Denver-Based Investment Banking Firm Pursues Energy Projects

Ward Cerny, a vice president with the Denver-based investment banking firm of Green Manning & Bunch, specializes in financing-related issues for the firm's energy and power clients.

An active advocate for renewable energy, Mr. Cerny says, "Colorado is a great place [for the wind energy industry] because there is lots of wind and geographically it is in the center of the nation and that is where many wind energy companies want to be located."

I first met Mr. Cerny, who has a bachelor's degree in international business from George Washington University and an MBA from the University of Chicago, several months ago at an ABA-sponsored teleconference focusing on renewable energy. It intrigued me that an investment banker was interested in the new energy economy and even, in the case of Mr. Cerny, was a member of the American Wind Energy Association. So Ann Vessels, the director of DU's externship program and I met him for lunch last week to talk about a side of renewable energy that often does not attract enough attention but is absolutely critical to the success of renewables: project finance.

Among Mr. Cerny's observations:

• Wind power has emerged as the top source of renewable energy, with worldwide capacity expanding from 16,000 megawatts of electricity capacity in 2000 to more than 120,000 MW in 2008 (annual growth rate of 28 percent).

• The credit crisis has had a short-term effect on annual wind installations, as access to project finance is tight and many tax equity investors have left the market.

• Volatility in fossil fuel prices, specifically those of oil and natural gas, threatens to price wind power out of some markets.

• Wind component manufacturers and service companies have continued to vertically integrate in order to secure their supply chain, but as the supply chain develops, he expects to see the industry trend toward consolidation into a few major assembly companies with a larger group of sub-tier suppliers.

• Utilities and large independent power producers will continue to be the dominant acquirers of wind power producing assets, as large power producers hedge against the uncertainty and price volatility of carbon.

• Governments worldwide have pledged $415.5 billion through economic stimulus packages toward greener energy developments.

He also made this extremely interesting comment: "The skill set needed for upstream oil and gas work is nearly the same as in windpower. They are very similar." In addition, he mentioned that developing coal-fired power and wind power is quite similar: "In 10 years there will be a very gray area when comparing the skills needed to do either."

As we neared the end of the conversation Mr. Cerny pointed out that despite what some might hope for, the rapid replacement of fossil fuels with renewable sources is still a ways in the future. While the use of oil and gas will not go away anytime soon, the need to nurture the development of renewables must nevertheless be a key strategy in America's energy future. And in some instances -- as mentioned above -- skills developed in one energy sector may serve one well in another sector.

The development of "human capital," meaning professionals who are familiar with the entire energy industry, is key to the country's energy future, he concluded.

Ward Cerny embodies the spirit of the new energy economy that is taking shape in the shadow of the Rocky Mountains in an energy city called Denver.

Former Colorado Supreme Court Justice Rebecca Love Kourlis Speaks About American Legal System to Graduate Students

Rebecca Love Kourlis, who served on the Colorado Supreme Court from 1995 through 2006, spoke about the American legal system to a gathering of graduate students earlier this week.

Justice Kourlis told the students -- many of whom were foreign students now studying at DU -- about her own background, including her early years practicing law in Denver and in western Colorado and of her tenure from 1987 through 1994 as a Colorado State District Court judge. Then she shifted to explaining her current role as executive director for the DU-based Institute for the Advancement of the American Legal System, a national, non-partisan organization dedicated to improving the process and culture of the civil justice system.

For many students Justice Kourlis' remarks provided a new context in which to examine the American legal system. In this regard, she spoke about the work of the Institute as it relates to addressing the challenges for the legal system. In particular, she pointed to three primary reasons the Institute was established:

• As currently organized, the civil justice system is too focused on the needs of judges and not enough on the needs of "the users," that is to say those who appear before judges. "We are not running the justice system as well as we might from the standpoint of the users," she said.
• Confidence in the American legal system is "going the wrong way," she said. "People worry that they cannot afford to get in the system. We felt that was not acceptable; people need confidence they will be treated fairly and their experience in the system is affordable and predictable."
• How judges are selected, trained, and evaluated needs close attention if the integrity of the system is to be maintained she said.

Following those introductory remarks, Justice Kourlis took questions from the diverse group of graduate students (students from eight different countries attended the presentation). Among the questions the students asked related to the practice of attorney advertising in the U.S., the use of contingency fees, and how the jury system works from a judge's perspective. With respect to the last question, Justice Kourlis reflected on her years as a trial court judge when she presided over many jury trials. In particular, Justice Kourlis emphasized that "the jury system is a really important part of our democracy," noting that the jury system allows individual citizens to become more familiar with how the legal system works. Justice Kourlis also spoke of her support for cameras in courtrooms unless the case involves a juvenile.

