4 Ways to Get Renewable Energy Certificates: Pros & Cons of Each
May 21, 2020 · By Jessica Johnson
A Guide for Corporate Renewable Energy Buyers
To meet renewable energy targets and reduce Scope 2 emissions, companies need to acquire – and retire – renewable energy certificates (RECs), which are sometimes called renewable energy credits. There are a handful of ways that a corporation can go about purchasing RECs, and most companies use more than one method to reach their sustainability goals. In this guide, we’ll cover the various ways to acquire RECs, along with some pros and cons of each, to aid corporate managers in their sustainability planning.
These are the four most common ways corporations get RECs:
1) Purchasing “Unbundled” RECs
2) Power Purchase Agreements
3) Energy Supplier Options: Green Power Programs, Green Tariffs
Let’s dive in!
Purchasing “Unbundled” RECs
Unbundled RECs are RECs that aren’t paired with the underlying electricity (see our Introduction to RECs article for more information). These types of RECs are not tied to a power purchase agreement. While there are many utilities and other providers that sell RECs, it is recommended that corporations use a broker that is certified by Green-e to ensure that the RECs are not double counted.
Unbundled RECs can be purchased from REC retailers at any time, making them one of the most flexible ways to reach renewable energy targets. Corporations typically purchase them in bulk to cover large percentages of their electricity use. As long as the REC was generated within the eligible 21-month window for the performance period they are being applied to, they will count toward renewable energy goals. In sustainability reports, the EPA recommends that the RECs be distributed evenly across all facilities proportional to their electricity consumption, so that each facility has the same percentage of their consumption met by the REC.
The fact that corporations can buy unbundled RECs in one area of the country and apply them to their energy usage in another area of the country makes the environmental impact difficult to assess. There’s an oversupply of unbundled RECs in the market, which has pushed REC prices down to such a degree that they’re not a large revenue source for renewable energy project developers. Unlike a power purchase agreement with a new project (which we’ll get to later), buying unbundled RECs does not guarantee that a new renewable energy project will be built; in fact most projects offering RECs now would have been built without the REC market.
But because unbundled RECs are so easy to acquire, many companies start here before looking into other options that have a bigger impact on new green power generation. In addition, companies with aggressive timelines may use unbundled RECs to meet their targets until RECs from long-term power purchase agreements start coming in (more on that later).
- Pros: They’re inexpensive, fast, and relatively easy to purchase.
- Cons: The environmental impact is questionable and there’s no potential “upside.” Although unbundled RECS will check the box on a sustainability report, if you are investing in renewable energy to fight climate change and protect your company’s long-term interests, you should look into other ways to acquire RECs that result in more renewable energy coming online. In addition, RECs are a cost, and will only ever be cost. Unlike power purchase agreements, there is no potential upside, like the opportunity to acquire RECs and earn revenue at the same time, or use the agreement to hedge energy costs.
Power Purchase Agreements
A power purchase agreement (PPA) is a contract between an “off-taker” (like a corporation) and the developer of a renewable energy project. There are two main types of PPAs: physical and virtual. While the mechanics differ, in all types, the contract guarantees that the developer will receive a fixed price for every megawatt hour (MWh) of energy it sells (up to a certain number of MWhs), and in return, the corporation receives the associated RECs. PPAs are long-term contracts, spanning 10-20 years. The RECs are delivered over time, as the project produces and sells energy.
It takes a lot of money to build a new wind or solar project, and most developers turn to banks to get the financing for construction vs. using their own funds. Most banks will only lend a developer money if the developer has a PPA in hand, which guarantees a certain amount of revenue: It’s a safe bet. That means that by entering into a PPA, the corporation is making it possible for a new project to get financed and built.
As opposed to purchasing unbundled RECs, the investment can be directly traced to a new project coming online. The amount of carbon dioxide emissions that are avoided by bringing the project online will vary depending on where it is located. A new renewable project on a “dirty” grid will have a much higher emissions impact than in California, for example, where there’s already a lot of wind and solar projects.
