Allowances/Emission Concept in Aligne

1. Allowances/EmissionConcept in Aligne By Tam Le May 18th, 2013

2. Allowances An authorization to emit a fixed amount of a pollutant. Allowance trading: Sources can buy or sell allowances on the open market. Because the total number of allowances is limited by the cap, emission reductions are assured. Compliance: At the end of each compliance period (plan year), each source must own at least as many allowances as its emissions. Evergreen: Most of the allowance credits are “evergreen” means if the credit is issued for the one year, it may be used on the following year as long as it has not been remitted. Notes that the value of the credit may be reduced as the EPA reduce its value for a cleaner environment.

3. Emission Cap A limit on the total amount of pollution that can be emitted (released) from all regulated sources (e.g., power plants); the cap is set lower than historical emissions in order to reduce emissions.

4. EMISSION – ALLOWANCE CONCEPT Max CAP Level (Fixed by EPA) = Max Allowance + Max Credit Purchased Desire (Targeted) Generation = Requires more permission (Allowance) Need to obtain more permission Via Purchase more Credit (Allowance) Max Emission Allowed (Allowance) Generation Pollution Permitted Allowance Credit granted by EPA Baseline

5. EMISSION – ALLOWANCE CONCEPT Max Emission Allowed (Allowance granted by EPA) Un-used allowance credit may be transferred for profit Adjusted economic generation Emission Level Max Generation Pollution Permitted Baseline Each year, the regulatory (EPA) allocate number of allowance credit certificates to each power plant. Should the power plant generate: 1 – More power, the allowance shorted need to be purchase to cover. 2 – Less power, the allowance not being used, may be sold for profit. Note: The allowance for each power plant granted by the regulatory is reduced each year. This is part of the Clean Air Act.

6. EMISSION – ALLOWANCE CONCEPT Allowance applied to the Generation Power Plant. Most fossil fuel power plant are not burned very cleanly. It often emitting bi-product such as NOX, SOX to the environment. Some state also tracking the CO2 along with the NOX, SOX as well. The CO2 tracking are governed under the Regional Green House Gas Initiative (RGGI). In United State, the clean air act from each the state dictate the level of emission that the power plant could emits to the environment. This level is reduced each year to promote more clean air to the environment. When the fossil fuel power plant produce power, the emission is emits to the environment. The power plant must own or purchase enough Allowance Credit to support the emission emitted. Some of the allowance credit is allocated to the power plant from the regulator (EPA) at no cost. The “no cost” allowance provided by the regulator (EPA) is reduced each year to promote more clean air. Most of the allowance are “evergreen”, means if the credit is not used in the issued year, it may carry forward to the following year, however, it value would be reduced as ruled by the regulator (EPA) to promote more clean air. Heavy penalty would applied if the power plant does not provide enough Allowance Credit to support the generated power. Nuclear Power Generations are considered as clean, there is no NOX, SOX or CO2 allowance requires.

7. EMISSION – ALLOWANCE TRADING CONCEPT Emission & Allowance relationship: The allowance is the credit that allows the generator to pollute a certain amount of NO2 and SO2 to the environment (emission). Some states are also tracking the CO2 as well this is called the Regional Green House Initiator RGGI. The emission is the amount of the pollution that the generator is actually polluted. In the general trading environment, the allowance received through a purchase or from the regulator (EPA) at “no cost”, they may be treated as a “long” (buy, gain on quantity) or “short” (sell, liquidating the ownership right to an allowance credit). The emission is the allowance obligation from the generation. The different between the long and the short is the amount of allowance that available or needed for a company to sell or purchase to meet the generation obligation at the end of the plan year. In summary, the more emission a power plant is emitted, the more emission sell trades are generated (sell = emission output). The more emission sell trade used to offset the allowances inventory, the more allowance purchases if the allowance inventory not enough to cover the emission sell.

8. EMISSION – ALLOWANCE ALLOCATION Multi-states allowance and Connecticut allowances Most of the allowance is valid in multi-states, with the exception of Connecticut. The state of the Connecticut allowance may be allocated to other states, however, other state’s allowance may not be used in the state of Connecticut.

9. RGGI – Regional Green House Gas Initiative As of the time of writing this material, the ten states participating in RGGI are: Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, and Vermont. These state are implementing the first mandatory cap-and-trade program in the United States to reduce greenhouse gas emissions. The authority of the individual states is the basis for the RGGI CO2 Budget Trading Programs. Through independent rules and/or regulations each state limits emissions of CO2 from electric power plants, creates CO2 allowances and establishes participation in CO2 allowance auctions. Regulated power plants can use a CO2 allowance issued by any of the ten participating states to demonstrate compliance with an individual state program. In this manner, the ten state programs, in aggregate, function as a single regional compliance market for CO2 emissions.

