October 22, 2010 - renewable energy credits

Continuing to look at RECs (renewable energy certificates or credits): today, an overview of how RECs are tracked and traded, and the kinds of markets in which RECs have value.

Because RECs are not tangible commodities, RECs are typically held and traded electronically.  In New England, the New England Power Pool Generation Information System (NEPOOL GIS) tracks the creation of RECs in each of the six states.  In much of the Western United States, RECs are tracked by the Western Renewable Energy Generation Information System (WREGIS).  Other accounting systems cover various voluntary markets.  These systems track the production and characteristics of renewable power.  In general, for each MWh of eligible renewable power produced, the systems credit the owner’s GIS account with one REC.  Where stronger state incentives exist, some resource types are compensated more highly, earning more than one REC per megawatt-hour.  This “REC multiplier” concept can make some project types (e.g. solar power) more lucrative.  Account holders may then engage in bilateral transactions with other REC market participants, generally buying and selling RECs without restriction.  However, because RECs are traded on an over the counter basis, there is no standardized exchange where REC prices or sales volumes are regularly posted.

Across the various states, the potential market into which generators may sell RECs is significant.  Voluntary markets allow a buyer to purchase RECs in order to support claims that the power the buyer consumes came from renewable resources.  This can provide a variety of “goodwill” benefits ranging from enhanced green marketing opportunities (e.g. “our product is environmentally friendly”) to allowing the buyer to publicly and financially support a particular renewable project (e.g. “we support the city’s community-scale wind project”).

The larger opportunity to sell RECs may lie in compliance markets.  In the majority of U.S. states as well as the District of Columbia, RPS programs requires electric companies to supply a minimum amount of power from qualified resources.  Each state’s program varies in its implementation.  In general, utilities must source an increasing percentage of power from renewable resources over the next several decades. 

October 21, 2010 - renewable energy credits

Yesterday, we began a look at RECS: renewable energy credits, or renewable energy certificates.  A REC represents the renewable attributes associated with a particular megawatt-hour of generation.  This approach to placing a higher value on renewable generation as opposed to other technologies works well because electrons are generally fungible, and indeed because power transactions are often “virtual” as opposed to physical deliveries of electrons from a specific generator to a specific consumer.  RECs may thus be sold to any purchaser, even if no power actually changes hands.  In some jurisdictions, RECs may be traded and used for compliance even if the underlying power would not physically be deliverable to the REC buyer.  It is thus important to view RECs as a separate commodity offering renewable generators a new revenue stream.

Each REC contains a broad range of information about its origins: what type of renewable resource produced the power, the date the REC was created, when the renewable generator was built, and the location of the renewable generator.  RECs include this information to allow buyers to make specific claims regarding the nature of the power they consume.  For example, a manufacturer might elect to purchase RECs generated by wind resources in order to market its products as environmentally sustainable.

Because many U.S. states have enacted legislative standards (called Renewable Portfolio Standards, or RPS) requiring certain amounts of utility load served to be sourced from renewable power, RECs also include information on their eligibility for certification for compliance with these state requirements.