Each week, we’re compiling the most relevant news stories from diverse sources online, connecting the latest environmental and energy economics research to global current events, real-time public discourse, and policy decisions. Here are some questions we’re asking and addressing with our research chops this week:
What financial arrangements are available to generate revenue for wind farms and incentivize operators to make sure equipment is reliable in times of crisis?
After the power crisis in Texas, many renewable energy investors have been reexamining their investments in Texas wind power—but not entirely because of turbines going offline during the freeze. Instead, a common arrangement for mitigating financial risks, known as hedges, is to blame for the dozens of wind operators across the state that now confront financial ruin. With hedges, a wind operator agrees to provide a fixed amount of power at a set price to a counterparty, usually a bank. If unable to provide the agreed amount of energy, the wind operator is obligated to purchase electricity on the wholesale market; at the peak of the crisis, costs ballooned from a typical price of around $22 per megawatt-hour to a staggering $9,000, leading many wind farms to owe more money to banks than their farms are worth. Many investors are now considering other financing arrangements as less risky alternatives, such as power purchase agreements, wherein the wind project sells energy to a utility under a long-term contract.
As RFF’s Jay Bartlett explains in a new blog post, wind projects in Texas typically structure their revenue in three ways: merchant arrangements, where wind projects receive revenue directly from the wholesale market at varying prices; power purchase agreements, where projects receive a fixed price for the energy they produce; and bank hedges, where projects exchange floating wholesale prices for fixed prices at a set amount of energy. Although wind projects of all types were unprepared for the extreme cold that gripped Texas, Bartlett notes that bank hedges provide a much stronger incentive than power purchase agreements for wind farms to stay operational. Bartlett also highlights a relatively novel arrangement—a proxy revenue swap—that is based on measured wind speeds to shield operators from financial penalties when they cannot provide power due to factors outside their control. “Appropriate incentives may not guarantee power supply,” Bartlett writes, “But aligning incentives between wind projects and system needs will better promote beneficial investments and operations.”
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After a year of economic and public health crises, what does the future hold for the world’s emissions trading systems?
China recently unveiled a five-year economic plan, which reaffirms the country’s ambitious climate goals and sets a commitment to reduce carbon intensity by 18 percent. But with no cap on total emissions yet, questions remain over the nation’s nascent emissions trading scheme, which officially launched this February and currently includes about 2,225 coal and gas-fired power plants. Once the system expands to include more of the national economy, China’s carbon pricing system likely will become an essential component of the world’s response to climate change, though potential setbacks remain. New coal-fired plants are being constructed, and China is still ironing out issues with data collection and accuracy. Nevertheless, China’s leadership has influenced the environmental ambitions of other countries in the region. Japan is developing a carbon pricing system; Indonesia plans to implement an emissions trading system; and proposals for similar programs exist in Vietnam, Thailand, and the Philippines.
On a new episode of Resources Radio, William Acworth reviews key insights from a related 2021 status report published by the International Carbon Action Partnership and discusses how various emissions trading systems have fared amid COVID-19. As a result of lockdowns across the globe, emissions—and demand for emissions allowances—initially declined, but carbon pricing systems ultimately stabilized and recovered. Notwithstanding challenges posed by the pandemic, Acworth highlights positive recent developments, including the launch of China’s emissions trading scheme, the expansion of regional carbon markets in the United States, and the beginnings of new systems across Asia. However, Acworth notes that carbon pricing is not a silver bullet and should accompany other climate change mitigation strategies. “A carbon price is unlikely to drive the transformation of these sectors, given the high abatement costs and other market barriers,” Acworth contends, pointing to “sector-specific policies, such as fuel standards and ultimately banning certain types of vehicles,” as other policy tools worth considering.
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As conventional nuclear power confronts economic and political roadblocks, what will be the role of advanced nuclear reactors in the clean energy transition?
Canada is embracing nuclear energy: its federal government released a policy road map last year with the aim of speeding deployment of small modular reactors, and top officials have signaled that further investments could be included in this year’s budget. Policymakers see advanced nuclear energy as essential for achieving Canada’s net-zero goals and as a lifeline for remote communities that have historically relied on fossil fuels. Canada’s efforts come as much of the developed world has pivoted away from conventional nuclear power due to safety concerns, public skepticism, and the rapidly declining cost of renewables. In the United States, for instance, five long-running nuclear plants are scheduled to close this year—a record for the most nuclear plant retirements in a single year in US history. At the same time, bipartisan support for advanced nuclear energy is emerging. Energy innovation legislation last year earmarked $200 million for the US Department of Energy’s Advanced Reactor Demonstration Program, which aims to get nuclear reactors online by the 2030s.
In a new explainer, RFF’s Vincent Gonzales and Lauren Dunlap explore the promise of advanced nuclear reactors, which could be safer, cheaper, more versatile, and less wasteful than existing large-scale, light-water nuclear reactors. Gonzales and Dunlap outline the variety of advanced nuclear reactors in development—including small modular reactors, which have emerged as an attractive option for policymakers, and emerging technologies such as fusion reactors. While these new technologies have the potential to overcome some of the economic and political obstacles that have confronted conventional nuclear reactors, up-front capital costs are still high, and attracting investment dollars for largely untested technologies with uncertain futures presents a challenge. However, a variety of policy tools exist for boosting novel technologies and lowering costs; advanced nuclear energy projects have been supported by federal investments and incentive policies, and the Advanced Reactor Demonstration Program at the Office of Nuclear Energy helps share the costs of research and development with private stakeholders. Other provisions to boost advanced nuclear energy were included in the Energy Act of 2020.
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