10. REC – Renewable Energy Credit Renewable Energy Certificates, or "green tags", are transferable rights for renewable energy within some American states. A renewable energy provider gets issued one green tag for each 1,000 KWh of energy it produces. The energy is sold into the electrical grid, and the certificates can be sold on the open market for additional profit. They are purchased by firms or individuals in order to identify a portion of their energy with renewable sources and are voluntary. They are typically used like an offsetting scheme or to show corporate responsibility, although their issuance is unregulated, with no national registry to ensure there is no double-counting. However, it is one way that an organization could purchase its energy from a local provider who uses fossil fuels, but back it with a certificate that supports a specific wind or hydro power project.

11. REC – Renewable Energy Credit • Renewable Energy Certificates (RECs), also known as Green tags, Renewable Energy Credits, or Tradable Renewable Certificates (TRCs), is a tradable commodity proving that certain electricity is generated using renewable energy sources. Typically one certificate represents generation of 1 MWH of electricity. • What is defined as "renewable" varies from certificate trading scheme to trading scheme. Usually, at least following sources are considered as renewable: • Wind (often further divided into onshore and offshore) • Solar (often further divided into photovoltaic and thermal) • Wave (often further divided into onshore and offshore) and tidal (often further divided into onshore and offshore) • Geothermal • Hydro (often further divided into small - micro hydro - and large) • Biomass (mainly biofuels, often further divided by actual fuel used). • Green certificates represent the environmental value of renewable energy generated. The certificates can be traded separately from the energy produced.

12. REC – Renewable Energy Credit Renewable Energy Credit is consumed on the Utility Side of the Power Market. As the utility company serving the load, the state mandate the utility company must provide portion of the load to be served from the “green energy”. Usually this portion account for approximately 1% to 5% depending on each state. This percent is increase each year to promote more green energy to be used. Example: If the load serving for the year is 100,000 MWH, the utility company must provide at least 1% of its load that equals to 1,000MWH of power from the green energy, assuming the state rule is 1%. If the utility company served only 900MWH from the green energy, the company has to provided an additional 100MWH worth of REC Certificates (1credit = 1MWH). All credit must be submitted to the state regulation by the end of the plan year. Note: Plan year is 12 calendar months. Different states will have difference plan year. Some state may start the plan year from Jan to Dec. While other state may start their plan year from Jun to May of the following year. If the utility company does not have enough REC to submit, they have to purchase the REC Certificates at the “cap price” set by the state regulation to meet their obligations. This is a form of penalty .

13. REC – Renewable Energy Credit - Certificates Renewable Energy Credit came from “Green Energy Generators”. Each MW that is generated will earn 1 REC Credit Certificate. For this reason, the REC credit is generated as the generator actually running and generate power. Most of the green energy generator are projected the number of credits to be generated, however, the actual credits are depending on the actual power that were generated. Therefore most of the REC Transferred are at the end of the plan year or as often as the green power generator could accumulated enough REC to generate the certificate. Since the holder of the certificate is not obligated to submitted their REC until the end of the plan year, the holder may trade the REC during the plan year for additional profits, and re-purchase at the lower price to balance out their REC requirements. NOTE: The excess REC at the end of the plan year become worthless. If the utility company short of the REC certificate for submission at the end of the plan year, the company must buy the certificate at a “cap price” set by the state to meet their requirements. This is a form of penalty.

14. U.S. SO2/NOX Emission Allowances An SO2/NOX allowance authorizes a unit within a utility or industrial source to emit one ton of SO2 or NOX during a given year or any year thereafter. At the end of each year, the unit must hold an amount of allowances at least equal to its annual emissions, i.e., a unit that emits 5,000 tons of SO2 must hold at least 5,000 allowances that are usable in that year. Allowances are fully marketable commodities. Once allocated, allowances can be bought, sold, or traded.

15. US Green Tags Renewable Energy Certificates (RECs), also known as Green tags, Renewable Energy Credits, or Tradable Renewable Certificates (TRCs), are tradable environmental commodities in the United States which represent proof that 1 megawatt-hour (MWH) of electricity was renewable (generated from an eligible renewable energy resource). These certificates can be sold and traded or bartered (exchanged for other good without exchange for money) and the owner of the REC can claim to have purchased renewable energy. It is important to understand that the energy associated with a REC is sold separately and is used by another party. The consumer of a REC receives only a certificate. In states which have a REC program, a green energy provider (such as a wind farm) is credited with one REC for every 1,000 kWh or 1 MWH of electricity it produces (for reference, an average residential customer consumes about 800 kWh in a month). A certifying agency gives each REC a unique identification number to make sure it doesn't get double-counted. The green energy is then fed into the electrical grid (by mandate), and the accompanying REC can then be sold on the open market.

