Paul MacGregor, Sr. Vice President of Clean Energy Markets for Nexant knows a thing or to about where the energy industry has been and where it’s headed. With the government spending more money than ever on energy technologies, its important for Paul and his team to stay ahead of the curve. Nexant’s clients look to Paul’s team to help them come up with a strategy to not only lower their energy consumption but also broaden the kind of energy it purchases or generates. Through energy efficient certificates or renewable energy credits, Nexant is able to provide its clients with a solid ROI all while creating a market of the future. Paul discusses with us the foundation of Nexant’s business and where he sees the markets going in the short and long term.

Full Transcript:

Ben Lack: Well, we’re here with Paul MacGregor, Senior Vice President for Clean Energy Markets Division with Nexant. Thanks so much for giving us some of your time.

Paul MacGregor: Well, thank you for having me for an interview.

Ben Lack: Sure. What I’d like to start with is could you tell us a little bit about what Nexant does and why you guys are in business?

Paul MacGregor: Yes, certainly. Nexant is a spinoff from Bechtel. We’d spunoff about ten years ago from now. We’re a privately-held corporation. We focus on energy engineering and specifically in the areas of energy efficiency and clean energy. And we do that in three ways. One we have a division that develops software for utilities and for system operators. And that helps manage the grid and make them more efficient. In fact, there’s not an electron that passes through a de-regulated markets of the U.S.. It’s not controlled by our software. The second thing we do is we have consulting divisions that work with both utilities and large energy users, like oil and gas companies, to be more energy efficient. And particularly on the utility side, we help develop many of the DSM programs, which demand side management, and work with many utilities to set up these programs to set up the type of rebates and offer the type of technologies they want implemented in their service territory, we review the programs and measure and verify how well they’re doing. And that makes a big contribution towards reducing energy use at the utility scale level. And then the third group is our group, the energy markets. And we focus on credits and these other types of measures that help enhance the profitability of putting in things such as renewable and energy efficiency measures. So, for example, if you were to put in a coal generation facility, HVAC equipment, a new chiller, anything that improves your operations that create savings, that can create credit. And so we work with our clients to help create these credits for them and add that to their payback picture. And we do the same with renewable. Many of our clients have put on solar on their rooftops and things such as that. And that helps them with profitability. And that’s really what our division focuses on is these type of credits.

Ben Lack: So explain what the credits actually are. Do you just have them and they’re a certificate that you put on the wall? Or are these credits that you can trade for cash or…

Paul MacGregor: These are credits that have monetary value. And there’s a process you go through. And if I start with the efficiency side which is most of our business folks are on efficiency. And so let me start with that one first. This is a relatively new type of credit. This has only been in place for about three, four years in a few states. And the purpose of these credits is to provide incentive for people to do energy efficiency measures. Often things such as a coal generation plant that takes a single fuel source and uses both thermal energy and electricity is much more efficient than buying from the grid, separately having a boiler. So you want to encourage that because sometimes it’s almost twice as efficient as buying from the grid. So, therefore, states have put in this incentive as credit. And to get the credit, you have to qualify your project. When we work with our clients to help get the project qualified, there’s certain metering requirements and measure verification requirements for that. So we work with our clients to get them certified in that state and then we go through the process of helping them create the credits. So we have to measure and verify what they’re saving typically through a quarter period of time. And then we work with the regulatory agency to get those credits provided so we can take them to marketplace and provide a counterparty. Typically, it’s utility because utilities have the requirements. And the utility then purchase these from us, and that provides a financial revenue stream back to our clients. And this can go on for ten years or longer, even to the life of the equipments. So that provides a great incentive for people to do coal generation and other energy-saving measures. So that’s one side of our business for these credits.

