What Is A REC & How Do They Work?

How Do Renewable Energy Certificates Work?

When renewable energy is produced, it goes into the local power grid and becomes indistinguishable from energy generated by other non-renewable sources. Renewable Energy Credits (RECs) were created to help energy buyers distinguish between renewable and non-renewable energy sources, by accounting for and assigning ownership to the attributes of renewable electricity generation and use. 

What Is A REC (Renewable Energy Credit)?

Renewable Energy Credits (RECs), also called Renewable Energy Certificates, are tradable instruments that represent the clean energy attributes of renewable energy and give the owner the legal right to claim renewable energy use from a specific source.One REC is created for every megawatt hour of renewable energy generated from sources such as solar, wind, hydropower, and geothermal energy.

Each Renewable Energy Credit is uniquely identified, and includes data such as where it was generated, when it was generated, and by what source. When the owner of a REC makes a renewable energy claim based on that REC, it is then retired and no longer a tradable asset.

The Renewable Energy Certificate Program

RECs are certified by independent third parties. The most common certification standard in the U.S. is Green-e®, which is administered by the Center for Resource Solutions. Green-e® certified RECs meet strict environmental and consumer protection standards. This ensures that the electricity and its associated RECs are produced by the reported renewable facility, in the amount specified, and are not claimed by more than one party.

Who buys RECs

In the Renewable Energy Credits market, REC purchases fall into two categories: Compliance and Voluntary. 

Compliance REC Market

Compliance buyers are utilities or electric suppliers that are required by state regulations called Renewable Portfolio Standards (RPS) to have a certain percentage of their electricity generation or sales from renewable sources. These buyers satisfy the RPS requirements either by buying RECs or generating them at their own renewable energy projects.

Voluntary REC Market

Voluntary REC buyers are environmentally conscious organizations or individuals interested in reducing their carbon footprint or greenhouse gas emissions. These buyers purchase RECs to offset carbon emissions associated with their purchased electricity, or to meet commitments for purchasing renewable energy.

Bundled vs. Unbundled RECs

If RECs are sold with their associated energy then they are known as bundled RECs. If they are sold separately from the underlying energy then they are known as Unbundled RECs. Unbundled RECs are nationally available and can be sourced from a single type of resource such as solar or wind.

Understanding How Unbundled RECs Work 

Unbundled RECS can provide organizations a cost-effective, flexible means to support renewable energy development and meet sustainability goals, even if clean energy products are not available locally. By purchasing RECs, businesses do not need to alter their existing power contracts and a single REC contract can offset load in multiple states or regions. However, because the abundant supply of RECs has outpaced demand, unbundled RECs can be so cheap they do not have any real financial impact on the projects they came from. Hence, buyers of unbundled RECs cannot make additionality claims, the claim that their purchase enabled a new project to be built. 

Power Purchase Agreements

Power Purchase Agreements (PPAs) and Virtual Power Purchase Agreements (VPPAs) are much stronger in terms of additionality than the purchase of unbundled RECs. The long-term contract to buy a project’s renewable energy is a critical factor in enabling the financing and construction of a new renewable energy project. The purchase of bundled RECs along with their underlying clean energy through the PPA/VPPA enables the buyer to objectively claim the purchase of clean energy from a specific project, often located within proximity to the organization’s load, and to claim additionality.

In markets with an RPS, RECs can carry a higher price making bundled PPA/VPPA deals more challenging for the offtake. For those PPA offtakes whose motivations are more financial, or who have an organizational need for renewable energy in a state with a mandatory RPS, the project can replace expensive project RECs with cheaper national RECs. This structure is often called a REC Swap or REC Arbitrage. 

REC Swap Arrangements with VPPAs and Retail PPAs

In RPS markets with higher priced RECs, or resource specific credits like Solar Renewable Energy Credits (SRECs), a REC swap can provide PPA offtakes the ability to achieve their goal of renewable energy usage claims in a more cost-effective way. 

