California Carbon Auction: Will Geothermal Value Finally Be Recognized?

19 january 2013

WASHINGTON D.C. — While public support for climate change aid is growing, U.S. negotiators once again offered no binding agreements on emissions reductions at the most recent United Nations climate talks – a stance that is becoming all too familiar to nations that see U.S. participation as crucial. Meanwhile a divided Congress has held off regulating carbon emissions, and some experts doubt that the nation will mandate protection of the climate via legislative act in the foreseeable future. Given hesitancy at the top, it was an act of leadership when California introduced Assembly Bill 32, the mandate to reduce greenhouse gas (GHG) emissions in the state to 1990 levels by 2020.

The newly implemented cap and trade system in California — one component of A.B. 32 — is a vehicle to reach that goal, and the geothermal industry is watching it closely.  California’s vast and naturally low-emitting geothermal resources play a significant role in reducing the state’s overall carbon emissions.  In November, companies made their first transactions in the auction-based system.

Geothermal Industry Watches Early Auction Results

California Air Resources Board (ARB) Chairwoman Mary D. Nichols told press the November 14 auction was a success.  Entities submitted sealed bids to the ARB, resulting in 100% of the available 2013 allowances sold.  But the measure of success for the program as outlined by requirements of AB 32 is not necessarily on how much money is raised; it’s whether the system is effective in reducing emissions.

William Glassley, Director of the California Geothermal Energy Collaborative, noted there were 23 million allowances sold in the auction, essentially equivalent to 23 million metric tonnes of CO₂ credits that can now be traded.  “The market may not have been as enthusiastic as some people hoped, but that’s a chunk of change; that’s not something to forget about,” he pointed out.

Glassley talked with the Geothermal Energy Association (GEA) about the Golden State’s groundbreaking efforts and the scenario that translates as opportunity for the geothermal industry.  “I think that the approach they’re taking in regard to the cap and trade is a very thoughtful one,” he said.  “They went through a significant process in evaluating what entities should be included as responsible parties.”

The program’s designers required entities that produce 25,000 or more metric tonnes of CO₂ equivalent per year to be subject to the carbon cap.  Those entities can still pollute, but must purchase allowances for it.  Since the number of allowances for sale will shrink over time, it is expected that entities will implement emission reduction measures to reduce the allowances they will need, and that allowances owned by the market could grow in value.  Free allowances make up part of the program, and this is another aspect that will change over time as ARB decreases the portion of allowances that are given away free.

Geothermal plants do not emit GHG levels to be required to participate in the cap and trade, but geothermal energy providers could choose to opt-in to the program, thereby increasing the visibility of geothermal as part of the trading process and buying into the value of allowances.  Some entities could potentially get free allowances by opting in.  According to guidance from CARB (PDF) on opting in to the program and requesting free allowances, “For entities within sectors receiving free allocation through the product-based allocation methodology, an entity may want to opt in if they are more efficient than other entities in the sector. An entity that purchases steam from another entity may also be eligible to receive allowances to compensate for a portion of the cap-and-trade costs included in purchased steam.”

Geothermal providers generally did not choose to participate in the first auction, but could opt in to later auctions.  “It is probably a wait-and-see approach, and that may be smart,” said Glassley.  And while geothermal companies aren’t necessarily involved in the bidding process initially, they should watch and learn from the process, he said.

“It’s important at this stage that there be open discussions in the geothermal community about the various pros and cons of strategies for participating in the process,” Glassley said.  Entities can put strategies to work in future quarterly auctions.

Geothermal Is A Sure Bet to Minimize GHG Emissions

California’s internal questions over how to minimize the emissions of the energy sector are coming out in the process.  For many familiar with the technology, geothermal energy is simply a logical answer.  Geothermal plants emit extremely low levels of GHGs — zero emissions in some cases — and provide a firm yet flexible alternative to high-emission energy sources such as coal and natural gas.

The geothermal industry has supported California’s efforts, offering geothermal as a roadmap to meeting emissions-reduction goals.