In a PPA, corporations aren’t paying a specific price for the RECs they receive, like they would when purchasing unbundled RECs. PPAs are known as a fixed-for-floating swap, and are typically “settled” monthly. The amount the corporation pays at settlement depends on the difference between the fixed price agreed to in the PPA, and the floating wholesale market price, which is what the developer actually sells the energy for. For example, if the PPA price is $15, but the developer sells the energy for $25, the developer will give the extra $10 to the corporation. On the other hand, if the developer sells the energy for $10, the corporation has to pay the developer $5 to make up the difference. Essentially, no matter what the wholesale price of energy happens to be over the next 15 years of the contract, the developer receives exactly $15 per megawatt hour: no more, no less.
It takes a lot of analytics to estimate what the corporation will pay for the RECs obtained through a PPA, because it depends on what wholesale market prices will be for the next 10-20 years. That’s where LevelTen Energy comes in. We calculate over a billion data points a day to give our clients an understanding of the most-likely projected settlement value for any given wind or solar PPA. In the best-case scenario, a PPA delivers a massive amount of RECs for a corporation and actually earns the corporation money. In the worst-case scenario, the corporation ends up paying much more than they expected each month, or the project doesn’t get built at all, which means no RECs would be delivered.
Once a PPA is signed, it may be another year or so before construction begins on the project, and another year or so before any energy is being generated. That’s important to keep in mind when looking at meeting a sustainability goal by a specific date.
While you can only enter into a PPA with a project that is located in certain areas of the country, the RECs you receive as a result of the PPA can be applied to your company’s overall renewable energy usage, no matter where you actually use energy. We’ll get into RECs and sustainability reporting in more detail in an upcoming article. If it’s important to you that your renewable energy purchase is located as close as possible to your facilities, it may not be possible through a PPA, depending on the location.
- Pros: High impact when it comes to reducing carbon emissions: PPAs result in new renewable energy projects coming online. And there’s potential upside: With the right analytics, PPAs can deliver RECs and revenue at the same time, or at least deliver RECs at a very low cost. In addition, PPAs enable a corporation to achieve renewable energy usage targets and Scope 2 emissions reductions at a large scale and over a long period of time.
- Cons: There are financial risks involved, which is why it’s critical to have a good advisor or a large internal team of energy experts who can properly analyze each PPA opportunity. It’s not a fast transaction: choosing a project and negotiating the contract can take 6+ months (but as a result, a large number of RECs will be delivered for 10+ years). PPAs for corporate customers are not available in all areas.
Supplier Options: Green Power Programs & Green Tariffs
Many electricity providers, including utilities and competitive suppliers, now offer ways for their customers to procure renewable energy and receive RECs in return. These include green power or green pricing programs, which are short-term commitments, as well as green tariffs, which are longer-term contracts.
Green Power/Green Pricing Programs
Thanks to pressure from corporate energy buyers, many utility companies are starting to offer green power programs, which give their customers a way to procure renewable energy and claim RECs as a result. According to the U.S. Department of Energy, as of 2017, there were at least 850 utilities that offered some type of green power program.
In green power or “green pricing” programs, typically the utility charges a premium for every kilowatt hour that you purchase, which shows up as a line item on your utility bill. In a block option (a fixed energy quantity), you get a set amount of kilowatt hours of renewable energy for a set monthly charge. In a percentage of monthly purchase, your company is charged on a cents per kilowatt hour basis, and you purchase a percentage of your monthly power as green power—for example, 70% renewable, while the rest may come from conventional or brown power. You can generally subscribe or unsubscribe from a green power program at any time, making this a flexible option.
The utility typically sources the renewable energy from one of its own facilities or from another renewable energy project nearby, which means it comes from a project that is located in the same region as where you use energy, which is important to some corporations. That said, you, the customer, generally have no input into exactly which project the energy comes from, and there’s no guarantee it supports the construction of a new project.
The utility acquires the associated RECs, and then retires them on your behalf, in proportion to the amount of green power you purchased. This allows you to claim those RECs in your sustainability reporting. To provide this service, utilities charge a premium on the energy, which means you could pay a lot more for the RECs than through other procurement methods.
Other types of energy suppliers that offer green power programs include “competitive suppliers” and community choice aggregation programs:
Competitive Suppliers: If your facilities are located in a region with retail electricity choice, then you have the option to buy electricity from any provider, not just your utility: These are known as competitive suppliers. Participating customers still pay for their electricity via their monthly bill from their utility, which then passes the payment through to the competitive electricity supplier. The corporation receives RECs, but at a premium price.
