HomeMy WebLinkAbout16 Monetize LCFS Credits
AGENDA ITEM #16
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MEETING DATE: February 2, 2022
TO: Board of Directors
FROM: Steven Keates, Conservation & Customer Service Senior
Analyst
SUBJECT: Monetization of Current Low Carbon Fuel Standard (LCFS)
Credits
APPROVED BY
Brian C. Wright, General Manager
RECOMMENDATION:
A. Authorize the General Manager to execute an agreement (Attachment F) with
Northern California Power Agency (NCPA) to enter into NCPA’s Market Purchase
Program.
B. Authorize the General Manager to sell District owned Low Carbon Fuel Standard
(LCFS) credits in the LCFS market of a quantity up to 1,100, which is estimated to
result in unbudgeted revenue and restricted cash funds to the District for year 2022
and annually thereafter.
BACKGROUND:
In March of 2017 the District established an account with the California Air Resources
Board’s (CARB) Low Carbon Fuel Standard Reporting Tool Credit Bank & Transfer
System (LRT-CBTS). The original staff report summarizing this process is provided here
as Attachment A.
Having been established as a low carbon fuel supplier with CARB, the District received
Low Carbon Fuel Standard (LCFS) credits on a quarterly basis. The credits represent
“Tons of CO2” conserved through the pathway. TDPUD has been accruing credits since
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our registration in 2017. Credits are received through two sources:
1) CARB provides credits to the District based on new Electric Vehicle registrations
in Truckee (verified through the DMV) on a quarterly basis. These are termed
“base credits” by CARB.
2) The District receives LCFS credits for all electricity sold through District owned EV
charging stations (located at Meadow Park, the Downtown Train Depot, and at
Pioneer Center). Credits generated by the charging stations are negligible relative
to the base credits.
LCFS Credits: Current Balance and Forecasted Accruals
The District has not sold any credits since it started accruing them in 2017. As seen in
Table 1, our current credit balance is 1,047 which includes all credits accrued through Q3
of 2021. Note that credits are issued on a quarterly basis for the previous quarter.
Therefore, credits for Q4 of 2021 will be issued at the end of Q1 2022.
Table 1 Summary of TDPUD LCFS Credits
Year Credits Received Credits Sold Cumulative Credits
2017 147 0 147
2018 196 0 343
2019 254 0 597
2020 171 0 768
2021 279 0 1,047
Total Current Credits: 1,047
The historical LCFS credit aggregation is shown at a quarterly resolution in Figure 1. Here
it can be seen that the quantities have varied significantly over the period from 2017
through 2022 and no obvious trend can be observed. The blue line indicates the
cumulative aggregation of District credits.
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Figure 1 LCFS Credits Earned by Quarter
CARB provides a description on how the number of credits accrued in a given quarter are
derived (Included as attachment C). Reviewing the calculation steps, it can be seen that
credit amounts are predicated on several factors for which future estimates can be
developed:
1) The number of Plug in Electric and Hybrid vehicles (PEVs) operating within
Truckee during the quarter (determined by CARB based on registration data
supplied by the DMV and other data sources).
2) The grid average carbon intensity (Also determined by CARB on an annual basis).
In practice, staff found limited correlation with the dispensed credits and PEV registrations
in Truckee.1 The best correlation (albeit still limited) was found between credits issued
and the number of new PEV registrations in the preceding quarter (shown in Figure 2).
1 Data on PEV registrations can be found by county and zip code here: https://www.energy.ca.gov/data-
reports/energy-insights/zero-emission-vehicle-and-charger-statistics. Note that limited data exists to
develop this correlation as TDPUD only registered as a Fuel Pathway with CARB in 2017 and the CEC
tool provides EV sales data at annual resolution.
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Figure 2 LCFS vs EV Sales (Lagged)
Sufficient correlation exists in the data to allow the District to develop reasonable
forecasts of its future LCFS distributions as a function of local PEV registrations.
Developing those forecasts however requires one more model which examines the
trend of PEV sales in Truckee. Figure 3 plots data from the California Energy
Commission (CEC) for PEVs in Truckee zip codes. Two trend lines are plotted which
represent two potential modes for growth – linear and exponential.2 While, in the near
future, the market is likely to follow more closely with the exponential fit, it is difficult to
forecast disruptive events such as seen in 2020 which would dampen the overall trend.
Thus, a linear extrapolation is also provided as a “conservative” lower bounds for
forecasted LCFS credits.
2 In this case the trend line uses a second order polynomial model which, in the short term, approximates
an exponential extrapolation. Note that a true exponential fit would predict a significantly steeper adoption
rate than what is shown or supported by the data.
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Figure 3 New EV Registration Projections in Truckee
By combining these models staff has developed a forecast of LCFS credit aggregation
for the 2022-2023 budget cycle (note that uncertainties in the model become much more
exaggerated farther out such that the estimates for a 2024-2025 budget cycle are less
useful for planning purposes).
