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.