The other side’s renewable. And the same thing, we work with our clients to put in, we’re doing a lot of activity right now in Massachusetts. We have a contract with the Commonwealth of Massachusetts for all of their public buildings. And many of these public building are putting on solar in particular. And so we work with them, once again, to help get these certified, and we have to put in measure verification processes. We have to put the right metering in place and collect all the data. And so we go through a very similar process for renewable. And we get these credits created, sold in the marketplace which is really important for solar. Because while solar is a wonderful technology, the reality is it’s fairly expensive. And it’s very difficult to make solar work for many companies or many institutions like the state of Massachusetts to put these on without some additional financial incentive. And these type of credits can be very valuable. They can be hundreds of dollars megawatt hour. And that can drive someone to be able to have ability to put these in on a rooftop because their payback may be a few years as opposed, to say, ten or twenty years without these type of credits.

Ben Lack: So is the certification that you’re helping your clients achieve, is that a standard certification throughout the U.S. or is the certification specific to states or the industry itself?

Paul MacGregor: Well, as you mentioned, the states. And that’s exactly the issue we have right now in the U.S. is every state has their own requirement. And that’s understandable. Every state has what they’re looking at the benefits of their particular region of the country. What we hope to see, and we believe will happen is there will be also a national standard on top of the states. And that will allow people to be able to create these credits and trade them anywhere within the U.S.. So if we’re here in Georgia, and right now we do not have a requirement for utilities to buy either renewable or energy efficiency credits. That you create them in Georgia, now you have a national market that you can sell into. So you have incentive anywhere in the U.S.

And so what we envision happening in a year or two from now is we’ll have two regiments if you will. They’ll be the state regiments which will have their own requirements, and they’re all different from state to state. And then we’ll also have a national on top of that which makes things a little more complex that’s why we’re there to work with our clients to go through all the complexities to get these certified and get them into the marketplace and be able to get them transacted to the value and get that into our clients’ hands.

Ben Lack: So a national corporation that has a presence in more than one state typically works within one state to get the certification so that they can start playing in the field. And then they work themselves into getting the certification for the other states. Is that kind of how it works?

Paul MacGregor: Yeah, the situation right now is when renewable is about thirty states at requirement, utilities have to buy. And that is a voluntary market, but the price to fairly well, it’s hard to stimulate a lot of interest in doing expensive type of energy efficiency renewable. So basically, we’re looking at states that have programs in place that have a fairly high price for their type of credits that can drive this. In working with the client, the client may have facilities across the United States or even international for that matter and working to find where the best states to be able to take advantage of the credits. And that’s a market, and the market does fluctuate. So it fluctuates on a daily and annual basis. And so we try to project forward what those prices will look like for our clients and advise them where the best locations do either renewable or energy efficiency. And we help them because we will transact forward multiple years. We try to do anywhere from three to five years in the future so we can lock in those prices for our clients.

Ben Lack: So what areas of the country have the strongest markets for the credits right now?

Paul MacGregor: Well, if you take a look, for example, solar. Solar’s unique and there’s often carve out for that. Most renewables are all grouped together as one type of classification. But solar has a lot of advantages people like to highlight and they do that by giving the extra carve out if you will. And while a typical renewable energy credit maybe twenty or twenty five dollars a state, the solar, because it has a carve out for itself, sometimes can be three-four-five hundred dollars a megawatt hour.

Ben Lack: Oh, wow.

Paul MacGregor: So that’s a very big incentive. And so we see growing right now is New Jersey has a fairly high price in excess of five hundred dollars. We see a lot of activity in New Jersey. Massachusetts has a new solar carve out that just went in last year. And, in effect, working a lot with the Commonwealth of Massachusetts for their public facilities to take advantage of that. They also probably be, maybe close to five hundred dollars. It’s a very new market. And then Pennsylvania also has a very robust market for solar, and they’re probably in the three hundreds type range. And that’s a lot to drive, new types of solar installations. So that’s the one area that probably has the highest price and really drives projects more than anything. Once you’re outside the solar, as far as renewable, generally it’s Northeast. The Northeast like Massachusetts, Connecticut. Those states generally have the higher prices, right now in the twenties and thirties area. And that’s still a very good price. You know two or three cents a kilowatt hour still can drive a lot of projects of biomass, a wind project. It’s just not sufficient to drive solar. And that’s why we see these carve outs.

Ben Lack: So how long has there been a credit market? And what types of volumes are currently being traded in every given month and maybe in 2010, you have expectations for what the volumes would be?