In a REC swap, the project retains its  RECs, selling them on the open market and replacing them with cheaper, nationally sourced Green-e® RECs. The difference in price between the project RECs and the replacement RECs provides the project additional revenue which can be used to reduce the PPA rate to the offtake. The result is a more competitive PPA price while maintaining the offtake’s ability to claim the use of renewable energy. However, they will not be able to claim that their renewable energy comes from the specific project. Instead, their renewable energy claims must match the attributes of the replacement RECs, whether that is solar, wind or other renewable sources.

Urban Grid is currently developing projects in Maryland and Pennsylvania where the state legislatures have enacted aggressive Renewable Portfolio Standards with solar carve-outs, which place a premium market value on SRECs. In both of these markets, a REC Swap is almost always the best route for an economical Retail PPA or VPPA.

Choosing Which REC to Purchase

RECs give companies, institutions, and individuals a simple way to offset their carbon footprint and support clean energy. Choosing whether to buy inexpensive national RECs, or bundled RECs via a long-term PPA depends on your budget, your risk tolerance, and your emissions reduction and public relations goals. Buyers who want to have the most impact with their renewable energy procurement should utilize bundled REC PPA/VPPAs to achieve additionality and maximize impact. In RPS markets with higher priced RECs, a PPA with a REC Swap approach may be the best choice. Unbundled RECs provide the least in terms of impact and marketing ability, but still play an important role in transitioning the grid to cleaner electricity and reducing carbon footprints.

ITC Step Down: Understanding Solar Federal Tax Credits

The Federal Investment Tax Credit for solar energy is one of the most important federal policy initiatives to support the growth of renewable energy in the US. The ITC currently allows you to deduct 30% of the cost of installing a solar energy system, which has commenced construction through 2019. The ITC then steps down to 26 percent in 2020 and 22 percent in 2021. As we enter the period of the ITC step down, it is important for corporate buyers of renewable energy to understand how this reduction could affect clean energy prices in the future.

How Does the Solar Federal Investment Tax Credit Work?

The original solar investment tax credit (ITC) was established in 2005 as part of the Energy Policy Act and is based on the amount of investment in solar property. Both the residential and commercial ITC are equal to 30 percent of the basis that is invested in an eligible property. Since 2005, the solar investment tax credit has been extended several times, most recently in late 2015 — leaving us with the policy in its current form. The 2015 extension included an ITC step down schedule that reduces the tax credit amount for commercial installations between now and 2022. After the step down from 30 percent to 22 percent in 2021, the residential credit will drop to zero, while the commercial and utility credit will drop to a permanent 10 percent.

For corporate renewable energy buyers, the decrease in federal investment tax credits from 2019 to 2022 could result in increased solar PPA/ VPPA rates.

The ITC Phase Out & Safe Harbor Guidance

With the impending step down of the solar investment tax credit, there remains one area of uncertainty — when a project begins to be eligible for the credit. The IRS issued a guidance statement, Notice 2018-59, which provides two methods a taxpayer may use to establish that construction of a qualified solar facility has begun; for the purposes of claiming the solar investment tax credit (ITC).

Those two methods are:

  1. The Physical Work Test, or
  2. The Five Percent Safe Harbor Test

The Physical Work Test

Under the physical work test stipulation, a project can satisfy the begin construction requirement if  “physical work of a significant nature” has been initiated. Activities like acquiring permits and funding do not count as “physical work”.

The Five Percent Safe Harbor Test

Projects can also satisfy the begin construction requirements by paying or incurring 5% or more of the total cost of the project. This is often the more flexible and reliable method to “begin construction”.  

Both tests require continuous progress towards completion.

As utility-scale solar developers look to secure the full 30% ITC for their projects, we expect to see many procure equipment early, such as solar modules, to meet the 5% threshold. This will put a strain on the supply of modules in the short term and may lead to a rise in solar module prices over the next couple of years. This is just another reason for corporates to get moving on a solar PPA and take advantage of today’s low prices.

What Happens After the ITC Step Down?

According to projection data released in 2015 by the George Washington University Solar Institute, if the 30% solar investment tax credit had not been extended, residential solar installations could have plunged 94% in 2017, and utility-scale projects could have declined 100% — with neither recovering anywhere close to today’s levels. Bloomberg New Energy Finance also predicted solar installations would drop by another two-thirds in 2017, which the Solar Energy Industries Association estimated would have cost America over 100,000 jobs. These predictions were used to help successfully lobby for the ITC’s multi-year extension and phase-out. 

