In a previous edition, we discussed how a company can extract value from reducing its greenhouse gas emissions through carbon emission reduction credits. Renewable energy credits (RECs) are another market-traded commodity traceable to climate change concerns. This article briefly describes RECs and how they are generated and marketed. The "Carbon Market Transactions" section of this edition of The Climate Report, discusses particular projects that generate RECs.
What Is a REC and How Is It Generated?
When an electricity generator produces electricity, whether from a renewable resource or traditional fossil fuel sources, the electricity is fed onto the electric transmission grid, where it mixes with energy generated by other sources. Once on the grid, electricity from one source is indistinguishable from electricity from other sources. RECs are designed to encourage the generation of electricity from renewable power sources by providing a mechanism to monetize the unique value of such power.
If properly documented, electricity generated through an eligible renewable energy source produces one REC for each megawatt-hour of electricity generated. The REC is a unique commodity that exists separate from the generated electricity and represents a property right to the environmental, social, and other nonpower qualities of renewable power. The REC can be bundled with the electricity and sold as renewable power, or the generator may instead sell the electricity to one buyer and the REC to a separate buyer. However, if the electricity generated by a renewable power resource is sold separately from the REC, the purchaser of that electricity may not claim it as "renewable energy."
The United States does not have a national REC registry. Depending upon the project location and type, a renewable power generator can register its RECs on a number of regional and voluntary tracking systems. These systems require documentation substantiating the claims of generation of renewable energy. As discussed below, the choice of registry will affect the potential marketability of the REC. Once verified in accordance with the registry's rules, each REC is given a unique tracking number so that it can be traded, sold, or retired. Links to U.S. REC registries, marketers, and brokers are available on the Department of Energy's web site.
Who Purchases RECs and What Are They Worth?
The market for RECs is driven largely by a combination of government mandates to increase the production of electricity from renewable sources and consumer demand for "green" energy. According to the Department of Energy, as of May 2009, 24 states plus the District of Columbia had adopted "renewable portfolio standards," which require electric utilities to obtain a certain amount of their power from renewable resources by a certain date. Although requirements vary widely, many states either allow or require utilities to meet these standards by generating or purchasing RECs. Many states impose limitations on the geographic area within which the RECs may be generated or require RECs to be generated from specific types of renewable resources (e.g., solar).
RECs may also be purchased on the open market by consumers who wish to minimize their personal greenhouse gas emissions. For example, events or companies that claim to be "carbon neutral" often purchase RECs equivalent to their electricity use. Individuals or organizations also purchase and "retire" RECs to encourage the development of renewable power resources.
Market prices for RECs vary widely. The value of a REC depends, in part, on its eligibility to satisfy a utility's compliance obligations. For example, prices for registered New Jersey solar RECs, which may be used to meet specific state standards, were between $660 and $680 at the end of 2009. In contrast, RECs available in the voluntary market that could not be used by utilities to meet compliance obligations were trading in the range of $0.75 to $1.50.