# Presentation: 513198

## “Environmental Finance Mechanisms through tradable emission credits in the U.S.”

- Peter Zaborowsky
- Evolution Markets LLC
- 914-323-0255, pzabo@evomarkets.com

## Presentation Overview

- Introduction to Evolution Markets
- Broad overview of the U.S. Emission Credit Markets
- Focus on the NOx Emission Credit Markets
- Regional Emission Reduction Credits for New Sources
- Cap and Trade Programs (SIP Call, HGA, RECLAIM)
- Examples of leveraging Emissions Markets in reduction projects
- Hypothetical repowering of oil fired baseload plant     with gas fired combined cycle

## Evolution Markets LLC

- Leading broker and advisor serving the Emissions and Coal markets
- Emissions Markets include:
- SO2 Allowances, NOx Allowances, ERCs
- GHG Reductions, Renewable Energy Credits
- Ranked #1 SO2 and NOx Broker by *Environmental Finance* in their last 3 annual industry surveys
- Comprised of brokers, traders, lawyers, utility engineers, coal & steel executives
- Our staff’s firsts include:
- first OTC and SIP NOx allowance transaction
- first SO2 and SIP NOx allowance option transaction
- first ERC transaction in NY and VA
- first weather derivative transaction
- first AAU transaction under the Kyoto Protocol
- first brokered EU allowances under European GHG trading

## Where are the Emission Markets?

- SO2 allowances - annual, nationwide 25MW+ EGUs only
- NOx allowances -19 states, May-Sep, 25MW+ EGUs and 250MMBTU+ non-EGU boilers
- HGA and RECLAIM – annual NOx allowance program
- CT and NY – non-ozone season NOx allowance program
- ERC markets – new sources only, in states with non-attainment areas

## Focus on Different Types of NOx Credits

- Regional emission reduction credit (ERC) markets (also known as offsets) required under new source review (NSR) in several states
- Large expansion of non-attainment regions expected under new 8 hour ozone standard
- Annual May-Sept NOx cap and trade market under the 19 state EPA NOx SIP Call in eastern U.S.
- Impacts all 25MW+ generators and large stationary boilers
- Annual allowance markets in Houston (down    to 10 ton sources) and Los Angeles (down        to 4 ton sources)

## Permanent Emission Reduction Credits

- Permanent, must pass 5 tests – RQSEP
- States with non-attainment areas include provisions in their State Implementation Plan (SIP) to generate ERCs
- ERCs exist for a variety of criteria pollutants (NOx, VOC, SOx, PM)
- State agencies certify ERCs after review and notice period
- Specified in tons per year (tpy)
- Usually traded to new or expanding sources that must meet Lowest Achievable Emission Rate (LAER) under New Source Review (NSR) and require “offsets”
- Bankable and held in state registry
- Illiquid market that usually only trades when a new plant is being constructed.  Transactions are usually immediate settlement, contingent forward sales or call options.

## NSR Under New 8 Hour Ozone Standard

- Regions in U.S. that are impacted by ERC trading will expand greatly
- EPA projections (lower map) illustrate impact on midwest and southeast regions
- Assuming a LAER of 0.015lbs-NOx/MMBTU for a new gas fired combined cycle plant locating in a severe non-attainment region, how many NOx ERCs are needed? (7,000HR, .9cf)
-  250MW = 103*1.3 = 134 ERCs
-  500MW = 268 ERCs

## NOx ERC Market Pricing Overview

## The Growing NOx Allowance Market (from 9 to 19 States, OTRSIP Call)

## Emission Credit Marketplace

- Allowances and ERCs trade through several over-the-counter brokers, there is no benchmark exchange but Evolution has approximately 60% market share.
- Evolution tracks all trades and publishes a daily market report at 5PM with closing bid-ask prices for actively traded market
- _[www.evomarkets.com](http://www.evomarkets.com/)__ for free account access_
- Trades are executed by verbal confirmation on taped lines.  Evolution assists in preparation of contract documents, and credit transfer documents

## Opportunities to leverage the Emission Markets

- Look at variety of approaches to create reductions:
- Repowering with newer, cleaner technology
- Switching to a lower emitting fuel
- Curtailment applications (limiting future operations)
- Shutdowns
- Energy efficiency/conservation initiatives
- Renewable energy development
- Take inventory of emission reduction potential at facilities and compare to regional market values:
- Reductions at a facility within an existing cap and trade program will be easiest to monetize (usually most liquid)
- Reductions from facilities that will certify ERCs are more difficult to monetize and may require programmatic approach        (administratively more burdensome)

## Repower oil baseload plant with new gas-fired CC

- Take an older 250MW oil fired simple cycle unit, operating at 0.22lbs NOx/MMBtu, heat rate of 10,000 BTUs/KWhr, 80% annual and ozone season capacity factor
- Baseline annual emissions of 1,971 and 821 ozone season (only 548 ozone season allowances allocated)
- Repower with new 250MW 7,000 BTUs/KWhr, 0.015lbs NOx/MMBTU gas combined cycle
- Annual emissions drop to 109 and ozone season to 46 (while reserving a 95% capacity factor for new facility)
- Sell a 5 year stream of NOx allowances immediately to finance upfront costs
- 502 tons (548-46) of each vintage year 2004-2008, raises $6,676,600 before work is even completed
- Certify permanent NOx ERCs through state air agency for differential annual emissions of 1,862 tons per year
- ERCs can only be certified after reductions have been created and may take from 3-9 months to complete certification process
- ERCs can begin to be “presold” on a “when certified” basis.  Ultimate ERC revenue timing will depend on active buyers in market
- ERC revenue should range from $9.3M - $18M for severe                           non-attainment regions in Eastern U.S., significantly more in                  Houston or several air districts in CA