16. REC in Aligne as US Green Tags When a renewable energy facility generates power, two products are produced: electricity and environmental benefits. In a Green Tag transaction, environmental “non-power” attributes are separated from the energy (power attribute) and sold as a "green tag." The electricity is sold separately as "residual" electricity. For this process to work, there has to be verification (called "attestation") that the renewable facility: ● Produced the power ● Delivered the power to the grid ● Sold the power and green tags only once. Attestation can trigger title passage and payment due.

17. Emission & Allowances Trading Model EPA 1 5 Generation 1 Generation 1 Generation 1 4 2 CPTY1 Energy Trading 3 CPTY2 CPTY3 EPA granted the allowances to the generation Generation assign the allowances to the Energy Trading. Energy Trading manages the allowances, trade the allowances as needed (buy/sell). Energy Trading forecast and monitor the generation emission (allowance consumption) and re-distribute the allowance back to the generation for remittance as needed. Extra allowances may be transferred between generations.

18. Emission & Allowances in Aligne The Emission: Aligne emission trade is used for generation emission forecasting based on load. This forecasting to determine the number of credits are needed for remittance. The Allowance: Aligne allowance trade is used to track all allowances including purchase, sales and granted allowances from the EPA that were re-allocated to the Energy Trading from the generation. Due to the limitation of the allowance liquidation methodology in Aligne, the allowance liquidation can not liquidate an emission trade with an allowance trade. For this reason, all of the generation forecast consumption must be model as allowance. Therefore, the Emission trade is not necessary to be used as trading strategy.

19. Allowances and Emission Configuration Depending on the type of Allowances being implemented, one or more of the following configuration issues should be addressed before entering Allowance or Emission deals: ● Units Configuration. Allowances need to be set up as a Power Unit in the Trade Units blotter. Similarly Metric ton needs to set up for Emissions. ● Markets must be properly configured for each type of allowance and emission deal. ● Renewable Facilities. These records are used in support of U.S. Green Tags as well as U.K. ROCS. ● ETS Registry Accounts. This screen is used to configure registry account information. Registry Accounts are used in conjunction with ETS Allowance deals. Registry Accounts are linked to ETS deals during trade entry via the ETB Emissions tab and are also used to specify ETS Allowance details. ● Yearly Fixing Dates. The Yearly Fixing Dates Blotter is used to specify fixing dates for Emission Shape deals. The entire configuration can be done in configuration section of Aligne.

20. Aligne Allowances Configuration

21. Aligne Allowances Trading Unit

22. Aligne Allowances Trade Entry

23. Allowance Deal Entry Aligne has Allowance templates for entering the allowance deals. Once selected one could choose the Market Components defined for physical Allowances. The Subtype on the Market Component record determines the type of allowance being entered (e.g., NOX/SO2, etc.). The Delivery Date on Allowance deals is the date the certificates are in hand, so the Start and End dates on Allowance deals are set to the same date. The Vintage year (equivalent to the "delivery period" on a regular power deal) is a curve like any other. Quantity on Allowance deals is calculated from certificate numbers. Because of certificate carry over, one may put certificates for prior years on this year's curve.

24. Aligne Allowances Trade Entry Use this tab for “Allowance Detail” Allowance Unit (Annually) Allowance Unit (Annually)

25. Aligne Allowances Trade Entry Optional Broker Fee Information is not needed

26. Aligne Allowances Trade Detail Note: Only the allowance trade that has “trade detail” that will be appeared on the “Allowance Inventory”

27. Entering Allowance Details • The fields displayed in the Allowance Detail dialog will vary depending on the allowance subtype selected. Field definitions are provided below. • With a "Buy" Allowance trade selected in the ETB browser, click on the Edit Allowances button to enter allowance details. • To add an Allowance detail record, click on the Add Row button, or right click in the Allowance Detail browser and select "Add Row" from the pop-up menu. • To remove an Allowance Detail record, highlight the record in the Allowances dialog and click on the "Delete Selected Row" button, or right click in the Allowance Detail browser and select "Delete Row" from the pop-up menu.