The 2015 extension and ITC step down seems to have prevented dramatic decreases in residential and utility-scale solar development. However, we won’t begin to see the phase out’s impact until 2020. In the short term, we expect the overall steady decrease in corporate PPA rates to flatten out, or even increase in some markets, due to pressure on solar panel prices. Even with upward pressure on prices due to the ITC step down, there are factors that could mitigate this. The following market conditions will continue to influence the amount of solar that gets deployed over the next several years, and the value proposition to corporate buyers in particular.

Solar Market Drivers:

  1. Declining costs of solar equipment
  2. Demand for residential, commercial  and utility-scale solar projects
  3. Rise of retail electricity rates
  4. Increase in natural gas prices — a key variable in wholesale electricity prices
  5. Rise in coal-fired electricity

Additionally, the ITC phase out may actually lead to greater competition among tax equity providers as it expands access to the market for investors with sufficient tax liability to absorb the lower tax credit. Solar developers could eventually take traditional tax equity investors out of the capital stack altogether in the future. Solar energy’s low risk and steady returns are attracting new investors whose profit expectations are much lower than current tax-equity investors.

The ITC phase out may also lead to reduced financing costs, as the need for separate tax equity investments for financing solar projects requires complex deal structures and due diligence.

The cost of solar power purchase agreements (PPAs) could increase as the investment tax credit steps down over the next five years.  Corporate buyers have an opportunity to take advantage of today’s low prices by executing PPA’s before the tax credit reductions take effect. If you are in the market for purchasing renewables or have sustainability commitments that could be accomplished via renewable energy purchase, it makes good financial sense to prioritize it now, with a little bit of urgency. 

Solar Energy FAQ: 14 Frequently Asked Questions About Utility-Scale Solar Projects

According to new figures from Wood Mackenzie Power and Renewables and the Solar Energy Industries Association (SEIA), there are now over 2 million solar photovoltaic (PV) installations in the U.S. These solar projects range from small, residential rooftop systems of 2 kilowatts to utility-scale solar projects as large as 500 Megawatts. Despite the rapid growth of large scale solar in the US, many details about this clean energy source are not widely known. Listed below are some solar energy FAQs. If you’re looking for investment options in utility-scale solar, check out our post on the different types of power purchase agreements.

How do solar panels work?   

Solar panels, also known as photovoltaic modules (PV modules), work by turning sunlight into direct current (DC) electricity. These panels are supported by some type of racking structure that can be fixed, or it may rotate on an axis. Solar panels are paired with inverters that convert the DC electricity into a more useable form of electricity known as alternating current (AC.) The AC electricity then passes through a transformer to ensure that the power is the appropriate voltage before it is sent to the electric grid.  

Where does the electricity generated by a utility-scale solar project go?   

The power produced from a utility-scale solar project installation is injected directly into the electric grid at the project’s “Point of Interconnection”. This injection can be into a distribution line (low voltage) which is what connects to your house or business or into a transmission line (high voltage) which takes power from power plants to the distribution grid that serves your house or business.

Can Solar Energy be Stored?

Yes, solar energy can be stored. There have been tremendous advancements in battery technology and reductions in costs that have led to an increase in the application of battery storage with renewable energy projects. When batteries are added to utility-scale solar projects, it allows the project to control how much and when energy is released into the grid. Additionally, the project can control when the batteries are being charged. Utility-scale solar plus battery storage projects are not widespread yet, but as costs continue to decrease,  we expect to see a steady increase in implementation, enabling the transition of large-scale renewables from intermittent to dispatch-able energy resources.

What is a “Utility-Scale” solar installation and how is it different from a rooftop solar array?

Urban Grid considers utility-scale solar projects to be 20MW or greater in size, which is enough energy to power thousands of homes or major manufacturing facilities. These projects require an interconnection to the power grid and use of the local electric grid to transmit power to the end user.

Rooftop solar and ground mount distributed generation installations are generally small, supplemental energy sources usually totaling less than 2 MW of generation capacity. These installations are also typically “behind the meter”, meaning the energy is being fed straight from the panels to the end user. In many markets, the surplus power not utilized by the house or facility is injected into the grid. Depending on the utility serving the facility, the utility may pay the generator for this power at a predetermined rate.

