Renewable energy certificates (RECs) represent the environmental attributes of power generated from renewable sources. They are traded separately from physical power in a number of national, regional and US state-based markets. Due to the differing schemes adopted to trade RECs in these markets (REC Schemes), cross-border trading is complicated and seldom occurs.
RECs serve a number of purposes, including compliance with mandatory electricity targets from renewable sources imposed by governmental and regulatory authorities, reporting renewable energy usage and voluntary carbon neutrality. However, the impetus for most REC Schemes is to provide a cost effective means with which to meet the mandatory renewable energy standards, particularly in Australia, Japan and certain US states.
In Europe, the European Commission published a white paper in 1997 setting a target to increase renewable energy consumption to 12 percent of all energy consumed by 2010. The Renewables Directive (2001/77/EC) set an additional renewable energy target to increase the portion of electricity generated from renewable sources in the EU to 22 percent by 2010. Last month, EU Member States agreed to a further target to obtain 20 percent of energy from renewable sources by 2020. EU Member States are free to choose their preferred vehicle to achieve these targets, such as REC trading, electricity taxes or feed-in tariffs.
In the United States, individual states set renewable energy targets referred to as Renewable Portfolio Standards (RPS). A RPS is designed to ensure that electricity providers supply a minimum percentage of their power, generated from renewable sources, to energy consumers within the state. Currently, 23 states and the District of Columbia have adopted RPS, which differ from state to state, although only 18 states and the District of Columbia have adopted REC Schemes to help meet the RPS.
REC Schemes are a cost effective means of meeting the various renewable energy targets. While REC Schemes compliment carbon credit schemes, which are mainly driven by the Kyoto Protocol, they are a response to a different renewable power requirement.
Although the mandatory and voluntary REC Schemes have some similarities, their differences often create problems for cross-border trading.
In Europe, most REC trading is on a voluntary basis. Only four European countries, the United Kingdom, Belgium, Italy and Sweden, have adopted mandatory domestic renewable targets and correspondingly implemented REC Schemes. These REC Schemes impose obligations on different market participants. The British and Belgian REC Schemes impose obligations upon suppliers. The Italian REC Scheme imposes obligations upon producers and importers, and the Swedish REC Scheme imposes obligations upon consumers.
The various US state RPS and the related REC Schemes also differ from state to state. For example, the participants in the New Jersey REC Scheme can comply with specific requirements for solar power generation only by actual solar generation or by submitting solar RECs, which represent the environmental attributes of solar power generation alone. This requirement is in addition to the other New Jersey renewable energy requirements which can be met by trading other types of RECs. In contrast, Maryland does not issue separate solar RECs. Instead, a REC may be issued in respect of a variety of renewable sources such as wind, geothermal or solar. Such differences between state REC Schemes may mean that a REC obtained in one state may not be used for compliance in another state, unless it can be shown that the REC was originally granted for power from an eligible renewable source in that other state. The fungibility of one state’s RECs against another state’s RECs may therefore be limited, which creates an impediment to inter-state trading in the United States.
Standardisation and harmonisation
The incompatible REC Scheme requirements have adversely affected the liquidity of REC markets. Greater harmonisation of REC Schemes, including the regulations governing RECs and the documentation used to trade them is likely to encourage the cross-border trade of RECs within the United States, the European Union and, eventually, internationally.
There is a movement in the various REC markets to harmonise the REC Schemes and to encourage the cross-border trade of RECs. For example, in 2006, Sweden and Norway attempted the first cross-border trading scheme where the aim was for Norway to join the REC Scheme operating in Sweden. In the end, Norway decided not to proceed as the cost of doing so would be too high for Norwegian consumers and industry. The countries could not agree on the sharing of cost burdens. Leading REC industry associations responded to the failure of the joint Sweden-Norway scheme by claiming that a political solution is necessary to integrate the European REC markets. Market participants are calling for the European Commission to start assimilating the European REC Schemes as, without harmonisation, support for renewable energy is substantially distorted and the potential for renewable energy will not be fully developed.
In addition, the US Congress is currently considering federal renewable energy targets and a federal REC Scheme along with the various proposed greenhouse gas legislation. Also in the United States, industry groups are attempting to address some of the REC Scheme inconsistencies through documentation. In February 2007, the American Bar Association, the American Council on Renewable Energy and the Environmental Markets Association published the first Master Renewable Energy Certificate Purchase and Sale Agreement (the Agreement) for REC trading designed to be generic enough to address differening programs and allow for cross-border trading. Given the Agreement is so new, it is unclear as of yet how widely accepted it will be in the REC markets.
Greater harmonisation of the REC Schemes would improve the liquidity of REC markets and the cost effectiveness of compliance with renewable energy targets. The Nordic attempts at a joint REC market, the US federal REC Scheme proposals and the publication of the Agreement in the United States demonstrate that REC market participants seek greater harmonisation and standardisation, and that they are willing to explore different options in order to further develop the REC markets.