Introduction to Renewable Energy Certificates (RECs)
May 14, 2020 · By Ben Serrurier
A Guide for Corporate Renewable Energy Buyers
Today’s companies are feeling the pressure to meet clean energy goals. Investors, employees, and customers are being more vocal than ever about the importance of using green energy and reducing carbon emissions, and “greenwashing” isn’t going to cut it: they want to see real change.
To meet those stakeholder demands, corporations need to procure Energy Attribute Certificates, which are called Renewable Energy Certificates (RECs) in the United States (and often referred to as “renewable energy credits”). While some corporations have had renewable energy goals for years, others are looking into them for the first time thanks to growing pressure from stakeholders. That’s why we’re launching a series of articles covering RECs, including the options to acquire RECs, how to use RECs in sustainability reporting, and the marketing claims companies can make associated with RECs.
This article is the first in the series, and covers the basics. So let’s get started.
What Is a Renewable Energy Certificate?
Essentially, a REC is a way to track – and lay claim to – not just the amount of renewable energy that is generated and sold, but also the positive environmental attributes associated with that energy. For every megawatt-hour (MWh) of renewable electricity generated and sold to the wholesale market, an associated REC is created. The REC generally includes information about the type of renewable resource and where it’s located, a date stamp for when it was generated, an emissions profile of the generating source, and a unique identification number.
Who Issues Renewable Energy Certificates?
As explained by the Office of Federal Sustainability, there are about ten regionally-based electronic REC tracking systems in the United States. These systems help to minimize the risk of fraud or more than one company claiming the same REC. Tracking can also be done through bilateral contract methods. The tracking system issues a uniquely numbered certificate for each REC generated. The certificate is created each time a MWh is produced by a facility registered in the tracking system. RECs can change ownership through the tracking system as they’re traded.
Green-e, a nonprofit organization founded by the Center for Resource Solutions, will certify RECs to ensure that they are properly accounted for and that no double counting takes place. It’s recommended that corporations only procure Green-e certified RECs to make sure they have no issues down the line when it comes to making claims in sustainability reports.
How Do Renewable Energy Certificates Work?
Most renewable energy generators participate in a REC tracking system, and they’re the ones who receive the certificates when they sell their electricity on the wholesale power market. Those generators are then free to pass on the RECs they receive to another entity.
Once a generator releases energy onto the grid through transmission lines, the electrons simply follow the path of least resistance. Electrons from a solar plant merge with electrons from a coal power plant, and when you turn on the lights at your corporate headquarters, it’s impossible to tell where those electrons came from, exactly.
To go “100% renewable,” a corporation could put solar panels on every roof of every building and generate enough to cover their needs, but for most corporations, that’s impractical, if not impossible. RECs provide a way for corporations to pay for renewable energy that gets added to the grid for everyone to use, and to take credit for that energy. If they want to go “100% renewable,” they can purchase enough RECs to cover every megawatt hour of energy that they purchase from their utility company or retail electricity provider.
Corporations have many different options to acquire RECs from clean energy generators (we’ll get to those later in our REC series). Once you’ve acquired a REC, you need to “retire” it in order to be able to use it in your sustainability reporting. When you retire a REC through the associated tracking system, it cannot be sold again, which means no one else can lay claim to that unit of renewable generation.
While any type of REC will help you reach your goals, it’s important to note that not all RECs are created equal.
Bundled vs. Unbundled Renewable Energy Certificates
There are two types of RECs that you can purchase: bundled (typically just called “RECs”) and unbundled RECs. Though RECs and electricity are produced concurrently, the two “products” are severable and represent different revenue streams for project developers.
When a REC is sold together with its associated energy, it is called a bundled REC. Bundled RECs often come from new-build projects because in order for developers to receive financing and construct the project, they must show guaranteed revenue streams for the expected energy rather than merely the severed REC. Buying a bundled REC (i.e. electricity + REC) from a yet-to-be-built project allows your company to make “additionality” claims, meaning that your company’s investment directly added new, low-cost renewable energy to the grid and displaced higher-cost fossil power.
