Playin' by the Rules - When A Molecule's Pedigree is More Important than Its Energy Content

There is a fundamental difference in the way value is established in renewable, decarbonized energy markets versus traditional commodities. In traditional energy markets, value is defined by natural laws — physics, chemistry, geography. But in the world of renewables and decarbonization, value is primarily determined by man-made laws — RULES that specify what a particular flavor of energy is worth, what is required to prove that worth, and how that value is ultimately captured by market participants. In effect, a molecule’s (or electron’s) pedigree is as important — if not more important — than its energy content. Whether you are deep into renewables markets or you deal with energy commodities that are impacted by the rules, it is critically important that you understand everything about how these rules work and how they are regulated. In today’s RBN blog we’ll begin an exploration into the inner workings of energy transition market mechanisms.

It’s all about those rules. Here’s some examples of what we’re talking about:

Perhaps the most significant is the California LCFS — the state’s Low Carbon Fuel Standard. In the LCFS, each energy commodity or source (called a pathway) — and there are hundreds of them — has a carbon intensity “score” or CI. That score is determined by a methodology — an algorithm, based in part on targets laid out in California Assembly Bill 32 and Executive Order S-01-07, which are the basis for rules promulgated by the California Air Resources Board (CARB). It really comes down to this: Deliver low-CI energy within the guidelines, get a credit; deliver high-CI energy, pay a penalty. To get the credits, which can be quite lucrative, you just need to follow the rules (see Come Clean).

Another example is the federal Renewable Fuel Standard Program (RFS). It doles out credits and penalties based on Renewable Identification Numbers (RINs), which are effectively scores based on the feedstock used, the fuel type produced, energy inputs, greenhouse gas reduction, and all sorts of other factors (see The RIN And Stimpy Show). 

And a third example is the federal 45Q carbon sequestration tax credits for the disposal of carbon dioxide (CO₂). It works for you if the CO₂ comes from approved sources using approved technologies and, in some proposed legislation, using approved workers (see Way Down In The Hole, Part 3).