Resource shuffling prohibition under the California cap-and-trade rules
Category: California cap-and-trade
On October 18, 2012, in Resolution 12-51, the Air Resources Board directed staff, in consultation with the California Independent System Operator (CAISO), the California Public Utilities Commission (CPUC), the California Energy Commission (CEC), and stakeholders, to refine the definition of resource shuffling.
The enforcement of the attestation requirements has been suspended for the period from January 1, 2013 to June 30, 2014. This means that no attestation will be required to be submitted in 2014 with respect to the 2013 emissions year.
Resource shuffling is a cap-and-trade concept that appears very vague. I am not overly upset with this fact as, apparently, the inventors of this regulatory formula i.e. Californian legislators also don’t have at present a clear and precise idea how this roughly outlined rule should be filled in with content. The said supposition is strongly supported by the presentation for the Cap-and-Trade Program Electricity Workshop held by California Air Resources Board on May 4, 2012 (available at the ARB website).
Section 95852(b)(2) of the California Final Regulation Order:
Resource shuffling is prohibited and is a violation of this article. First Deliverers must submit the following attestations annually to ARB, by June 1, in writing, by certified mail only:
(A) "I certify under penalty of perjury of the laws of the State of California that [facility or company name] for which I am an agent has not engaged in the activity of resource shuffling to reduce compliance obligation for emissions, based on emission reductions that have not occurred as reported under MRR."
Resource Shuffling is defined in the California cap-and-trade legislation as ‘any plan, scheme, or artifice to receive credit based on emissions reductions that have not occurred, involving delivery of electricity to the California grid.’
In contrast to this vaguely designed definition, Section 95852(b)(2) of the California Final Regulation Order unambiguously prohibits resource shuffling and requires clear-cut attestation by the market participant that the company or facility has not engaged in resource shuffling.
So, if such a strictly formulated restriction is at issue, what resource shuffling prohibition will mean in practice? The answer to this question is burdened with difficulty since the California scheme is quite unique in that regard and generally there are not direct analogies in other cap-and-trades.
Some helpful hints provides a brochure ‘California Agency Unanimously Adopts Cap-and-Trade Regulations, A Review of Key Program Design Elements and Outstanding Issues’ October 25, 2011 (at www.linklaters.com) which indicates that, ‘In its simplest form, resource shuffling would prevent importing “clean” power from a neighboring state while exporting or otherwise diverting “dirty” power originally scheduled for use in California.’
The said study points out that the prohibition against resource shuffling is intended to prevent covered entities from receiving credit for emissions reductions by simply changing the location where “dirty” energy is delivered or used.
It gives an example that the resource shuffling rule will prevent a generator with a mixed portfolio of generating assets in neighbouring states from receiving credit for emissions reductions simply by shuffling dispatch points within its portfolio without reducing actual GHG emissions.
Effective January 1, 2013, the following substitutions of electricity deliveries from a higher emission resource with electricity deliveries from a lower emission resource shall not constitute resource shuffling:
1. Electricity deliveries that are caused by the procurement of electricity eligible to be counted towards and purchased for Renewable Portfolio Standard (RPS) compliance in California.
2. Electricity deliveries made for the purpose of compliance with state or federal laws and regulations, including the Emission Performance Standard (EPS) rules established by CEC and the CPUC pursuant to Senate Bill 1368.
3. Electricity deliveries made for the purpose of compliance with requirements related to maintaining reliable grid operations, such as North American Electric Reliability Corporation (NERC) Reliability Standards, and Reliability Coordinator directives, including the provision of electricity between balancing authorities or load-serving entities when required to alleviate emergency grid conditions.
4. Electricity deliveries made for the purpose of compliance with either a judicially approved settlement of litigation or a settlement of a transaction dispute pursuant to the dispute resolution terms and conditions of a contract for reasons other than reducing GHG compliance obligations.
5. Electricity deliveries that are necessitated by the retirement of resources.
6. Electricity deliveries that are necessitated by termination of a contract or divestiture of resources for reasons other than reducing GHG compliance obligation.
7. Electricity deliveries that are necessitated by early termination of a contract for, or full or partial divestiture of, resources subject to the EPS rules.