The one hour meeting was marked by a great deal of curiosity on the students' part as well as Justice Kourlis' interest in how legal systems work in the foreign students' countries. Several students with whom I spoke afterwards voiced their appreciation that Justice Kourlis had made time to speak with them and had done so in a clear and understandable manner. They seemed particularly struck by the fact that an individual of Justice Kourlis' stature was interested in their countries' legal systems.

Justice Kourlis was accompanied by Pam Gagel, the Institute's assistant director and a 1985 graduate of the DU College of Law and an accomplished lawyer in her own right.

From my perspective, it was great to see the program's students listening to and learning from one of America's leading experts in the field of improving the justice system, no small task to be sure but a timely and key one to the foundation of America's legal system.

Natural Gas: An Increasingly Important Option for U.S. Energy Generation?

National Public Radio broadcast a fascinating three-part series last week about the role of natural gas in the U.S. energy portfolio. Among the questions addressed were whether natural gas could be a "transition" fuel as the economy moves to a more renewables-based economy and why natural gas was given so little attention -- in fact almost none -- in the recently passed U.S. House measure known as the Waxman-Markey energy bill.

For those interested in where gas stands in the context of U.S. energy policy, you will want to check out these broadcasts: "Rediscovering Natural Gas by Hitting Rock Bottom" (Part 1, Sept. 22, 2009); "Who's Looking at Natural Gas Now? Big Oil" (Part 2, Sept. 23, 2009); and "With Little Clout, Natural Gas Lobby Strikes Out" (Part 3, Sept. 24, 2009).

If these stories interest you -- and anyone interested in America's energy challenges should be interested in a fuel that has been deemed "the cleanest of all fossil fuels" by Christopher Flavin at the Worldwatch Institute -- also check out a new U.S. Department of Energy publication called "Modern Shale Gas Development in the United States: A Primer."

Also, have a look at Mr. Flavin's recent commentary "The New Case for Natural Gas."

U.S. Senate Poised to Consider Climate Chance Legislation

A story this morning on NPR's Morning Edition provides a brief, but useful overview of the status of Congressional consideration of climate change legislation.

In "Senate Unveils Plans to Reduce Emmission," Sept. 30, 2009) NPR reporter Christopher Joyce outlines what are expected to be the key differences between the House Waxman-Markey bill, which has already been approved in the U.S. House, and a U.S. Senate bill expected to be introduced by Barbara Boxer, Democrat U.S. Senator from California.

House of DU Law Professor KK DuVivier Featured October 3 on Colorado Renewable Energy Society Solar Home Tour

The Colorado Renewable Energy Society (CRES) Solar Home Tour on Oct. 3 will feature the house of DU Law Prof. KK DuVivier and her husband Lance Wright. The house (the building details can be seen by clicking here) was designed to meet the very strict standards of the Passive House Institute U.S. (PHIUS). If it passes the final energy inspections, it will be among the first officially certified “passive houses” in the United States.

According to Prof. DuVivier,

"The PHIUS was established in January of 2008 in Champaign-Urbana, Illinois to promote the European building technique called 'Passiv Haus.' Passive House standards go way beyond the well known passive solar gain techniques of the United States. Their combination of super-insulation (R-40 walls and R-70 ceilings), energy efficient heat recovery ventilation, minimization of thermal bridging, passive solar heat gain, and the careful utilization of highly efficient windows and doors produces a house that is more than the sum of its parts. The typical European Passive House is heated through a combination of: passive solar gain, waste heat from appliances and people, and supplemental heat from devices that use about as much energy as a hand-held hair dryer."

Building a green house was a natural fit for the couple. Lance majored in forestry and began his career as a ranger with the U.S. Forest Service. Later he was involved in politics and served as a member of the Parker, Colorado, City Council. In 2002, he ran for a seat in the U.S. Congress. While he was not successful, his campaign raised the issue of the link between U.S. national security and its energy policies, an idea that has now been adopted nearly everywhere in American politics.

Prof. DuVivier also has had a long-time interest in energy-related issues. She began her career as a geologist for a French uranium exploration company before she attended law school. Today she teaches Energy Law (and Mining Law as well) and writes about renewable energy and energy efficiency.

