United States Environmental Protection Agency Air and Radiation (ANR-445) 400/1-91/045 December 1991 Auctions, Direct Sales, and Independent Power Producers Written Guarantee Regulations In May IWl, the U.S. Hnvironmenlal Protection Agency proposed the Auctions, Direct Sales, and Independent Power Producers (IPP) Written Guarantee Regulations (Subpart I-, 40 CFR Part 73). In December 1991, these regulations were promulgated, becoming the first Acid Rain Program regulations to be implemented under Title IV of the Clean Air Act Amendments of 1WO. This fact sheet discusses the key components of these regulations and the role that auctions, sales, and IPP written set-based allowance trading system. Introduction EPA's Acid Rain Program will establish an innovative, market- based allowance trading system to achieve a 10-million-ton reduction in sulfur dioxide (SOi) emissions, one of the primary precursors of acid rain. Under this system, fossil-fuel- fired power plants, the principal emitters of SQz, will be allotted trade- able "allowances" based on theirpast fuel usage. Each allowance entitles a unit to emit 1 ton of SOi during or after the year specified on the allowance. At the end of the year, the number of allowances a unit holds must equal or exceed total emissions at that unit; otherwise, stringent penalties will apply. Allowances may be bought, sold, or banked like any other commodity. If a utility holds surplus allowances, it may sell them to units whose emissions levels exceed their allowance supply, or it may save them for use in future years. EPA envisions die emergence of an ac- tive allowance market in the coming years, where brokers, environmental groups, and utilities alike will par- ticipate in allowance transactions. Because the availability of allowances is crucial to ensure both the economic efficiency of the emis- sions limitation program and the ad- dition of new electric-generating capacity, Title IV of the dean Air Act Amendments mandates that EPA hold or sponsor yearly auctions and direct sales of allowances for a small portion of the total allowances allocated each year. In addition, Tide IV requires that EPA provide a written guarantee en- suring priority for certain new inde- pendent power producers (IPPs) in purchasing allowances in the direct sales. The auctions, sales, and IPP guarantee provisions of Title IV should provide some certainty that units, including new IPPs, will have a public source of allowances beyond those allocated initially to existing units. Moreover, the auctions are ex- pected to help signal price informa- tion to the allowance market early in the regulatory program. Where Will the Allowances Come From? To supply the sales and auctions with allowances, EPA will set aside in a Special Allowance Reserve 2.8 percent of the total annual allowances allocated to all units. During Phase I, when the allowance pool will total 5.7 million allowances annually, 150,000 allowances will be available every year for auctions and another 25,000 allowances reserved for the direct sales. During Phase II, when allowance pool totals will in- crease to 8.9 million allowances year- ly, 200,000 allowances will be earmarked annually for auctions and 50,000 designated for the direct sales. 1 Private allowance holders (such as utilities or brokerages) also may offer their allowances for sale at the EPA auctions, provided that the allowances are dated either for the year in which they are offered, for any previous year, or for 7 years in the future. Authorized account rep- resentatives must notify EPA of their intent to sell at least 15 business days prior to an auction. The account rep- resentatives must specify the number of allowances they are offering and their minimum price requirements. How Will EPA Conduct Auctions? A uctions and direct sales com- jfxmence in 1993 and will be held each year thereafter. EPA will or- ganize an allowance auction no later man March 31 of every year. Auc- tions will be divided into two seg- ments: (1) a "spot" allowance auction, in which allowances will be sold that can be used in that same year for compliance purposes, and (2) an "advance" auction for the sale of allowances that will become valid 7 years after the transaction date, al- though they can be traded earlier. Bidders must send sealed offers con- taining information on the number and type ("spot" or "advance") of allowances desired and the purchase price to EPA no later than 3 Dusiness days prior to the auction. Each bid Printed on Recycled Paper. ------- must also include a certified check or letter of credit for the total bid cost. EPA will sell allowances from the Special Allowance Reserve on the basis of bid price, starting with the highest-priced bid and continuing until all allowances have been sold or the number of bids is exhausted. EPA may not set a minimum price for allowances from the Special Allowance Reserve. The Agency will sell allowances from the Special Allowance Reserve before it begins auctioning off allowances offered by private holders. EPA will sell "offered" allowances in ascending order, start- ing with the allowances for which private holders have set the lowest minimum price