Unbundled RECs, however, can’t garner additionality claims. That’s because unbundled RECs aren’t tied to their underlying power. Unbundled REC supply has far outpaced demand, which has driven the cost of unbundled RECs down. While companies can still purchase unbundled RECs to achieve sustainability goals, unbundled RECs don’t have as positive an environmental impact because they don’t lead to new renewable energy being generated and merely represent a re-shuffling of the existing renewable energy supply on the market today.
Most companies are entering into the renewable energy market because their customers, leaders, and stakeholders want to see them have more sustainable practices. While purchasing unbundled RECs technically “counts” towards sustainability goals, many stakeholders may ask “What change did this actually create?” Achieving additionality ensures that your company is promoting a more sustainable world because it actively decarbonizes the grid by displacing fossil power.
Renewable Energy Certificate Prices
RECs are priced differently depending upon whether they are compliance market RECs or voluntary market RECs. Compliance market RECs are used to meet renewable portfolio standards (RPS), must meet certain criteria laid out in the RPS statutes, and are often more expensive. Voluntary REC markets are almost exclusively driven by climate-related sustainability goals, making them more common for corporate clean energy purchasers. Since there are fewer strings attached, voluntary market RECs have lower prices. Some states have a tier system for RECs to indicate their positive environmental impact. For example, Tier 1 RECs come from new wind and solar projects. The RECs with a higher carbon-reduction impact are typically more expensive than RECs with a lower impact, like those produced in an already clean grid.
For example, imagine a new clean energy project is built in the southeast, where a lot of coal is being burned to produce energy. A renewable energy project producing RECs there is going to create a much bigger reduction in carbon emissions than if you were to build a new clean energy project in Washington state, where there’s a robust hydroelectric-powered grid. Even though each scenario produces RECs, the RECs from the southeast would generally cost more due to their more positive environmental impact.
REC prices can fluctuate based on changes to wholesale energy markets. For example, we looked at REC prices in Pennsylvania, Maryland, and New Jersey following the Minimum Offer Price Ruling (MOPR) in December 2019, which was expected to negatively impact renewable energy projects in the PJM market. Monthly moving averages of Tier-1 RECs in those states have been increasing from a base of roughly $6.50 in August 2019 to over $9.50 in January 2020, as shown below. While there are more market factors affecting the valuation of RECs than MOPR, including a decline in 10-15-year forwards in PJM Locational Marginal Prices, the marked acceleration in prices at the end of the year and from October 2019 to January 2020 is notable. This sort of volatility must be taken into consideration when deciding whether to achieve sustainability goals through unbundled RECs or a bundled energy + RECs PPA.
Renewable Energy Certificates vs. Carbon Offsets
Although RECs can help you achieve carbon emissions goals, they’re not the same as carbon offsets, which are also known as voluntary emission reductions (VERs) or carbon reduction tons (CRTs).
RECs are designed to reduce the carbon impact caused by your company’s electricity use— they specifically impact a company’s scope 2 emissions.
Carbon offsets come from projects or activities that reduce greenhouse gas emissions, increase carbon sequestration or help remove greenhouse gas from the atmosphere. Like bundled RECs, carbon offset projects must be additional, and the emissions they remove have to be “real, permanent and verified” according to the EPA.
Carbon offsets can be used to address scope 1, scope 2 or scope 3 emissions. By reducing greenhouse gas emissions with a project, you can “offset” emissions in other parts of your business. They’re meant to be used in conjunction with your company’s progress in reducing its own emissions and can help when you can’t otherwise reduce your direct or indirect emissions.
Lastly: RECs are measured in megawatt-hours (MWh), while carbon offsets are measured in metric tons of CO2. Both can be useful ways to address your company’s carbon footprint, but they aren’t interchangeable terms.
That’s it for now. In our next article, we’ll cover your options to acquire RECs, with some pros and cons of each.