Paul MacGregor: If you look right now, look at the volumes and the type of, say, how liquid the market is, in the past twelve months, I speak for ourselves, market, I mean, we’ve transacted probably a little over five million credits or megawatt hours in the past year. And most of those transactions have taken place in the Northeast and Mid-Atlantic states. That’s where most of the activity takes place. We expect other markets like California to become like that. And the reason why, well, you say, “California’s a big state. Why isn’t California in the same positions as the Northeast and Mid-Atlantic?” And principally that’s because RECS were invented, if you will, in the late nineties with the idea of unbundling the renewable energy attributes. You know, the good things about renewables from electrons. It’s very hard  to be able to know when electrons are going obviously in the grid. And if you want to create a market incentive, the best way to do that was to separate the two so people could sell the recs, the attributes separate from the electricity.

California is the only state where they require it bundled together. And so utilities will then buy electricity through what’s called the Power Purchase Agreement as well as the recs combined with it. So you don’t have, if you will, an independent market to stimulate production of renewable energy separate from building a facility to sell to utility. So what’s going to happen in California is they’re now unbundling these renewable energy credits. And that’s going to create a greater market in California you’ve never seen before. So I say the Northeast and Mid-Atlantic, but the caveat being that California going forward now should be a very big and robust market for these type of credits.

Ben Lack: So are the rest of the states really on a wait-and-see approach?

Paul MacGregor: Well, there’s about twenty states, mostly in the Southeast and the Middle Atlantic that have not implemented a portfolio standard which requires you to at least buy these type of credits. I think many of them are waiting to see what’s going to happen on a national level. We’re seeing some activity for some states that believe that the federal regiment maybe not to their liking. And they realize it’s most likely going to come about. So why not as our state, put the type of rules that we want that can supersede what the fed has put into place.

The way the rules is being written is, let’s say you have a ten percent requirement in your state, and the federal is eight percent. Then all you have to do is abide by the state rules. If you have zero percent and the fed has a requirement of eight percent, then you got to abide by all the fed rules or some combination of the two if you’re in between. So there’s incentive for the states, seeing the national all going through to put through their own requirements. And so we’ve seen some activity in the Southeast, and actually some of the Midwest states looking to put through a portfolio standard where maybe a year ago they had no interest. But now they realize the federal law’s going in, and so the sense is let’s get ahead of that if you will and put their own rules instead of having the federal government dictate how they put forward the portfolio standard for us.

Ben Lack: So how does Nexant balance this struggle between the states and the federal government to really make sure that the market continues to grow?

Paul MacGregor: We participate a lot in testimony for commissions as well as with different agencies of the federal government. And just because we have a lot of experience in these markets, particularly the efficiency market, we’re involved in the very beginning of the efficiency markets and have sold in all that states that have requirements. We’ve been the first to create the credits and sell these credits. And so we’ve quite a big background. Just in energy efficiency alone, I think we sold about almost two billion kilowatt hours in the past twelve to eighteen months. So we’re very active in markets. And so we’ve done is we participate in different commissions in the states, as well as, at different committees and staffs of the Congress to give our opinions of what we believe will be an effective market.

And actually, I’ve been very pleased on how receptive we’ve been met with our suggestions and comments. In particularly so far at the state level, we’ve been able to share our experiences as new states put in these requirements. And they’ve been very interested in our input and very receptive to it.

Ben Lack: Give us kind of a forecast. Over the next twelve months, do you see a lot of states adopting new standards to kind of get ahead of anything that comes out federally? And what’s the timeline for something to come out federally?

Paul MacGregor: Well, if I take the latter part of the question first, I believe the federal that we believe there could be something within about the next six months. The bill that originated about a year and a half ago in the prior administration with Senator Bingman in his committee in the Senate had put forth a bill that actually was passed by the Senate. And that bill only dealt with renewable energy and energy efficiency as a national portfolio standard.  That last year became incorporated as part of the cap and trade legislation, both in the House and in the Senate. We believe probably because of the situation right now that the cap and trade may not go forward at least in its present structure for some time. At least, probably until after the election. But we believe there’s quite a bit of support for the national portfolio standard, in a sense that the Congress wants to accomplish something here in the near term, realizing it’s going to be very difficult to put through a cap and trade system in the present situation.

