Strong markets await regulatory changes

By Nick Roumpis

Markets for renewable energy certificates (RECs) are growing around the world, but regulatory developments are keeping the biggest market players on their toes, says Nick Roumpis

2017 was a good year for RECs around the globe. The traditionally strong markets of Europe and North America prospered while recent adopters such as China increased in importance.
In the US, after a slow 2016 when the supply of certificates outstripped demand, the renewable energy market saw healthy growth.

Izzet Bensusan, CEO of Karbone, which was again voted Best Advisory and Best Broker in the North American RECs market, says: "Volume has gone up ... because the Renewable Portfolio Standards (RPSs) call for more introduction of renewable energy in different states. As a result, you have more credits generated and more trading of these credits taking place."

He points to states such as Pennsylvania, New Jersey, New York and Illinois, where regional legislation is expected to boost the renewable energy sector further. Pennsylvania and New Jersey are already among the biggest RECs markets in the US.

Bensusan also notes growing demand for RECs from voluntary corporate buyers and attributes this to an increase in impact investing over the past 12 months. "There is a big trend towards the voluntary market driven by much more impact investing going on," he said.

Scott Eidson, vice-president of environmental markets at 3Degrees, which retained the title of Best Trading Company – North America, agrees: "The number of participants, renewables capacity and market pulse, all point towards needing new renewables to meet voracious voluntary demand.

"We believe that voluntary and compliance markets will continue to grow in 2018 and beyond, and that several states will either extend or increase renewables mandates, partly in response to the current federal administration's stance on the environment and energy.

"Look out for volatile markets, rising voluntary prices, and interesting regulatory changes at the state level in 2018."

The Trump administration is having an unsettling impact on the market because of uncertainty about possible changes in federal regulations.

"This has been a crazy transition year for the market," says Randy Lack, chief marketing officer at Element Markets, which claimed the titles of Best Broker, Best Advisory and Best Trading Company for Renewable Identification Numbers (RINs). "Once Trump was elected, we saw him nominating Scott Pruitt as the Environmental Protection Agency (EPA) administrator, so someone who had sued EPA was actually nominated to handle EPA.

"There was a fear that there would be steps to unwind a lot of the progress around the renewable fuel sector, but ... this has been the best year in our company's history," he adds.

The EPA oversees the Renewable Fuel Standard (RFS), a national policy to ensure each gallon of gasoline or diesel sold in the US contains a certain percentage of biofuel. RINs are the credits issued to biofuel producers to monitor compliance with the RFS.

The price of RINs rose steadily under the Obama administration, as the EPA tightened the RFS and the agency had planned to raise the targets to record levels in late 2016. But, after billionaire investor Carl Icahn was appointed as an advisor to President Trump, this tightening did not go ahead. Icahn is the majority owner of refiner CVR Energy which has lobbied for lower RFS targets.

The market reacted by sending RINs down to a 12-month low in February. However, the administration's failure to act on CVR's recommendations saw prices rebound by 200% by August, and Ichan resigned from his government role later that month.

Of the various RIN categories – for biodiesel, bioethanol etc – biogas was the strongest market in 2017, Lack says. "The prices have basically doubled again this year. It's a very robust market and we are seeing a lot of new biogas projects".

Biogas currently accounts for the largest number of projects and the most capex of all the US renewable fuels, he adds.

David Bennett, partner of energy compliance services at Weaver, which was voted Best Verifier in the RINs market, says: "One of the biggest factors is the change in the administration in Washington and there is a lot of uncertainty around the effect this might have on the renewable fuels market." But he agrees that none of the proposed changes has been confirmed so far.

In the RECs market, there is less concern about the new administration. "You really need to look into what kind of impact they have had," says Karbone's Bensusan. "The federal government does not have an impact on renewable energy credits on a local level, while the RPS [which set targets for renewable energy output] are decided by the states.

"The investment tax credit (ITC) has largely been decided by the previous administration and they are not touching it." The ITC allows some investors to recoup up to 30% of the value of renewables projects and was due to expire at the end of 2015, but has been extended to between 2019 and 2022.

