Federal Markets – SO2, NOx and Mercury
Our core US focus is on the Federal SO2 and NOx Allowance trading programs. TFS Energy's strength in these markets has been recognized by a first place for best US NOx broker in Environmental Finance for both 2005 and 2006 and second place for best US SO2 broker in 2006. In 2005 we were also awarded second place as best overall US emissions broker in Energy Risk and won best overall in 2006.
The proposed revisions to the NOx and SO2 compliance obligations under the Clean Air Interstate Rule (CAIR) and the introduction of mercury trading under the Clean Air Mercury Rule (CAMR) should prove to be the driving force for domestic trading over the balance of the decade.
TFS' Environmental Products desk is a leading broker of federal SO2 allowances, established under the Acid Rain Program (ARP) of the U.S. EPA's Clean Air Act of 1990. The SO2 market is fully developed with spot, forward, option and swap transactions all commonplace. Allowances are allocated to facilities in Vintage Years on a 30 year forward basis. This enables generators to do adequate cost benefit analysis on the relative value of a long term allowance purchase versus a major emissions control project at a facility.
The Clean Air Interstate Rule "CAIR" set to begin in 2010, plans to significantly reduce SO2 emissions. Beginning in 2010, eastern states will be required to surrender two allowances for every one ton of emissions and 2.86 allowances for every ton in 2015. The CAIR proposals have led to a period of unprecedented volatility in the SO2 market as affected companies have utilized the marketplace for their long term hedging requirements. The CAIR Act has already spurred considerable activity in the previously dormant 2010 and later Vintages. TFS specializes in devising hedging structures to assist clients in optimizing their emissions portfolios under these new and evolving frameworks.
Market participation has increased over the past few years, and will continue to follow this trend. Over the past year, both the Nymex and the Chicago Climate Futures Exchange have added SO2 allowances to their list of cleared products. This has greatly enhance liquidity in the marketplace by enabling new counterparts to take advantage of the more streamlined credit and contracting features a cleared product offers.
Historical SO2 Prices
NOx SIP Allowances
An outgrowth of the Ozone Transport Commission (OTC), the NOx SIP Call Budget Trading Program (NBP) controls the transfer of ozone pollution among 20 Midwest, Northeastern, and Southeastern states, including the District of Columbia.
The program establishes a budget or "cap" for a predetermined timeframe known as the "ozone season" which is in effect for the period of May 1st - September 30th. The deadline set by the EPA to secure all allowances for seasonal emissions is Dec. 1. Major sources include utility generators, steel producers, paper mills, cement kilns, chemical plants, and oil refineries. As with the SO2 market, one allowance is equal to one ton of NOx emissions. The rapid expansion of the NOx SIP Call program has created a liquid market that allows participants a wealth of options to comply with program mandates.
One of the most unique aspects of the NBP is Progressive Flow Control (PFC). PFC was established by the EPA to limit the use of Banked allowances from years past to meet compliance for a given year. PFC fosters numerous Vintage swap transactions that drive much of the trading in NOx. TFS is an expert in structuring Vintage swaps to maximize emissions portfolios in this banking constrained market. TFS has been named best US NOx broker two years straight by Environmental Finance.
The Clean Air Interstate Rule set to begin in 2009, will expand the program to 25 states and increase the cap of allowances by roughly 70,000 tons. CAIR will also introduce an annual NOx program that will run from Jan 1- Dec 31.
Historical NOx Prices
Mercury
The Clean Air Mercury Rule (CAMR), is the first federal establish plan to reduce mercury emissions released from coal-fired power plants. This rule was issued on March 15, 2005, and when fully implemented this plan, with in its two-phase process will reduce mercury emissions nearly 70 percent of from current levels. Phase-One is implemented almost automatically, with the already intact federal cap on SO2 and NOx, which requires reduction of these two emissions under CAIR, levels of mercury should be reduced to 38 tons per year. Afterwards Phase Two, which is due to begin in 2018, coal-fired power plants will reduce mercury emissions by 15 tons per year.