So we think there’s a very high likelihood that a national portfolio standard will go forward, and they’ll have a sizable component for energy efficiency because many states will be most impacted which is the Southeast and the Midwestern states, do have the ability to do a considerable amount of energy efficiency. Here in Georgia, for example, well, you think it’s a nice sunny place, we should be able to do a lot of solar. But the reality is it’s fairly cloudy here, and solar’s difficult in Georgia. Also wind, we don’t have a lot of wind capability in the state. Principally, it’s biomass. There’s only so much biomass you can produce here. So energy efficiency, though, is a great opportunity because obviously Atlanta’s a large metropolitan area. Lots of facilities here and buildings that can achieve better efficiency. We do a fair amount of industry that can put more co-generation in and be more efficient. So Georgia could achieve a significant reduction if you include efficiency. So we believe in a national legislation that we’ll have a sizable component for efficiency which will be great for our clients because many of them are only taking advantage of the few states right now. And once this goes through nationally, they can have maybe two thousand stores across the country. All two thousand stores can now participate and create these credits.

So that’s how we view the national market. The state market we’re seeing a couple states in the Midwest and a couple in the Southeast are right now looking at adding RPS…

Ben Lack: Like Colorado, I know is…

Paul MacGregor: Colorado is one of them that we’re looking at. We believe another one of the Midwest states will. I don’t want to go in and describe the exactly the states that we’ve had discussions with. State senators in those states and so on. I want to keep that privilege. But I will say that we believe a couple Southeast states and a couple Midwest will go forward probably the next year time period.

Ben Lack: Well, it’s got to be exciting on the forefront of such an emerging market. I guess the question is why are you doing what you do?

Paul MacGregor: Well, there’s two ways to answer the question. You mean personally? I grew up in the 1970s when I came of age. And the 1970s which was the period of gas shortages, oil shortages, and we first really thought about energy and renewable energy. And I became very excited about renewable energy. And so I ended up going through a path through school of going through electrical engineering. Finally, getting a doctorate in electrical engineering from Georgia Tech. And the focus of that dissertation I worked on was on coal generation and small power like sulfur and how we to integrate that with the grid and make it practical. And that’s been something that’s kind of driven my career through the years after being at General Electric and finally getting into the energy management type work I did in the past decade.

It’s kind of culminating with the work we’re doing here at Nexant. We’re finding capabilities to be able to make these type of technologies more economic. So you get another market incentive for them to be able to make these technologies implement them, and it’s been a tremendous benefit. So we’ve had tremendous success here. We’ve started this division about two, two and a half years ago with Nexant. And it’s been a tremendous success for us.  At first we envisioned when we came on board that we didn’t see if we could be a division or not. We actually became a division because we were so successful in about a year. And we continue to grow tremendously within the organization. And Nexant as a whole has done phenomenally well. We’ve doubled in the last two years, our revenue base. And part of that success has been what we’ve done in this division.

So it’s been tremendously gratifying because something I love to do, that I’ve been driven my whole life to get involved in. And it’s great to see the markets have that positive impact on renewable energy efficiency. And it’s been a perfect situation at Nexant because it’s a company that really been involved since its creation from Bechtel and the engineering side of this business particularly on the energy piece of it. So it blends well with what we do, and we have a lot of resources at Nexant we can draw from into our division because we have, essentially, over four hundred very talented engineers in our company.

Ben Lack: Well, I really do appreciate you giving us some of your time today. It is very cool to hear about what’s going on with you guys and just learning a little bit how these credit markets work because I know that it’s definitely going to be a part of our future. And how quickly it gets adopted is going to be based on how quickly we can learn and get our arms around how it all works. And having guys like you out there really kind of pushing it out into the market. It’s really very helpful for our audience, and for everybody out there to do it. So thanks for giving us some of your time, and we definitely look forward to speaking with you soon.

Paul MacGregor: Oh, you’re very welcome. I appreciate spending the time.