Table 2 Forecasted LCFS Credit Accrual
Budget Year Max Sales Min Sales Max Credits Min Credits Forecasted Credits
2022 150 85 300 253 277
2023 188 94 340 263 302
2024 229 102 385 273 329
2025 275 111 435 283 359
Staff estimates that the District will continue to accrue LCFS credits at a rate of roughly
317 per year assuming (1) no significant changes are made to the LCFS legislation and
(2) existing trends continue with respect to PEV adoption in Truckee.3
LCFS Credit Valuation
The actual valuation of District owned credits is time-sensitive and subject to prevailing
market conditions. One market report dated November, 2021 indicated that credits were
at that time valued at $152 each (included in Attachment B). This report also
3 Note that the rate at which the District earns credits will drop as the grid carbon intensity continues to
improve. CARB has the prerogative to determine what value they will use to derive credit volumes.
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demonstrated a downward trend in the value of LCFS credits – something that has been
observed by other market participants and expressed in a recent workshop with CARB
staff. Based on existing market trends, staff estimates that the market value is currently
$142 and likely to continue declining. This is one impetus for this staff report and the
recommendation to sell District credits at this time. Table 3 shows the current estimated
value of District LCFS credits and forecasted revenue from LCFS credits (assuming
current market conditions persist).
Table 3 Estimated LCFS Revenue through Current Budget Cycle
LCFS Credits Value
Existing Credits 1,047 $148,674
Forecasted Credits (per Year) 317 $44,962
Total for 2022-2023 Budget Cycle 1,364 $193,636
Assuming a value of $142 per credit, the Districts current credits are valued at $148,674
and future credits would represent approximately $45,000 per year. This combines to total
a forecasted revenue of $193,363 for the 2022-2023 budget cycle.
Note that it is very difficult to predict the future market for LCFS credits. As the intention
of the program is to accelerate the reduction of carbon content in transportation fuels, the
value of LCFS credits will continue to drop if the program is successful. However; many
market participants have expressed concern with CARB over the volatility and recent
drops in value relative to other carbon cap-and-trade frameworks. CARB may decide to
implement some interventions to provide market stability though CARB has not expressed
any opinions on the matter to date.
Spending Requirements
In its LCFS guidance document 20-03 (included as Attachment E) CARB provides
guidance on its requirements for spending proceeds from the sale of credits. The District
is considered a Load Serving Entity (LSE) within the LCFS framework and its associated
spending requirements are defined starting on page 4 of the guidance document.
The overarching requirement for spending LCFS credit proceeds are that expenditures
must advance Transportation Electrification within the LSE’s service territory. The LSE is
provided some discretion regarding how this is accomplished and some of the examples
provided by CARB include:
1) Providing incentive support for purchasing/leasing EV’s or other electrification
transportation equipment
2) Providing incentive or direct investment for installing EV charging infrastructure
3) Providing rate options or incentives to encourage EV charging during off-peak
hours to provide grid benefits
4) Providing on-bill credit or other incentives to promote the use of electric
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transportation
5) Marketing, education, outreach programs to provide information and material it
inform the public on the benefits of EV transportation.
While the above represent the general spending requirements for the LCFS proceeds,
CARB also provide more specific requirements under two categories:
Category Description
Clean Fuel Reward (CFR)
Program4
Small publically owned utilities (POUs) must contribute a minimum of 2%
of base credits to the CFR beginning in 2023
Holdback Credit Equity
Requirements
Starting January 1, 2022 a minimum of 30% of the credits not contributed
to CFR must be used to support transportation electrification for the
primary benefit of (or primarily serving) (1) Disadvantaged communities,
(2) Low-income communities, (3) Low-income individuals, (4) Rural area.
The minimum percentage increases to 40% in 2023 and then finally to
50% in 2024 and beyond.
Finally, CARB places strict limits on the percentage of proceeds which can be spent on
Administrative costs. Per the guidance document no more than 10% of total annual
spending on holdback credit equity projects may be spent on administrative costs which
are the defined on pages 10-11.
In the following section staff demonstrates how the District programs through which the
LCFS proceeds will be spent comply with the spending requirements outlined above.
PURPOSE:
The purpose of this staff report is to provide the Board with sufficient information
regarding the Districts participation in the LCFS program as to make a decision on
whether or not to sell the District’s accumulated LCFS credits.
General information regarding the scope of the sale and the spending requirements
levied by CARB on its proceeds are provided in the previous section of this staff report.
In this section staff provides details on the process of the sale and the planned
expenditures for which the proceeds are budgeted (including demonstration on how the
expenditures are compliant with CARB spending requirements).
4 A statewide program overseen by the California Air Resources Board which provides rebate incentives
for EV purchases through dealerships at the time of sale (upstream buy down of cost to purchase). More
info can be found at https://cleanfuelreward.com/california-ev-rebate-program .
