Having a background in derivatives trading, I have seen markets, and their participants, accomplish remarkable things. Socio-economic and political realities are evidenced in fractions of a second. Popular opinion is redefined in a matter of hours. This is why many industry observers, myself included, believe that the commoditization of the attributes associated with building energy efficiency measures and on/off-site alternative energy generation will play an integral part in helping to propel sustainable building deep into the mainstream in 2007 and beyond.

Tradable Certificates

Market forces have been at work for years in the renewable energy certificate (REC) market. An REC represents the environmental attributes associated with 1 megawatt hour (MWh) of electricity produced by a renewable source. Traditionally, RECs have been associated with large, utility-owned renewable generation certified by the Center for Resource Solutions Green-e program. However, it’s important to understand that on-site generation, no matter how small, can also create Green-e certified RECs.

Even further, energy saved through various conservation and efficiency measures (ECMs) will produce tradable assets—energy efficiency credits (EECs)—in the future as well. Accordingly, the first step in reaping the long-term monetary benefits of on-site generation and energy efficiency is then simply having the understanding that your client’s capital investment may have longer term tradable benefits.

Examining Contracts

The next step in capitalizing on up front project investments in on-site generation or energy efficiency measures is examining your contracts. Generally, a facility enters into a net-metering agreement with a utility to sell unused on-site renewable generation back to the grid. This contract usually stipulates that any environmental attributes associated with on-site generation are passed back to the utility when the energy is passed back onto the grid. It is possible to construct a contract in which your client will be compensated for the energy sold back to the grid by the utility and will also be able to retain title to the tradable renewable certificates.

Partnering With a Marketer

A renewable energy marketer will be able to provide your client with the contracts needed to define the energy efficiency and on-site renewable energy generation attributes. Once the assets have been defined, the marketer will then help you certify the commodity as Green-e in order to enhance its salability. It is also likely that the marketer will be able to find a counterparty to purchase the benefits for those attributes before the project is undertaken.

Other Considerations

Instead of selling the assets, it is important for your client to consider the investment potential of holding at least a portion of the attributes. Energy produced by solar panels, small wind projects, geothermal generation, and co-generation equipment may become more valuable as the market for renewable energy attributes matures. Also, it is important to make sure that attributes are not sold for energy that is devoted to the LEED Energy & Atmosphere Credit for renewable energy. For instance, LEED-EB EA Credit 2.1-2.4 encourages the use of renewable energy by allowing projects to earn up to 4 points by providing for 12 percent of energy use with on-site renewable generation. Therefore, attributes (RECs) should only be sold for energy generated in excess of that 12 percent level.

These concepts can be leveraged to make sustainable projects even more attractive to investors. Market forces will only become more relevant as the industry matures and we head towards a regulatory environment where carbon dioxide and other greenhouse gases may be regulated in the U.S. The future of tradable environmental attributes is yet to be determined, but one thing is sure; financial markets are beginning to take notice of the burgeoning bull market in sustainable design.