It’s getting a lot more expensive to buy the rights to claim renewable energy – in some cases, up to ten times what it cost a year ago! Renewable Energy Certificates (RECs) have long been the easiest and cheapest way for an organization to fulfill a renewable energy commitment, but RECs are no longer the add-on they once were. The rise in price reflects simple supply and demand, and in an environment where demand for renewable energy from corporations and institutions is only growing, it is important that energy buyers understand the dynamics behind RECs, what they are, when they make sense and what the limitations are.
What are RECs?
Simply stated, a REC is a certificate that is created when one megawatt-hour (MWh) of electricity is generated by a renewable source. These certificates are sold by generation owners as an incremental value source. The certificates have no inherent value, rather their price is a reflection of how badly buyers need or want to buy them. In many states – those with Renewable Portfolio Standards (RPS) – load serving entities, like suppliers or utilities, may be required to buy RECs to achieve a specified share of renewables in the electricity supply mix. Those are the buyers who need RECs. The buyers who want RECs are companies, cities, universities, homeowners or any entity who decides that they want to make the claim of being supplied by renewable energy.
How are RECs used?
Buying and retiring RECs allows an electricity user to credibly make the claim that it is powered by renewable energy. Let’s say, for example, that a chain of coffee shops with 10 locations across Chicago uses 1,500 MWh of power annually. The owner elects to buy 1,500 RECs for the 2021 year and begins to include in their marketing material that the business is supplied by renewable energy. Compared to installing renewable generation at each of the coffee shops, which is likely not economical, buying RECs is simple and has the same net effect on the overall mix of generated power. A helpful way to frame the REC construct is that the coffee shops have sponsored 1,500 MWh of renewable generation elsewhere, which is equivalent to the power the shops use.
Are there different types of RECs?
If the business is interested in a more specific claim, such as renewable energy that has certain characteristics (location, generation source, new build), RECs with a specific characteristic set can be purchased at a premium. The least expensive RECs will not be tied to any specific technology or location – any qualifying renewable technology, anywhere in the U.S. For example, if the coffee shop owner wanted RECs tied to newly built solar generation in Illinois, the pool of RECs available in the market would be much smaller, therefore, depending on specific demand, the price likely much higher. State RPS requirements dictate how active and expensive a particular REC may be, for example, top- tier Massachusetts solar and New Jersey solar RECs are often ten to twenty times more expensive than general RECs.
The most important part is that these RECs represent renewable energy that is not being claimed by any other consumer.
How are RECs tracked?
A claim to renewable energy via a REC purchase is credible because of the systems set up to ensure accuracy and transparency, such as M-RETS® or the Generation Attribute Tracking System in PJM. For most businesses, it is important that a claim to renewable energy can be independently substantiated. Organizations such as the Center for Resource Solutions and its Green-e® program ensure that the RECs they have certified reflect actual electricity generation from qualified renewable sources. Further, certification and accurate tracking of RECs prevents double counting. While many companies are making voluntary REC purchases, a robust tracking and verification framework exists for so-called compliance RECs that energy suppliers need to meet RPS standards.
What are the pricing dynamics?
For most of their 15-20-year history, general RECs have not been in high demand. Compliance-driven RECs have long been a material value stream for project development, but general RECs at below $1 did not do much to move the needle for developers. In the last couple of years, however, the number of organizations making sustainability commitments has ramped up, along with the demand for RECs. There is a timing imbalance between the supply and the demand, which is pushing prices up. While a customer may decide to buy RECs and execute their purchase in the same day, a large-scale wind or solar development takes years from initial concept to commercial operation. We have seen general REC prices above $5 for the last few months – a level which will likely spur additional renewable development – but it will take years for those new projects to come online.
How do you buy RECs?
Much like any commodity, RECs are traded both on exchanges and through bilateral transactions. Energy customers in deregulated states can buy RECs that are bundled with their energy supply contract. Standalone REC transactions for customers based in any market can be facilitated through an energy supplier, an energy broker or a specialty environmental offset provider. It is important that energy buyers understand exactly what they are hoping to accomplish with their REC purchase. Typically, energy buyers should only start to consider REC prices once they have confirmed specifications for location, vintage, technology source and an ongoing strategy. The ongoing strategy is important because although RECs are a single year product, sustainability commitments do not typically have an end date.
What are the limitations of RECs?
RECs have proven to be a useful construct for the renewable energy industry, but as companies push to make increasingly meaningful commitments, RECs do not always meet decarbonization goals. A simple REC purchase may just be trading who claims the certificate for renewable energy. Trading claims to renewable sources already on the grid with no net impact does meet the impact threshold for many companies. A considered assessment of impact is essential before any REC purchase. Increasingly, more companies are deciding that relying on RECs alone to deliver on sustainability goals doesn’t cut it.
Financially, RECs are a cost adder. Other avenues of accessing renewable energy, whether through on-site generation, a vPPA or an integrated retail product can serve as hedges and investments that may include financial upside versus the default procurement option and therefore reduce overall energy spend. To learn more about options for accessing renewable energy, check out these Customer Insights editions “The Renewable Energy Landscape” and “Renewable Energy Buying Trends: Virtual Power Purchase Agreements”.
Administratively, RECs are an annual product. If a buyer wants to offset their annual energy usage with RECS, they need to estimate energy usage for a given year, buy RECs, and then true-up the REC volume and the usage volume. Alternatively, a buyer can wait to buy RECs for a given year until after that year has ended, but they become a price-taker at that point and could end up significantly overpaying.
How do I establish a REC strategy?
RECs do not have to be an all or nothing approach. Often, RECs are used to fill in the gaps around other types of renewable energy procurement. To begin the conversation about how RECs fit into your strategy, our energy experts can help. If you are just curious or getting started, contact Evan Howell at email@example.com or (312) 488-2211 about establishing a custom Decarbonization Roadmap to meet your Environmental, Social, and (Corporate) Governance (ESG) and financial goals. If you are already working with an AEP Energy Sales Representative, they will happily provide more information or click here to request more information.
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