“GEA applauds California’s efforts to reduce greenhouse gas emissions by 30% by the year 2020. This ambitious goal will serve to mitigate global climate change and increase America’s energy security, and geothermal is poised to provide the Golden State with the roadmap to meet this target,” said GEA Executive Director Karl Gawell. “California’s program should serve as a model for other states and the federal government as we seek energy independence, job growth and a cleaner, safer environment for future generations.”

Last month GEA released a new report detailing GHG emissions as they relate to geothermal.  Geothermal plant emissions are substantially lower than those of traditional fossil-fuel plants, like natural gas and coal plants. According to the report an average geothermal power plant emits about 5% of the carbon dioxide, 1% of the sulfur dioxide, and less than 1% of the nitrous oxide emitted by a coal-fired plant of equal size.

Glassley said he sees potential through the cap-and-trade process for greater visibility of the value that geothermal energy provides as a commodity.  “The role geothermal could play is not appreciated enough,” he said.  “It’s a real learning opportunity not only for the geothermal community, but for the public at large, the regulatory agencies, the Resources Board, and the California PUC.”

GEA has noted that in 2010, geothermal energy provided approximately 42% of California’s commercial in-state renewable electricity generation.  Various estimates of the additional future potential of geothermal energy in the state range from 3,186 to 24,750 MW using conventional and incrementally improved technologies, or between 10% and 90% of the estimated increases in demand for new power generation for the state.

A Carbon Trading Future in the U.S. and Beyond

This is not the first cap and trade system in the U.S., but it differs from the Regional Greenhouse Gas Initiative, begun in 2009 in northeastern states, in many ways.  That system only limits carbon dioxide emissions from electric utilities, but California’s new program goes beyond to include large industrial facilities in 2013 and will add distributors of transportation, natural gas and other fuels in 2015.

Ideally, other states will introduce similar systems or even join California’s system. Recently adopted regulations in Quebec will facilitate carbon trading between the two jurisdictions, showing there is more than just idealism paving the way.

It seems likely that similar systems could be developed in different states or that a multi-state approach will pan out, Glassley told the GEA.  “This is probably where the future is going,” he said, “so it would be really smart to be looking at the California example, and for the geothermal community specifically to improve its visibility and the recognition of its positive character so that when markets are put together in the future, they would explicitly take advantage of the opportunities geothermal provides.”

“The role geothermal could play in the landscape of RPS goals and the cap-and-trade is diminished if companies aren’t aggressively pursuing a presence out there,” Glassley emphasized.

Geothermal could play a big part in pioneering efforts that will lead to success in the long run for the California system and beyond.  Australia, for example, just enacted a carbon tax which is scheduled to convert to a cap-and-trade system in 2015. The longest running program is the European Union’s Emissions Trading System, which became operational in 2005.  China is now working with the EU to establish a cap-and-trade program in eight of its cities.  The California program “is likely to influence the design of emerging programs in Australia, South Korea and even China,” wrote Dallas Burtraw, Senior Fellow and Darius Gaskins Chair, Resources for the Future, in an op-ed to the Sacramento Bee.

Opportunities for Distributed Generation Expansion in California

By paying close attention as the cap-and-trade system plays out over the next few auction cycles, the industry can look forward to getting a sense of the opportunity for the utility-scale geothermal industry to gain visibility as well as be a larger part of the process of determining what aspects of the program might be used in future or expanded programs.

“Given what the geothermal industry has, namely the ability to generate power without significant emissions, it can be a great opportunity to get some kind of credit and recognition from that,” Glassley said.

Glassley noted that California also presents opportunities for community-scale distributed generation geothermal projects. California’s investor-owned utilities can set up independently of major utilities, and there are now 16 of these community choice segregation efforts underway.  This could result in a significant expansion for geothermal on the distributed generation level.

“Many of those efforts are happening in places where there are geothermal resources,” Glassley said.  “The community choice segregated groups are interested in geothermal, but aren’t sure how to go about it.  They can talk in terms of how many megawatts they need, but they don’t know how to evaluable their resources, and the geothermal industry can provide that service; we could see distributed generation take off as well.”