28. Entering Allowances Trade Detail Allocated: This field indicates the total number of used allowances. Remaining: This field shows the total of unused allowances. Cash Settle: This check box is used when the entire allotment is being bought on a cash basis. Selecting this check box will enable a Price field where a dollar amount can be entered. This field is only used for Cash Settlement transactions. Expected Pay Day: This optional field indicates when payment is expected on the highlighted Allowance trade. Actual Pay Day: This optional field is used to indicate when payment for the Allowances trade was actually received. Broker's Fee: This optional field is used to indicate the date that broker fee was paid. Swap/ Loan: Use this check box to mark off buy trades that are swap transactions. Check for YES, uncheck for NO. Status: This field indicates the status of an allowance. When an allowance record is saved, Aligne applies the status of 'O' (Open). An open allowance trade must be matched with an open buy or open sell record in the Allowance Inventory Management module. Once the records have been matched, the Status field is set to 'C' (Closed).

29. Entering Allowances Trade Detail Vintage: This field indicates the year in which the Allowance is being drawn. It is populated directly from the Component1 field on the trade. This field is not displayed for ETS allowances. The underlying database field is set to NULL, since the field is not needed for ETS allowances. Facility ID: Use this field to add a facility or resource identifier to the allowance record. These IDs are typically used by the system for Renewables and U.S. Green Tags. Choices in this field are user definable via the Renewable Facilities screen. This field is not displayed for ETS allowances. Start Serial/End Serial: The total allotment of Allowances can be divided into segments. The Start and End Serial fields mark the beginning and end of any segment. Typically, the lot number can be used only once. New segments or ranges must then start on the next available lot number. For example, if you have a total of 100 allowance lots, then you can establish a range starting from 1-10. Usually, a new range must start on lot 11 and 1-10 cannot be used again. The exception to this rule is if the Character Variable CORS is set to Y. If it is, then identical certificate/serial numbers and ranges are allowed when the Facility ID is the same but the vintage (delivery month and year) is different. This field is not displayed for ETS allowances. Amount: This field indicates the amount of Allowances within a given segment. The field is calculated by the numerical range specified in the Start and End Serial fields. Delivery Date: This field reflects the delivery date for the Allowance trade as specified during deal entry. This date can be changed as need. This field is not displayed for ETS allowances.

30. Entering Allowances Trade Detail Confirmation ID: This optional, free form field can be used to add information pertaining to confirmation of payment, receipt of power, etc. This field is not displayed for ETS allowances. Trustee: This optional, free form field can be used to specify a trustee. This field is not displayed for ETS allowances. Collateral: Select this check box if collateral is required for the Allowance trade. This field is not displayed for ETS allowances.

31. Allowance Liquidation and Inventory • Aligne provides two screens for liquidating Allowances: • The Allowance Inventory Blotter is used to manage the matching and sequencing of serial numbers. Serial numbers must be added manually, and realization and matching can be done only one sell at a time. • The Allowance Trade Liquidation screen is used for trade- level liquidations. It can manage multiple liquidations (i.e., all sells versus select buys or one- on- one). It does not capture or manage serial number sequences. • Allowance Inventory Management • The Allowance Inventory Blotter is used to manage Allowance deals by matching buys against sells, initiating liquidation, undoing liquidation, and splitting buy records. To access this screen, from the main Aligne Screens Tree, select 'Mid-Office --> Allowance Inventory.' • The screen consists of two browsers: • The upper browser lists active Allowance Sell trades. • The lower browser lists active Allowance Buy trades. • You can use the filter fields at the top of the screen to filter records by Counterparty, Market/ Component, or matched/ unmatched sells.

32. Aligne Allowances Inventory Accessing The Allowance Inventory Screen No matching “Sell Trade” for liquidation purpose Allowance Trade entered via the ETB.

33. Allowances Inventory • Allowance Trade Detail is needed before listed on the inventory

34. Allowance Liquidation • Allowance Trade Liquidations screen allows you to offset the buy and a sell trades, also, you could liquidate the allowance certificate for the emission that were used by your generation. • In a scenario where the liquidation is used to link up with the emission from the generation, a sell trade of allowance may be entered for the appropriate generation. If within the same organization, an interbook deal may be appropriated. • You can liquidate as many trades at a time as needed, so long as the net volume across the sells and buys = 0. • The Allowance Trade Liquidation screen consists of two browsers: • The top browser shows records selected by the Position filter (i.e., Buy or Sell). • The lower browser shows the complementary records (that is, if the Position filter is set to Buy, then the lower browser shows the Sell

35. Allowances Liquidation From the Allowances Inventory screen, select the trade that will use for liquidation. Click on the “Liquidate” button to open the “Allowances Liquidation Screen”

36. Allowance Liquidation The Allowance Liquidation initial display does only show the sell trade that will be used in the liquidation on the top blotter. To bring in the buy trades for matching with the sell trade on the lower blotter, go back to the Allowance Inventory screen to pick the trades for use for liquidation, double click on the buy trades from the Allowance Inventory blotter, the designated trades will be populated on the lower blotter of the Allowance Liquidation screen.