8. Electricity deliveries that are necessitated by expiration of a contract.
9. Electricity deliveries pursuant to contracts for short term delivery of electricity with terms of no more than 12 months, for either specified or unspecified power, linked to the selling off of power from, or assigning of a contract for, electricity subject to the EPS rules from a power plant that does not meet the EPS with which a California Electrical Distribution Utility has a contract, or in which a California Electrical Distribution Utility has an ownership share, and based on economic decisions including congestion costs but excluding implicit and explicit GHG costs. In evaluating these short term deliveries of electricity, ARB will consider the levels of past sales and purchases from similar resources of electricity, among other factors, to judge whether the activity is resource shuffling.
10.Short-term transactions and contracts for delivery of electricity with terms of no more than 12 months, or resulting from an economic bid or self-schedule that clears the CAISO day-ahead or real-time market, for either specified or unspecified power, based on economic decisions including implicit and explicit GHG costs and congestion costs, unless such activity is linked to the selling off of power from, or assigning of a contract for, electricity subject to the EPS rules from a power plant that does not meet the EPS with which a California Electricity Distribution Utility has a contract, or in which a California Electricity Distribution Utility has an ownership share, that is not covered under paragraphs 11, 12 or 13 below.
11.Electricity deliveries that are necessitated by operational emergencies or transmission or distribution constraints, including constraints caused by the inability to obtain or retain transmission rights, transmission curtailments or outages, or emergencies.
12.Electricity deliveries that are necessitated because a First Deliverer has surplus electricity (more than enough to meet demand) as a result of the First Deliverer being required to take electricity from specific generating units (e.g., electricity contracts with "must-take" or "must-run" provisions.).
13.Deliveries of electricity that are required to make up for transmission losses associated with electricity deliveries in California.
Similarly, any other importer or intermediary will not receive credit for emissions reductions simply by amending its contracts so that “dirty” power previously scheduled for delivery into California is sent to a neighbouring state and is replaced by “clean” power.
The study in question make also the hypothesis: ‘Without the prohibition against Resource Shuffling, one could envision the development of an interstate market for power swaps along California’s borders that would be characterized as swaps between California exporters of “dirty” power and California importers of “clean” power.’
Nevertheless, the precise delineation of factual circumstances that can be captured by the provision in question appears to be the one of the most uncertain interpretational questions in the California cap-and-trade regulations. The difficulties in their resolving would be magnified by the fact that, as was mentioned, there are no at present appropriate parallels for this regulatory concept in other emission trading schemes.
Certain examples of the possible difficulties are envisioned in the above-cited study:
‘For example, it is not clear under the Regulations whether an entity that switches its portfolio from a high emissions factor source to a low emissions factor source is in compliance if that high emissions factor source continues to sell its power to other market participants – including those outside of California. Since the high emissions factor source is still generating power, its emissions have not been reduced. Can the entity that swapped its power sources confidently claim it is not “Resource Shuffling” despite the fact that it has no authority to determine whether and to whom the high emissions factor sourced power is sold? To take this hypothetical to the extreme, the Regulations could permit California to pursue and sanction entities for noncompliance with the Regulations based on acts taken by third parties well beyond California’s borders.’
All the above ambiguities arise mainly from overly broad and imprecise definition for resource shuffling included in California cap-and-trade regulations and there are serious grounds for its change.
The ARB staff provided limited guidance regarding what is not resource shuffling ('safe harbor' concept -see box). Cases not covered by the attached list will have to be resolved on an ad hoc basis, ultimately by judicial judgments.
Examples of resource shuffling that have been indicated in the ARB Guidance so far are:
1. Substituting relatively lower emission electricity to replace electricity generated at a high emission power plant procured by a First Deliverer under a long-term contract or ownership arrangement, when the power plant does not meet California's EPS, and the substitution is made in order to reduce a First Deliverer's compliance obligation.
2. Assigning a long-term contract for high emission electricity specified directly above to a third party, for the purpose of reducing a compliance obligation.
In the ARB opinion expressed in the November 2012 Guidance, resource shuffling 'involves substitution of electricity from relatively lower emitting generation for electricity from relatively high emitting generation, when such substitution does not qualify under the "safe harbors" listed above. Resource shuffling is evident when a First Deliverer knowingly substitutes electricity with relatively lower emissions for electricity with relatively higher emissions as part of a plan to reduce the First Deliverer's compliance obligation under the Cap-and-Trade Regulation.'
In earlier workshop materials the instances of the resource shuffling have been named, among others, as:
- cherry picking,
- facility swapping,
So, let’s hope that by the time the prohibition against resource shuffling will be included in the EU ETS legislation, Californian carbon market resolves the most part of the problems regarding the practical application for this rule.