CRES has sponsored the Denver Tour since 1996. According to CRES, the tour showcases "the latest and greatest in energy efficiency, renewable energy, and sustainable green building practices." Among the sponsors is the National Renewable Energy Laboratory, which is located in Golden, Colorado, about 25 minutes from the DU campus.

Those interested in seeing Prof. DuVivier's house (and the other houses) can click here to register. I have visited her house several times and it is indeed impressive. Individuals interested in seeing what future homes will look like -- including an electricity meter that often runs backwards meaning that the house is generating electricity that is being returned to the grid! -- should not miss this opportunity. Seldom do we get to see today what tomorrow will look like.

International Bank HSBC Projects $2 Trillion Revenue per Year by 2020 for Low-Carbon Sector

Global banking giant HSBC said last week that total revenue associated with low-carbon products and services may top $2 trillion annually by 2020.

In 2006 the Stern Report, commissioned by the UK government, projected low-carbon goods and services would generate $500 billion by 2050.

Joaquim de Lima, global head of quant research for equities, said, "We can see that this seemingly huge figure has already been surpassed well ahead of time as more and more businesses adapt their business model."

According to Reuters ("World Climate Business Revenue $2 Trillion by 2020: HSBC," Sept. 18, 2009), "The climate sector has surpassed the size of the global aerospace or defense industry, with the United States, Japan, France, Germany, and Spain accounting for 76 percent of global climate revenues, the report found."

EU Court of First Instance Delivers Blow to European Commission Regulation of EU Emissions Trading Scheme

Last week the European Court of First Instance (CFI), the second highest court in the European Union, overturned two European Commission decisions that reduced the number of carbon credits that Estonia and Poland can distribute under the EU Emissions Trading System (ETS) between 2008-2012 to carbon emitters in those countries.

In Poland v. Commission, Case T-183/07 and Estonia v. Commission, Case T-263/07, the CFI issued a rebuke to the European Commission, noting that "by imposing...a ceiling on emission allowances to be allocated, the Commission exceeded its powers."

The European Commission, the EU institution that enforces the system, was quick to disagree with the CFI's decision. Barbara Helfferich, the environmental spokesperson for environmental matters, said, "We are extremely disappointed by the judgment," The Wall Street Journal reported ("EU Court Overturns Some Emission Caps," Sept. 24, 2009). The Commission has until Nov. 23 to appeal the decision to the European Court of Justice, the EU's highest court.

To fully understand the importance of this decision, some background about the ETS is necessary. In 2003, the European Union adopted legislation -- Directive 2003/87 of the European Parliament and of the Council of 13 October 2003 -- to establish a European Community-wide system for greenhouse gas emission allowance trading. Among other things, the legislation mandated that each EU Member State develop a "national allocation plan" (NAP) stating the total number of allowances it intended to allocate for each five-year ETS period. Under the legislation, the NAP was to be based on objective and transparent criteria applicable across the entire EU. When finished, the NAP was to be transmitted by each Member State to the European Commission, which had the right to reject it or any aspect of it if the NAP was incompatible with the criteria set out in the legislation.

In 2006 Poland and Estonia respectively transmitted their NAPs to the European Commission. The following year, the European Commission held that the NAPs were not in compliance with the legislation and directed the two countries to reduce the total number of emissions allowances the countries had proposed by 26.7 percent in Poland and 47.8 percent in Estonia. The two countries appealed the Commission's decisions to the CFI.

On Sept. 23, the CFI held that an EU member state alone has the authority to develop its NAP and to make the final decision about the number of emissions allowances it will allocate for each five-year period and the distribution of those allowances among its economic operators. The CFI confirmed that the European Commission has the power to review in respect to the NAPs, but that the power "is very restricted." The court went on to say, "Accordingly, the Commission is authorized to verify the conformity of the NAP notified by the Member State with the criteria set out in the [legislation] and to reject that plan on the grounds of incompatibility with those criteria and provisions."

However, the CFI went on to note that the Commission's decision to in essence reject an NAP on the basis of reasoning which consists "only in the evocation of doubts as to the reliability of the data used by Estonia and Poland" represented legal error on the Commission's part. The CFI also said:

"Further, it is for each Member State, not the Commission, to decide, on the basis of its NAP drawn up in accordance with the [legislation], on the total quantity of allowances it will allocate for the period in question, to initiate the process of allocation of those allowances to the operater of each installation and to rule on allocation of those allowances. Consequently, by imposing in the contested decisions allowance ceilings above which the NAP would be regarded as incompatible with the assessment criteria, the Commission substituted itself, in practice, for the Member States concerned. Therefore, those decisions have the effect of encroaching on the exclusive competence which the [legislation] confers on the Member States in deciding the total quantity of allowances which they will allocate in respect of each five-year period as from 1 January 2008."