Community Choice Aggregation (CCA): These programs are local governmental entities that procure electricity on behalf of customers within some geographic area. CCAs can choose where they get their electricity from, and many choose to provide more renewable energy than a utility would. CCAs can source the energy from a PPA with a project developer, or they can purchase unbundled RECs and pass those along to their customers. That means the electricity doesn’t necessarily come from a local renewable energy project, and the money you pay as a CCA customer doesn’t necessarily result in the construction of a new renewable project.
- Pros: Short-term contracts, fast and easy to participate
- Cons: You’ll pay a premium for the RECs, green programs are not available everywhere, not always “additional” – which means impact is questionable
Green Tariffs/Sleeved PPAs
If your company is large enough, you may be able to negotiate a long-term contract with your utility company for green power in what is known as a “green tariff” or “sleeved” PPA. In this arrangement, the utility company enters into a power purchase agreement with a specific renewable energy project, and then provides the RECs to you. The term lengths tend to be shorter than direct PPAs with project developers; they are often 3-7 years, vs. 10+ years.
This type of contract enables you to support the development of a new renewable project and obtain RECs, without having to enter into a power purchase agreement on your own. These types of programs are sometimes available in regulated markets, where a direct PPA with a supplier is not an option for a corporate buyer.
- Pros: Results in a new project added to the grid, you don’t need to negotiate/own the PPA
- Cons: The utility charges a fee for this service, so a sleeved PPA typically costs more than a direct PPA with the renewable energy project developer
Pros & Cons of REC Procurement Options
|Unbundled RECs||Supplier Green Power Programs||Power Purchase Agreements|
|-Available in Regulated Markets|
-Always a Cost (no upside)
-Not Always Available
There are many ways to generate renewable energy on your property, including biomass, fuel cells, geothermal heat, and wind turbines, but the most common is solar panels, known as photovoltaic systems. A few famous examples of this include Apple’s corporate headquarters, which features a 17-megawatt onsite rooftop solar installation, and the Tesla Gigafactory, which will draw all of its power from solar panels on the roof, plus geothermal heat and wind, once it is completed.
Some companies may choose to purchase, install, operate and maintain the equipment themselves, but since that falls outside of the expertise of most companies, the majority outsource either everything to a vendor, or just pieces (like the installation or operation). Other companies choose to host an on-site generation system that is completely owned, operated and maintained by another company, and agree to buy the power that is generated from it for 10-20 years. This approach is known as an on-site power purchase agreement, and removes the burden of financing, operating, and maintaining the system.
Most on-site systems still sell and transmit the power to the grid; the electrons don’t flow directly to your outlets, and you still have a utility bill. Once the on-site system is registered, a REC will be issued for every megawatt hour of renewable energy it generates. RECs generated from on-site activities still need to be retired if you’d like to use them toward your goals. In some cases it’s possible that the system produces more energy than you use at that location, in which case you could apply the RECs you receive to other parts of your operations, or sell them on the voluntary market.
- Pros: High profile; your investment in renewable energy is obvious to your stakeholders
- Cons: It’s very expensive, not all facilities are ideal, and for most companies it will not generate the required amount of RECs to reach goals
Corporations Are Making a Difference
According to 2017 data from the National Renewable Energy Laboratory, PPAs, unbundled RECs, and utility renewable contracts tend to be purchased in large quantities by larger nonresidential electricity customers. As a result, these products account for about 68% of green power sales but only account for about 4% of customers (Figure 1 below). In contrast, CCAs, competitive suppliers, and utility green pricing programs primarily serve small electricity buyers such as residential and small commercial customers. These products account for about 96% of green power customers but only about 32% of green power sales.
The data shows that green power sales are driven by corporations, and thanks to corporate sustainability commitments, sales will continue to grow. Ultimately, more demand for RECs means more demand for clean megawatt hours, so we commend all corporations for purchasing RECs, no matter where they come from.
Ready to Get Started?
If you’re considering a power purchase agreement as part of your overall REC procurement plans, contact us for a free consultation to discuss your needs.