Friday, April 06, 2007

Cleantech investors and carbon and RECs (pt 1)

Investors and entrepreneurs have been having a lot of conversations lately about the carbon offset and green tag markets and where they're headed. For example, last week NEEIC organized a very well-organized event at Foley Hoag's Waltham office with several expert speakers, who addressed a room full of investors about the general topic. It seems like most cleantech investors are trying to get smart on what exactly carbon credits and RECs are, and what they could mean for their investments. This week's supreme court ruling on the subject (note: pdf) just added further fuel to the fire (so to speak)...

To start with -- what are carbon credits, and what are RECs, and why are they different? It's a confusing issue right now. You can get some useful descriptions here, but let's break it down into the differences from an investor's perspective:

Carbon credits ("offsets") are a representation of a physical commodity (albeit in this case a "negative" one). If you own a 1 ton carbon emissions reduction credit, you literally own that physical attribute -- one ton of avoided emissions of carbon into the air. In this way, they're similar to NOx, SOx and other pollution emissions credits. Or like selling a ton of corn or metals or any other physical commodity. Now, measuring and verifying an absence of a physical commodity like atmospheric carbon emissions is tougher than measuring a ton of corn or metal, but the principle remains the same.

Renewable Energy Certificates ("RECs" or "Green Tags") are a representation that the electricity you are using came from green power. That's a very different proposition -- essentially, the REC is a way of branding the electricity. Indeed, in most cases the kwh you actually consume came from a blended mix of fossil fuel-based and renewable sources (mostly the former), so buying a REC is a way of paying extra money that then gets transferred back to the renewable generators in particular (and through other hands along the way...). It's not a physical commodity you're buying. You're buying a label that shows your money went toward something you want to encourage.

It may seem like an esoteric difference, but one way to think about it is this: Carbon credits are related only to climate change; RECs bundle in a lot of other issues as well, such as local air pollution, energy independence, etc. The various differences (physical commodity versus labeling, and climate change-focused versus broadly conceptual) are important for investors, as we'll discuss in the next post on this topic. (Part Two) (Part Three)

In other news this week:
  • We've talked before about the rise of online green media. This week came announcements of two more fundings in the space: PE Week Wire reported that SustainableCircles (d/b/a SustainLane) raised a $3.5mm Series B. Also announced this week was that PointOV (d/b/a, which aims to be the "ethical Amazon") raised 800k GBP -- 500k GBP from the NorthStar Equity Investors, and 300k GBP from angels. NSEI had previously backed the company with a 200k GBP investment in June, 2006. PointOV reports that they now have a 1mm GBP annualized gross revenue rate.
  • Jon Shieber at VentureWire reported earlier this week that Biodiesel Technologies has raised "under $5 million in an institutional round of funding." Adirondack Venture Fund and Roberts Mitani LLC provided the financing, and the company expects to raise a larger round later this year. The company estimates their modular approach could provide 4mgpy biodiesel plants at a cost of $1.25mm per plant (full production costs were not provided).
  • SJF Ventures (f/k/a Sustainable Jobs Fund) announced successful fundraising, with $28mm of new capital, about half of which is to be devoted to cleantech investments. Interesting quote from David Kirkpatrick on the topic of rising cleantech startup valuations: "That's why I'm glad we're not cleantech only."
Other news and notes: Upcoming conferences to take note of -- Cleantech Forum XIII in Frankfurt, Germany... and the Clean Energy Venture Summit in Austin, TX... Congrats to the Kellogg MBA team in the recent Sustainable Venture Capital Investment Competition... And finally, the quote of the week: Rex Tillerson, CEO of Exxon Mobil, on the subject of biofuels: "I don't know much about farming, I'm not an expert on biofuels and there's not a lot of technology I can add to moonshine."


Blogger Eric said...

Just to add to this description:

RECs represent the environmental attributes of 1 MWH (1,000 KWH) of green power vs. the electricity grid in which the green power is coming from. If the Kansas grid averages 1,500 lbs. of CO2, 250 lbs. SOx, 350 lbs. N2O, etc. per MWH, then the REC represents these savings, or offsets.

Since people buy green power because it is green (compared to what, you ask? Compared to the grid)the relationship to carbon offsets is very clear. Infact, the EPA Climate Leaders E-Grid software defines these environmental attributes per MWH for us.

Since 1 REC = 1 MWH and 1 MWH = E-Grid figures, we can see that RECs are themselves carbon offsets, with no sunlight between the two logic statements. Though any claim should have an independent audit of the calculations.

Still unsure? Think of it this way:

If there are only two ingredients in chocolate, cocoa and milk, and you have ABC-certified organic cocoa and USDA-certified organic milk, a simple audit will conclude you have organic chocolate.


11:37 PM  

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