The decision said that it was the duty of the Commission, in its exercise of the power of review, to explain in what ways the instruments used by a Member State in drawing up an NAP were incompatible with the criteria set forth in the legislation.

There were a number of significant reactions to the CFI's decision:

• The International Emissions Trading Association called "on all Member States to hold back from attempting to make use of a loophole that simply has to be closed for the carbon market, and European climate policy, to continue on a sound footing." The association, a leading voice in the business community in relation to carbon markets, went on to say:

"It is well understood that the success of the second phase of the EU ETS, and the avoidance of the over-supply that caused problems for the first [phase], was the firm control exercised by the European Commission on national authorities' proposals for emissions requirements. It now appears that the implementation of this control was not soundly based in law, a prospect that opens up the possibility of considerable additional supply coming onto the market in an uncoordinated fashion. Such an outcome would be contrary to decisions taken by the European Council about the level of European emissions reduction ambition."

• European Commission Environment Commissioner Stavros Dimas said, "We are currently examining the Court rulings on the Estonian and Polish NAPs in depth and are considering whether to appeal." He went on to say:

"The Court rulings...imply that the Commission has to take new NAP decisions in respect of Poland and Estonia. The originally notified national allocation plans cannot therefore be deemed to be acceptable as a result of today's judgments. Consequently and ahead of these decisions, those countries are not allowed to issue any additional allowances beyond those created in the EU ETS registry system. In preparing new decisions the Commission would base itself on the best available data. In this context the importance of the verified emissions for 2005 to 2008 should be noted. In the light of these data, it would appear unlikely that there would be any material difference concerning the total number of allowances consistent with the terms of the legislation. The actual 2008 emissions in Estonia and Poland correspond closely to those anticipated in the Commission Decisions on the Estonian and Poland NAPs and are therefore consistent with the assessments made by the Commission."

• An analyst with the firm Point Carbon, Henrik Hasselnkippe, told the New York Times ("Europe Loses a Ruling on Carbon Quotas," Sept. 24, 2009) that Poland, Estonia, and a handful of other countries may end up compromising with the European Commission on a figure that is mutually agreeable. One factor that might play a role in this negotiating strategy is that it is entirely possible that because of the economic downturn, the Commission could force the countries to accept even lower emissions allowance targets.

There are also important ramifications associated with the ruling:

• Carbon prices may not trend down as a result of the ruling. In fact, the price of EU carbon allowances actually rose -- as much as four percent for December permits -- last Friday, two days after the decision, ClimateWire reported today ("European Carbon Prices Surge After 2 Days of Confusion," Sept. 28, 2009). In the same story, an analyst at the carbon market analysis firm Orbeo said, "The European Commission is trying to show that the impact of the ruling will be limited. The market has digested the news now and is buying back a bit. Some utilities see the current price level as a good opportunity to buy before winter."
• The international credibility of the EU on reducing carbon emissions has been dented, to be sure, and the EU may face some cynicism from fellow participants at the Copenhagen UN Conference on Climate Change in December.
• Other EU countries, including but not limited to the Czech Republic and Italy may decide to challenge their own allocations.

This problem is unlikely to have any significant long-term impact, however, since the EU agreed last year that from 2012 forwards the Commission would retain the sole right to allocate emissions allowances. As Sanjeev Kumar from the WWF said, "It's a loss of fuss about nothing. The ruling only applies to phase two of the ETS (2008-2012], after which allocation is centralized," euobserver.com reported ("EU Court Slaps Down Brussels Attempts to Lower Eastern CO2 Emissions," Sept. 23, 2009).

Meanwhile, the EU appears close to considering legislation that would establish a minimum carbon tax. New Energy Finance, a U.K.-based news and briefing organization that follows clean energy and carbon markets and has seen a draft copy of the legislation, said, "The proposed directive introduces minimum levels of taxation on different types of fuels linked to the intensity of their emissions, to be effective from 2013. The tax would apply to fossil fuel users that fall outside the EU ETS, such as small installations," the Financial Times reported ("EU Carbon Tax?" Sept. 25, 2009). A handful of EU countries have enacted their own carbon tax systems.