Carl Steen, partner at Dentons, which was voted Best Law Firm for North American RECs, adds: "The RECs market in North America is a maturing market and it's not really liquid yet, it is largely driven by compliance and in many cases, it's a state-by-state driven market, so you have a wide fluctuation of prices in different markets.

"The RECs market will hopefully mature, but right now it's unpredictable. If there are additional compliance requirements, this will give a boost to the RECs trading market.

"There is tension between what is happening at the state level and what is happening at the federal level. When this harmonises, you will see a more robust RECs market."

Steen notes that there is also growing momentum for more specialised RECs in certain states. For example, "RECs for offshore wind are likely to develop in the next few years". New Jersey and Maryland already have separate REC incentives in place for offshore wind energy and New York and Massachusetts are considering similar schemes, he notes. Some states also have separate REC programmes for solar energy.

In Europe, demand for renewable energy credits, known as 'Guarantees of Origin' (GOs), has risen by more than 80% between 2011 and 2016 and this momentum continued in 2017 as companies are gearing up their efforts to achieve their 2020 clean energy targets.

GOs are issued to power producers for each MWh of renewable energy generated, in the same way as RECs in the US, and they can be traded on the Leipzig-based European Energy Exchange (EEX).

But Marie Bluett, head of renewable portfolio management at South Pole Group, which once again took the titles of Best Trading Company and Best Advisory – Europe, notes that the momentum is global, not just European.

"We see two markets joining forces, the voluntary carbon world and the renewable energy world," Bluett says.

In the last year, there has been "tremendous growth in renewable energy solutions in Asia, Africa and South America," she adds.

In Asia, the most significant development was China's launch of a pilot national REC scheme in July. The National Development and Reform Commission (NDRC) said it was intended to incentivise further development of the renewable energy sector without government subsidies.

As in established RECs markets, the Chinese RECs, known as Green Certificates, will be used by suppliers of electricity to prove how much of their purchased power came from renewable sources, excluding hydro.

Bluett says: "China has been super interesting. On the one hand you have the international RECs, but then you have the Chinese government looking to implement its own certificate scheme.

"The more governments get involved in renewable energy tracking, the more solid the market will become."

Michelle Davies, head of clean energy and sustainability at Eversheds Sutherland, is optimistic about renewables globally. "We expect clean energy to dominate our global approach to power and its utilisation and supply," she says.

A trend towards more aggregation of projects along with new finance tools will culminate in "renewable energy being the dominant power source being developed on a non-supported basis with enhanced technology solutions making it even more competitive," she predicts.

Eversheds Sutherland was voted Best Law Firm in the RINs market.

Australia also saw a lot of activity in 2017.

"The Australian renewables market has been nothing short of crazy in 2017," says Chris Halliwell, senior broker at TFS Green, which was again voted Best Broker in that market. "[There was] a boom in projects due to an influx of capital and soaring energy prices, and very high RECs prices due to the federal Renewable Energy Target (RET) scheme running short.

"A lot of adaptation was required for both developers and off-takers to structure deals in this environment," he adds.

Australia launched its RET scheme in 2011 and, since then, it has operated in two parts, the Small-scale Renewable Energy Scheme (SRES) and the Large-scale RET (LRET).

"2018 is going to be a huge year," Halliwell predicts. "The RET scheme is expected to run into a short squeeze." This will create chaos in the short-term but create opportunities to take positions for the following years, he says. "Stand by for a big one."

Australia has set a target for large-scale generation of 33,000 GWh, meaning that around 23.5% of the country's electricity in 2020 will be from renewable sources.

The government is currently reviewing its RET scheme and a new national target could emerge in 2018.

"The future of the market very much depends on policy decisions," says Martijn Wilder, partner at Baker & McKenzie, the long-standing winner in the Best Law Firm – Australia, category. "There has been a lot of healthy trading but the extent to which that volume increase will affect the price really depends on what happens on the policy side".

Energy has been the top political issue in Australia for the past year, he notes.

"No matter what happens, there is going to be a mechanism to regulate emissions and to encourage renewable energy and certificates," he says. "The actual specifics for that are still unknown – this is the challenge. The details are just not there."