Interested in Utility-Scale Solar?

 

Do utility-scale solar projects prevent homeowners from installing panels on their roofs?

No. People are free to install solar panels on their roofs if the circumstances are right for them and if the local regulations permit.  

How long is a utility-scale solar project operational?

At Urban Grid, we fully expect our utility-scale solar projects to have the capability of producing electricity efficiently for more than 35 years. Here are some key factors that will impact the project’s life:

  1. The solar panels used in utility-scale solar projects typically have a manufacturer’s warranty for 25 years or longer. Solar panels will continue to produce energy past their warranties.
  2. The project may have land control for 50 or more years, depending on the specific terms of the land agreement.
  3. Solar projects have life spans of approximately 30-40 years (or longer) until the panels are no longer efficient. With the underlying land secured, the project will be able to be upgraded or re-powered over the course of operation with new more efficient equipment, extending the life and improving efficiency.

What happens after the useful life of the solar project?    

When the solar facility is no longer efficient, the system will be decommissioned and the equipment removed, recycling everything that can be, and returning the land to the condition in which it existed prior to the installation of the solar project. Solar has a minimal impact on the land, unlike fossil fuel power plants. When the project is removed, the land is returned to essentially its original state. Many landowners see leasing land for utility-scale solar projects as a form of land banking, as it has minimal long term impact on the value of the land.

Do utility-scale solar projects make any noise?   

Solar panels do not produce noise, but the inverters that change the current of electricity from DC to AC do produce a slight hum that is not audible past the property boundaries. Solar projects are  considered quiet neighbors.

Will the project produce glare?   

Urban Grid utilizes the best available Photovoltaic solar (PV) panel technology for all of our utility-scale projects. These panels are dark in color and are treated with an anti-reflective coating. The purpose of solar panels is to absorb as much sunlight as possible to produce energy efficiently so the point of the panels is to be as minimally reflective as possible. Solar panels are generally less reflective than windows and have been approved by the Federal Aviation Administration for installation on and around airports across the country.

How tall are solar panels for utility-scale solar projects?

Solar panels can range in height from  8-15 feet high depending on the racking structure and solar module used.

How does Urban Grid approach landscape design and management?

Urban Grid works hard to ensure that our projects will not change the look or feel of the community. Solar arrays have a low profile (8-15 feet from grade) and we use setbacks and vegetative buffers to shield the project from view. We see this as part of being a good neighbor.

If you’re a landowner looking to sell your property to a utility-scale solar developer, contact us today!

Are there long-term stormwater concerns with utility-scale solar?

Utility-scale solar projects do not increase runoff and may actually improve soil and water quality. Stormwater management plans are a required part of the solar development process. These plans are prepared by professional engineers to ensure that projects do not contribute to erosion or flooding. Once operational, the use of perennial ground cover and elimination of annual tillage, irrigation, and fertilizer (in the case of farmland) allows the soil to absorb water and rejuvenate during the life of the project. A solar project has maximum ground permeability and is much better in terms of stormwater runoff than most other types of development.

What are the impacts on wildlife?

Solar farms do not pose a threat to wildlife. Wildlife studies are an important part of the development process — trained experts study proposed sites to ensure that utility-scale solar development minimizes impact to wildlife. Solar projects can also provide important habitat for birds and pollinators like bees and butterflies.

What benefits do utility-scale solar projects bring to the community?

In most cases, solar projects are sited on land that generates relatively little tax revenue. The change in use provides the locality with a new higher tax revenue source. Additionally, solar projects utilize minimal public infrastructure (water, sewer, police, etc.) relative to commercial or residential development so the cost to the locality is very low. Utility-scale solar projects create local construction jobs and increased business for local services such as hotels and restaurants. The solar projects also create a small number of long term jobs for vegetation management and Operations and Maintenance of the facility.

This  Economic Impact analysis on utility-scale solar in Virginia provides more information: https://www.vml.org/wp-content/uploads/pdf/VTCApril19_Mangum_22-23.pdf