37. Allowance Liquidation • Double click on the trade that will be used for this liquidation from the Allowance Inventory, the trade will be populated on the lower blotter of the Liquidation screen. • If mistake is made, double click on the trade from the lower blotter, it will be removed. • Should only liquidate with the same vintage trades

38. Aligne Allowances Liquidation Liquidation could only be done for the same product and vintage year.

39. Aligne Allowances Liquidation Double click on the select row that you wish to use for liquidation. This action will populate the selected data to the liquidation screen Liquidation could only be done for the same product and vintage year, also the matched amount. Note that the liquidation icon is not active due to the condition is not matched

40. Aligne Allowances Liquidation Split If the amount does not match for the liquidation purpose, the “BUY” trade may be split to generate the amount that would match for the liquidation Note that the amount of 15000 Allowance is split to 2 Allowance, 10,000 and 5,000

41. Aligne Allowances Liquidation Now , the amount, product, vintage year, and Status = o (open), the allowance is ready for liquidation Notice: the liquidation icon is now active Notice: After the liquidation , the liquidated data is now have the status is C (closed: for both of the purchase and sales sides of the trade.

42. The Column in the report for the Allowances To generate a report on allowance trades use Report designer to create a report. Below is the list of report columns and filters that may be used for a specific report on allowances. In the View field, select “PETEXP” from the picklist. Sort Columns Description 1 +AL VINTAGE DELIV Vintage 2 1B/S Buy/Sell 3 TNUM Ticket 4 CPTY Counterparty 5 +AL AMOUNT Allowances amount 6 +AL STARTNUM Allowances certificate start serial 7 +AL ENDNUM Allowances certificate end Serial 8 PRICE FUNC Trade price (in parameter select 2 for comp field) 9 PRICE FUNC Market price (in parameter select 1 for the comp field) 10 P&L MTM (in parameter select INCEPTION for period) 11 +AL STATUS Status

43. The filter setting in the report for the Allowances The filter column may be used Columns Conditions OHM >TODAY OHM COMP >TODAY TRADE TYPE PW TRADE TYPE2 ALLOWANCE PHYSICAL TRADER USERID +AL AMOUNT <>0

44. Aligne Allowances Report Weighted Average Price Based on Purchase only trades Inventory Value Purchase - Sales

45. REC Configuration Emission unit may be MW or Metric Ton.

46. Emission Trades

47. Emission Deal Entry Note that if the GLOC TPOWEREQ is set to Y, one of the Accounting fields on the Emissions tab must be populated before the Emission Physical deal can be saved. If TPOWEREQ is set to N, the Accounting fields are not required for Emission Physical entry. Same applies to Emission shapes deal. Use Emission tab to enter emission details

48. Emission Shapes Emission Shapes are directly related to the fuel usage required for power production. As such, verified Emission Shapes have a "granularity" and "shape." So the Emission Shapes template makes use of Aligne's "Shape" functionality. The screen image below shows some of the key functionality involved when entering Emission Shapes. Add load and price details to emission shapes The shape details tab displays various details records

49. Emission Auto Generation • Aligne provides the ability to enter or import Emission Profiles representing emitted pollutant (SOx, NOx, carbon dioxide, etc.) volumes. If customers want to track their power generation positions as well as the emitted pollutant volumes associated with those positions, both the power trade (physical or shape) and the emission trade can be entered and managed separately. However, in reality, there is a link between the two – the burning of fossil fuels used in the generation of electricity results in the creation of an associated amount of emitted pollutant. Providing a way to associate the emitted pollutant volumes with the associated power generation position gives you increased control over how emissions trading risk metrics are calculated. Once emission profile volumes have been calculated, these deals can then be grouped with emission allowance trades to see how well the allowances cover the forecasted or actual emission volumes. • Aligne's Emission Profile Auto Generation feature does two things: • It allows you to select a power trade deal (physical or shape), press a button, and automatically generate an Emissions Physical deal that will be linked to the power trade. • It provides the ability to attach a formula to the emission profile trade. This formula is then used by the Reporter to calculate the nominal volume on the emission profile trade by applying the formula to the volume of the power trade.

50. Emission Auto Generation from ETB