Renewable energy hedge deal blazes carbon-neutral trail



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Becoming carbon neutral in a cost-effective manner has one New Hampshire university seeing green, both in terms of environmental sustainability and cost savings. According to Southern New Hampshire University President Paul LeBlanc, the Manchester school has become the state’s first carbon-neutral university, thanks in part to an innovative renewable energy hedge agreement with an out-of-state energy producer. “This is firmly grounded in our background as a business school,” said LeBlanc. “This is innovative and very consistent with who we’ve been and who we are. The policy, financial model, the innovation — it is all part of our DNA.” Under the agreement with PPM Energy Inc.’s Maple Ridge Wind Farm in New York, SNHU will stabilize its energy costs while also securing enough renewable energy credits to more than offset its own carbon output. “From a business perspective, we lock in our energy costs for the next 15 years,” said LeBlanc. “From a community perspective, we are being innovative by adapting a sophisticated but well-established financial tool to the relationship of renewable energy providers and consumers. From an environmental perspective, becoming a carbon-neutral campus is a substantial and dramatic illustration of the university’s commitment to sustainability.” Through this new so-called “contract for differences” hedge, or CFD, SNHU has contracted with PPM for a virtual financial swap based on the 15 million kilowatt-hours of electricity SNHU will use per year at a fixed “strike” price of 7.6 cents per kwh. If PPM earns more than this agreed-upon strike price each month from sales into its local spot market it will pay SNHU the difference. If PPM earns less than this agreed-upon strike price SNHU will compensate PPM for its shortfall. While SNHU will continue purchasing natural gas and electricity from its traditional sources in New Hampshire, and PPM will continue supplying its renewable energy to its local spot market, the agreement works because the market prices for energy at PPM’s wind farm and for SNHU rise and fall in the same way based on the price of natural gas used to generate electricity, according to Roy Morrison, a wind hedge expert and director of SNHU’s Office of Sustainability. “This is all done virtually, but there is an absolutely clear audit trail to verify the hedge is kosher,” said Morrison. “It creates a fixed cost from a variable cost.” A win-win situation for both entities, this agreement takes the volatility out of energy prices, enabling the university to budget more effectively, said Morrison. And by ensuring PPM a steady income, the agreement allows for continued investment in renewable energy technology. As part of the agreement, SNHU will receive 17,500 renewable energy credits per year, offsetting its annual 11,400 tons of carbon emissions and allowing for additional carbon-offsetting projects, including retrofitting existing facilities. Becoming carbon neutral Although the popularity of wind hedges and CFDs is growing, SNHU may actually be the first organization or business to enter into a contract for both with a renewable energy producer, according to Morrison. “What this represents in a large sense is sustainability emerging into the marketplace,” said Morrison. Renewable energy credits, or RECs, represent the technology and environmental attributes of one megawatt-hour of electricity produced by a renewable source. Holders of RECs can either cash all of them, cash a portion of them and use the money to retrofit less-efficient facilities, retire them or sell them on the commodity market, LeBlanc said. As more and more states begin to adopt emission standards, higher-polluting companies find themselves buying RECs from less-polluting facilities in a market that continues to grow steadily, said renewable energy experts Ed Holt and Lori Bird. In their article, “Emerging Markets for RECs: Opportunities and Challenges,” Holt and Bird note that between 8 and 13 million mwh of RECs were available on the compliance market for a value of $140 million in 2004. Only 3 million mwh, of RECs valued between $15 and $45 million, were available on the voluntary market at that time. The two predict, however, that by 2010 the REC compliance market could grow to 45 million mwh, for a value of $600 million, and the voluntary market could grow to 20 million mwh, valued at between $100 and $300 million. Although energy providers in the state will soon be subject to minimum renewable standards, thanks to the recent passage of House Bill 873 (see sidebar), there are no mandates in place for Granite State businesses or institutions. But a growing number, like SNHU, have stepped forward, voluntarily putting innovative practices in place and exploring innovative renewable energy technology. Morrison and LeBlanc are confident the new model adopted by SNHU will continue to attract interest as more people begin to understand the financial and environmental benefits and realize it is a model that can be adapted to fit a company’s individual needs. “It makes sense for companies and institutions to have a relationship with renewable energy producers,” Morrison said. “We think this is an innovative program and that it has great potential,” added LeBlanc. “This is one big dramatic leap forward, and that’s kind of fun.”
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