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January 24, 2011

Prices decline, but RGGI impact solid

It’s been nearly two-and-a-half years since the Regional Greenhouse Gas Initiative held its first auction of carbon credits. In that time, the emissions cap-and-trade program has raised $777.5 million in carbon credit sales to power plants operating in the 10 participating Northeast and mid-Atlantic states. Maine’s share to date is $23.5 million, the bulk of which has funded energy-efficiency programs in the state, including more than a dozen major projects.

But while Maine supporters of RGGI tout its benefits, efforts to establish a federal cap-and-trade program have fizzled, impacting the RGGI market. Future use of the funds remains in question, and in December, controversy erupted when New York, New Jersey and New Hampshire acknowledged using RGGI proceeds to balance their state budgets, not for energy programs. New Hampshire legislators have since submitted a bill to withdraw from RGGI.

Last year, Gov. John Baldacci vowed not to divert RGGI funds, according to the Kennebec Journal. But the state has an $850 million budget hole, and the new Legislature and administration are not barred from using RGGI money to bail out the budget. A memorandum of understanding signed by the 10 governors in 2005 that initiated RGGI stipulated that states use at least 25% of the proceeds for energy efficiency, but that isn’t a mandate.

Adrienne Bennett, Gov. Paul LePage’s press secretary, says the administration is not sure at this point if RGGI funds will be used to help balance the budget, due to be drafted in February. “We haven’t gotten that far yet.”

Even with three states diverting a collective $158 million to their state budgets, the average amount of RGGI funds used for energy-efficiency projects is 64%, while 14% helps low-income ratepayers to pay their energy bills and 3% funds other greenhouse gas-reduction programs, says David Littell, chair of RGGI Inc., the nonprofit established to manage the program. Maine’s commitment to energy efficiency is the highest at 95%, with the remainder going toward administrative costs.

As states grapple with budget pressures, businesses are struggling too, and using RGGI funds to help them achieve energy savings can offset that. “It makes businesses more competitive during a recessionary time, which has grown much more important as the program has evolved than when it was originally designed,” says Littell.

Clearing the air

RGGI made history at its first auction in September 2008, becoming the country’s first mandatory, market-based program designed to reduce carbon dioxide emissions. The program set an initial regionwide emissions cap of 188 million short tons a year from 2009-2014, then reduces that cap 10% overall by 2018. Fossil fuel power plants with a capacity of 25 megawatts or greater — a little more than 200 — are required to purchase the carbon credits to offset their annual emissions, with one credit equaling one short ton. In Maine, six power plants are required to purchase credits.

RGGI auctions are conducted electronically and modeled on similar energy-related auctions, says Littell. All participants can bid what they want, but in the end they all pay the same price, called the clearing price, set just below the lowest bid accepted.

The first auction netted a clearing price of $3.07, and the price rose to $3.51 a ton in the third auction held in March 2009. Since then, however, it has dropped, and lately sold at a floor price of $1.86. (As of this year, that price has increased to $1.89.) The economic climate has “driven emissions downward,” as have efficiency upgrades, reducing demand for credits. Speculation about a federal program helped keep prices up. All of those forces “[create] a situation where there are more allowances than the market needs right now,” Littell says.

However, Littell says “the market is functioning well,” and RGGI will undertake an overall assessment of the program as directed by the memorandum of understanding.

Michael Stoddard, head of the Efficiency Maine Trust, the state organization that directs energy-efficiency funds, says the downward trend will continue. “We’re not going to see $11 million a year anymore. If people think there’s going to be just tons of money to take and redeploy, it doesn’t look like it’s going to be that way. It’ll be more like $3 or $4 million a year,” he says.

Efficiency Maine has used more than half of Maine’s RGGI funds, $13.5 million, to fund its business programs, which include assistance for lighting, HVAC and system upgrades. Residential programs have received $4.2 million, and a fund to help large projects has received $7.1 million, given as grants to 19 companies and organizations, including paper mills, manufacturers and schools. Efficiency Maine targeted the funds to projects that would result in the highest energy savings for the least amount of money, says Stoddard.

The program has multiple benefits. The cap on emissions will curb greenhouse gases entering the atmosphere, while the money raised by selling carbon credits funds efficiencies that further reduce emissions. Businesses and customers who directly receive grants or funding through the programs see their energy costs decrease, and large grants can also help leverage private dollars.

And though critics argue cap-and-trade programs will force power plants to increase electricity prices to cover the cost of the credits, Stoddard says that increase is marginal and offset by a decrease in consumption. The overall reduction in electricity demand shrinks peak usage, cutting the need for new power plants and bringing electricity costs down for everyone, he says. According to Environment Northeast, a nonprofit tracking RGGI, emissions in the RGGI region have dropped about 30% since the program began, and wholesale electricity prices have fallen 40%-50%. “It’s at least a double win from an economic perspective,” says Stoddard.

Thanks to a $314,200 grant, chemical manufacturer GAC Chemical in Searsport completed an upgrade of its boilers and lighting in December. The nearly $630,000 project was too expensive for the company to finance on its own, says President David Colter. Updated software for two boilers and technology to recapture steam from manufacturing and heating processes is expected to cut GAC Chemical’s No. 6 oil costs by 20%, generating an anticipated payoff in three years. Improved lighting in its dozen or so buildings will also save money.

The investment will help the company, which has about 55 workers, preserve jobs, Colter says. “The small business community has limited opportunities to obtain resources. Looking at this project, it demonstrated that it’s good for GAC Chemical, it’s good for the state … and it’s good for the environment.”

 

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