissions allowances provides a cost effective alternative to reducing their own emissions.
4.8.2.1 Kyoto Protocol to the United Nations Framework Convention on Climate Change
Industrialized countries that ratified the Kyoto Protocol to the United Nations Framework Convention on Climate Change accepted binding commitments to reduce their emissions of greenhouse gases during the 2008 to 2012 period by an aggregate 5% below 1990 emissions. Each country that accepted an emissions limit then imposed emissions limits for its own industries under their respective national laws. In addition to reducing one's own emissions, the Kyoto Protocol provides three flexible mechanisms for countries and their industries to meet their emissions reductions obligations: emissions trading, Clean Development Mechanism (CDM), and Joint Implementation (JI).
Industrialized countries that ratified the Kyoto Protocol to the United Nations Framework Convention on Climate Change accepted binding commitments to reduce their emissions of greenhouse gases during the 2008 to 2012 period by an aggregate 5% below 1990 emissions. Each country that accepted an emissions limit then imposed emissions limits for its own industries under their respective national laws. In addition to reducing one's own emissions, the Kyoto Protocol provides three flexible mechanisms for countries and their industries to meet their emissions reductions obligations: emissions trading, Clean Development Mechanism (CDM), and Joint Implementation (JI).
4.8.2.2 Emissions Reduction Purchase Agreement
Emissions Reduction Purchase Agreements or ERPAs are agreements between a seller and a buyer of Certified Emission Reductions (CERs, also known as climate or carbon credits) under the Clean Development Mechanism (CDM). The seller may be the developer of a CDM project and the buyer may be a company or country that needs the CERs for legal compliance purposes pursuant to their emissions limits under the Kyoto Protocol (in the case of countries) or national law (in the case of emitters located in countries that have ratified the Kyoto Protocol). Also, either or both parties can simply be traders in CERs as a result of the large secondary market that has emerged for this environmental commodity. CERs are generated by projects undertaken under the CDM. ERPAs contain a number of standard terms relating to the creation, ownership and transfer of the CERs.
Other emissions trading agreements have also been developed that are designed for voluntary carbon markets, but are based on principles similar to that codified in ERPAs.
Emissions Reduction Purchase Agreements or ERPAs are agreements between a seller and a buyer of Certified Emission Reductions (CERs, also known as climate or carbon credits) under the Clean Development Mechanism (CDM). The seller may be the developer of a CDM project and the buyer may be a company or country that needs the CERs for legal compliance purposes pursuant to their emissions limits under the Kyoto Protocol (in the case of countries) or national law (in the case of emitters located in countries that have ratified the Kyoto Protocol). Also, either or both parties can simply be traders in CERs as a result of the large secondary market that has emerged for this environmental commodity. CERs are generated by projects undertaken under the CDM. ERPAs contain a number of standard terms relating to the creation, ownership and transfer of the CERs.
Other emissions trading agreements have also been developed that are designed for voluntary carbon markets, but are based on principles similar to that codified in ERPAs.
4.8.3 Environmental Attributes Trading Agreement
Environmental attributesare one of the two commodities produced by a clean energy project (the other being energy production or savings) and consist of the environmental advantages or emissions benefits associated with the project. Environmental attributes trading agreements are a mechanism to sell and purchase environmental attributes.
Environmental attributes have assumed the status of a tradable commodity and are often codified in the form of Renewable Energy Certificates (RECs; there are also energy efficiency certificates or EECs). In addition to environmental attributes and RECs, they are also known as green tags, renewable energy credits, green tickets, green certificates, tradable renewable energy credits, and tradable renewable certificates. In international parlance, green certificates relate to renewable energy, white certificates (particularly in the European Union) relate to energy efficiency, and brown certificates relate to greenhouse gas emissions.
It is important to note that environment attributes are often regulatory constructs of various levels of government, and thus subject to change. The upshot is that the environmental attributes of a clean energy project have a cash value which can sometimes be more than the value of the energy produced and can be an important source of revenue. A purchaser of the RECs may be different than the purchaser of the clean energy. Jurisdictions using RECs may have compliance (mandatory) or voluntary markets. RECs arise as a byproduct of energy savings or clean energy production; no additional capital cost or input cost is required.
Sample Emissions/Environmental Attributes Trading Agreements
Environmental attributesare one of the two commodities produced by a clean energy project (the other being energy production or savings) and consist of the environmental advantages or emissions benefits associated with the project. Environmental attributes trading agreements are a mechanism to sell and purchase environmental attributes.
Environmental attributes have assumed the status of a tradable commodity and are often codified in the form of Renewable Energy Certificates (RECs; there are also energy efficiency certificates or EECs). In addition to environmental attributes and RECs, they are also known as green tags, renewable energy credits, green tickets, green certificates, tradable renewable energy credits, and tradable renewable certificates. In international parlance, green certificates relate to renewable energy, white certificates (particularly in the European Union) relate to energy efficiency, and brown certificates relate to greenhouse gas emissions.
It is important to note that environment attributes are often regulatory constructs of various levels of government, and thus subject to change. The upshot is that the environmental attributes of a clean energy project have a cash value which can sometimes be more than the value of the energy produced and can be an important source of revenue. A purchaser of the RECs may be different than the purchaser of the clean energy. Jurisdictions using RECs may have compliance (mandatory) or voluntary markets. RECs arise as a byproduct of energy savings or clean energy production; no additional capital cost or input cost is required.
Sample Emissions/Environmental Attributes Trading Agreements