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Sales Process
NCPA provides a service to its member utilities under the Market Purchase Program
which enables NCPA to buy and/or sell certain commodities on behalf of its member
utilities. In order to participate in this program TDPUD would need to sign an agreement
with NCPA. This agreement is provided as Attachment F to this staff report. The LCFS
specific language can be found in Exhibit K of the document.
With the agreement in place between the District and NCPA, TDPUD can allocate its
existing LCFS credits to NCPA through the LRT-CBTS (online tool) to sell on its behalf.
NCPA is currently preparing to pool together LCFS credits from its member utilities to
aggregate to a large enough scale as to improve the potential sale price.
Once credits are sold, NCPA pays TDPUD the proceeds and the District reports the
final sale volume and revenue amounts to CARB in our end-of-year reporting.
Planned Usage of Proceeds
In past years incentives were provided for residential and commercial EV charging
infrastructure out of the Public Good Charge (PBC) budget.5 For the 2022 and 2023
budget cycle staff expanded the budget for such programs in part due to the expectation
that LCFS credits would need to be monetized in the near future to comply with CARB
rules. As such, the existing expense budget for Department 4 (Conservation) included
the necessary spending for CARB approved LCFS programs.
For each budget year the District will implement customer programs which provide
rebate incentives for several transportation electrification measure (which are also
consistent with the District’s decarbonization efforts)
Table 4 Listing of Transportation Electrification Rebate Offerings
Measure Incentive Amount (per)
Residential EV chargers (Base Charger) $500
Residential EV chargers (Smart Charger) $700
Commercial EV Chargers $2,000
Main Panel Upgrade (Residential)6 $1,000
In addition to the rebates offered above, District staff will be actively working with
community partners to identify potential transportation electrification projects which will
5 Public Goods Charge do regulations allow for spending on such categories.
6 The final incentive level for this measure is still under review and may be revised upwards.
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benefit disadvantaged members of our community. Examples of such projects could
include:
1) Multilingual marketing, education, and outreach regarding electric
transportation options and benefits
2) Rebates towards purchase of new or used EVs
3) Contributions towards electrification of local public transit buses, school
buses, or drayage trucks.
While there exists some overlap between the PBC programs and LCFS programs (for
example EV chargers, and main panel upgrade rebates), a total of $186,888 is
budgeted to be spent on LCFS specific transportation electrification projects. Error!
Reference source not found. summarizes the budgeted LCFS specific expenditures in
the 2022-2023 budget cycle.
Table 5 Summary of Planned LCFS Expenditures by Year for 2022 and 2023 Budget Cycles
Budgeted
Expenses
% of
Total Notes
Budget Year 2022
CFR Contribution $0 0% CFR spending requirement starts in 2023
Hold-Back Credits $62,521 67%
Income Qualified $30,637 33% Consistent with 30% requirement for 1st year
Total Expenses $93,158 100%
Budget Year 2023
CFR Contribution $1,000 1% ~ 2% of the forecasted $45,000 Revenue for 2023
Hold-Back Credits $56,238 59%
Income Qualified $37,492 40% Consistent with 40% requirement for 2nd year
Total Expenses $94,730 100%
Table 6 Overall Budgeted LCFS Expenditures for '22 - '23 budget cycle
Budgeted
Expenses
% of
Total
Total Implementation Costs $168,199 90% Only 10% of total expenditures are allowed to be
spent on Administrative overhead Total Admin Costs $18,689 10%
Total $186,888
It can be seen that the planned expenditures for 2022 and 2023 ($186,888) fall just
under the expected revenue from the LCFS credits for the same period ($193,636). This
is largely due to intentional conservative planning given the uncertain value of LCFS
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credits at the time of sale. The program expenses will be managed actively throughout
the budget cycle to adapt as necessary to actual revenue from the LCFS credits.
FISCAL IMPACT:
The monetization of the District’s LCFS credits will create unbudgeted revenue and the
funds will be deposited in a restricted cash account, similar to AB32 auction sale
proceeds. While their sale will result in additional unbudgeted revenue to the District;
this revenue comes with strict spending requirements per the California Air Resources
Board. Staff have already developed programs which will meet CARB requirements and
worked the associated expenses into the budget for the 2022-2023 budget cycle.
To the extent qualifying program expenditures are made, funds can be transferred from
the LCFS restricted account to general fund operating account. For 2022 and 2023, the
recommended transfers would be the qualifying expenditure amount in excess of the
budgeted expenditure amounts, if any. The remaining balance in the LCFS restricted
account would be available for 2024 and thereafter. Indirectly, the District will see
incremental increases in revenue due to the load growth associated with transportation
electrification.
ATTACHMENTS:
Several attachments are provided in support of this staff report:
Attachment Attachment
Attachment A 2017 Staff report to the Board requesting registration into the LCFS program
Attachment B LCFS Market Update Report for November 2021
Attachment C CARB Base Credit calculation methodology for PEVs
Attachment D CARB Base Credit calculation methodology for forklifts
Attachment E CARB guidance document on LCFS spending requirements
Attachment F NCPA Market Purchase Program Agreement for sale of LCFS Credits