requirements. The Agency wifi sell offered allowances until the allowance supply is depleted, bids are used up, or the minimum price for the next set of offered allowances exceeds the max- imum purchase price of the next bid. EPA will return proceeds and un- sold allowances from the auctioning of reserve allowances on a pro rata basis to those units from wnich the Agency originally withheld allowances to create the Special Allowance Reserve. Proceeds from the sale of offered allowances will be returned to private allowance holders that contributed the allowances to the auction. EPA will likewise return payment from unsuc- cessful bids and allowances from un- successful offers. will begin the direct sale of _jallowances on June 1 of each year and continue transactions until all allowances are sold or 10 days before the allowance transfer deadline, whichever comes first. During Phase I, the EPA direct sales will offer only "advance" allowances (see above). From the year 2000 onward, organiza- tions and individuals will also be able to purchase "spot" allowances at the direct sales. EPA will offer allowances for $1,500 each, indexed to inflation. Any individual or organization may purchase allowances at EPA- sponsored direct sales by submitting the proper application materials, which specify the number and type ("spot" or "advanced") of allowances desired. EPA will consider and grant conditional approval on applications based on order of receipt. Upon ap- proval, allowances are reserved under the name of the applicant. Ap- proved applicants must tender 50 percent of the total payment within 6 months of the date on which their request was affirmed by EPA; the second half must be paid on or before the allowance transfer deadline. Pay- ment defaults will result in a withdrawal of purchase requests by EPA. The Agency will transfer allowances only after full payment is received. In the case that requests ex- ceed available allowances, ap- plicants will be placed in a waiting line on a first-come, first-served basis. If, by the allowance transfer deadline, the direct sales reserve has not been exhausted, the allowances not sold in the direct sales will be of- fered at the next year's auctions. Un- sold "advance" allowances will be sold at an additional "advance" auc- tion; unsold "spot" allowances will be offered in the regular "spot" auction. Similar to the auction program, EPA will portion proceeds from the direct sale of allowances on a pro rata. basis to those units from which EPA withheld allowances to create the direct sales reserve. Wrttrcen maintain the total emissions cap of 8.9 million tons of SO2, Title IV requires new units (most units commencing operation after passage of the Act) to obtain allowances from existing allowance holders or through the auctions and sales programs. New IPPs that can certify that their efforts to acquire allowances from affiliate utilities and all Phase I units have been unsuccess- ful may be eligible to apply for an IPP written guarantee. The guarantee es- tablishes an IPPs prerogative to pur- chase allowances from the Special Allowance Reserve for $1,500 before these allowances are made available to other parties. Written guarantees are intended to secure financing to new IPPs by assuring lenders that new in- dependent power projects have access to the allowances needed. Applicants may request a guaran- tee for the useful life of the unit, up to 30 years, beginning in the year 2000. In the application, IPPs must specify their emissions limitations and the number of allowances re- quested. Once EPA approves the ap- plication, the IPP will be eligible to purchase allowances (up to the num- ber stated on the application) from the direct sale in any year for the duration of the guarantee, provided the IPP alerts EPA of its intent to ex- ercise the guarantee by April 15 in each year mat direct sales are held. If direct sales are discontinued, EPA will still honor the written guaran- tees and provide new IPPs with allowances. To continue to hold a guarantee, holders will need to cer- tify a continuing need for the guaran- tee. In addition, EPA can terminate the guarantee if the IPP does not ful- fill certain requirements. E^PA's auctions and sales program iwill help ease compliance with the emissions limitations established under Title IV of the Clean Air Act Amendments. Agency-sponsored auctions and direct sales will furnish utilities and other groups with addi- tional options for purchasing allowances, thereby enlarging and stimulating the allowance trading market. In addition, giving new IPPs priority in acquiring allowances should help to ensure continued growth in the nation's energy generation capacity. too3® "[Cor more information, write to: U.S. EPA Office of Air and Radiation Acid Rain Division (ANR-445) Washington, DC 20460 If you would like to receive other fact sheets in this series, call the Acid Rain Hotline at (617) 641-5377 or the EPA Public Information Center (PIC) at 202-260-2080. Fact sheets are available on the fol- lowing subjects: o Allowance System o Continuous Emission Monitoring o Environmental Benefits o Excess Emissions o Permits o Proposed Acid Rain Rules ------- |