Renewable Energy Credits (RECs)
A renewable energy credit (REC) is a tradable commodity that is created to monetize the benefits and attributes created by the generation of electricity from a renewable source. A REC represents the assertion that a specified amount of electricity was produced from a verified renewable resource. By monetizing the value of the benefits, REC's create an investment incentive for consumers. RECs are known by other names, including green tags, green energy certificates,and tradable renewable certificates.
Credits are unique and vary depending on the issuer and register a number of characteristics, including the resource type, location, vintage, and so on. Presently there is no national system in place regulating the REC market. This creates a fractured regime that is governed by one or more parties including private, cooperative, corporative, local, state, and regional actors. The lack of harmonization also requires individuals to check locally to see how REC's are governed in their locality.
One roadblock in creating a unified framework to foster a market for REC's is that there is still disagreement regarding the scope of REC's. Some proponents of RECs argue that the credits should simply represent proof of renewable generation and that the benefits and attributes exist separate from the credit. Limiting REC's to proof of generation has the effect of simplifying the monetization of the commodity resulting a more universal, fungible commodity.
Other REC proponents argue against the simple generation framework. These persons argue for “bulking up” the RECs by claiming that they represent the avoided greenhouse gas (“GHG”) emissions from a conventional energy source. Although this definition is not widely accepted, it does find some support in the original theories that originally gave rise to RECs.
How Do RECs Benefit the Environment?
The central impetus of eco markets is to effect environmental protection, and to provide a marketplace where emitters can achieve compliance through trading of eco-related products. The purpose of RECs is to merge environmental protection interests and economic interests into a symbiotic relationship that fosters both objectives. Eco markets are hybrid systems that are imperfect at meeting either of their economic or environmental ends zealously, and have drawn criticism accordingly.
Debates concerning RECs continue as to whether they effectively reduce GHG emissions, whether they are a cost effective means of doing so, whether they are equivalent to emissions offsets, and what purchaser actually acquires when they buy a REC.
The impact that RECs have on overall emissions of GHGs is important in determining their utility and value, and unfortunately there is no universal answer. RECs must be judged on an individual, case-by-case basis, as there is no national standard, and voluntary market regulations are relatively loose.
However, some environmental benefits of wind energy cannot be discounted even if they cannot be unequivocally quantified. Without question, wind’s main benefits are the reduction of GHGs and the increase in domestic energy production.
The question of whether the purchase of RECs actually results in less emitted carbon dioxide is a viable one. In limited scenarios, the purchase and retirement of a REC can confer ownership of an avoided-emissions claim. Usually, however, the purchase of a REC is more akin to providing a subsidy to the alternative energy project that produced the REC.
Consider the situation where a small wind turbine owner is connected to the grid and sells the associated RECs unbundled from the electricity. Since all electricity is equal once it enters the grid, the renewable power that is pumped into the grid from the consumer’s side has the overall effect of reducing the demand on the utility. The utility in turn produces less electricity because the grid cannot have more electricity flowing into it than is being used at any given time.
A green product retailer named “Native Energy” has claimed that “...[t]he result is that for every kWh generated by a renewable generator, one kWh less is generated by fossil fuel plants.” This argument is more conceptual than practical because the grid is incredibly inefficient. A quantity of energy pumped into the grid from a remote location will not necessarily result in the same amount of avoided electricity produced by the utility. For example, if you live in an area such as the Southeast United States and you buy RECs to cover your electricity usage, you may still end up using electricity produced mostly from coal. Therefore, RECs are useful for claiming carbon neutrality up to your amount of electrical consumption because it represents proof that electricity was produced without carbon emissions.
As long as there is not a government policy that allocates the ownership of GHG reductions created by renewable energy to conventional plants (such as cap-and-trade where the capped entities receive credit for reductions), renewable energy systems can provide a means to effectively address climate change.
However, RECs cannot be used for carbon neutrality claims beyond the claimant’s metered electrical use because most RECs are generated from sources that did not rely on their sale for financial viability. In other words, they are not additional.
“Additionality” is a concept that imagines what would have happened under the status quo had the REC not been purchased or contracted for.
Although many additionality tests exist, the basic question to ask is whether a project relied on the revenue from the sale of RECs for their financial viability. Absent proof of additionality, RECs cannot be considered equal to emissions offsets.
Technically, actual carbon emissions cannot be offset by non-additional renewable energy projects. Additional projects can be created, for example, by the pre-sale of all RECs generated over the lifetime of the generating unit (“GU”). Under such a scenario the pre-sale of the REC was used to finance the project, which can be said to not have occurred but for the REC sales.
RECs are also prone to being “double counted.” This is because the emissions reductions are indirect and occur remotely from the renewable energy generation. The owner of the renewable energy generator is most likely not the owner of the fossil-fuel plant where the actual emissions reduction occurred.
The bottom line is that in most scenarios, RECs do not embody the requisite “additionality” to be considered emissions offsets, and are akin to a subsidy in support of a public good. RECs do, however, represent proof of emissions-free energy production.
Marketers have involved claims to the environmental attributes of a mWh of generation that is separated (unbundled) from the power. The attributes can be further “disaggregated” and sold separately to distinct purchasers. Estimates of the amount of carbon dioxide (CO2) offset by RECs are based on assumptions about the power that is displaced by the GU.
Avoided emissions are one aspect of a REC, and it includes other environmental benefits as well. REC purchases do ultimately, though indirectly, provide environmental benefits including reduced land and water impacts and improved air quality.
Further, the purchases can encourage the development of new additional renewable energy projects, thus reducing the overall electrical footprint. Customers wanting to buy “green power” through utility tariffs increases the demand for RECs in the voluntary market. Demand for RECs is increased in the compliance market if a state (e.g. New York increasing from 25% by 2013 to 30% by 2015), which requires more renewable energy projects to be built.
It is important to note that RECs should not be equated with offsets because they do not automatically meet additionality criteria. That is, a REC that is generated to meet a state “renewable portfolio standard” (“RPS”) is not additional even if it does have the potential to reduce CO2 emissions because it presumably was created in contemplation of the RPS.
The REC Marketplace
RECs are primarily sold in two types of markets in the Unites States – compliance markets and voluntary markets. Compliance markets are those which require a minimum renewable energy requirement present in a region’s electricity mix by a certain date. These are embodied in a renewable portfolio standard (“RPS”). The standard can take the form of an absolute amount of electricity, a percentage, or a more creative approach.
Either state or local government may enact RPSs. As of now there is no national RPS. Electricity providers in RPS states demonstrate compliance by obtaining RECs by creation or purchase, and submitting them as part of a yearly audit.
Advocates of a national RPS point to Texas’ program as a model of success for the country. After passing its RPS, Texas quickly became one of the largest renewable energy markets in the country. Opponents of a national RPS claim that it is unfair to parts of the country with disproportionately less renewable resources, and will raise their electricity rates.
The voluntary market, however, was created out of peoples’ desire to “go green.” Many businesses and institutions use REC purchases as evidence of their corporate conscience. For example, the University of Pennsylvania, Intel, and Whole Foods are voluntary purchasers of RECs. Anybody can sell a REC on the voluntary market, but the market has defined standards in certification, verification, and tracking.
REC Management Systems
Certification ensures that RECs come from eligible renewable sources that meet widely accepted consumer standards. Many green power retailers and REC marketers require third party certification of the associated generating units (“GUs”) prior to their promulgation of any RECs. Third party certification often requires independent verification that the amount of electricity generated from a renewable source is proportional to the amount of RECs created.
For voluntary purchasers of RECs, certification provides assurance that the supplier’s claims are accurate and the product meets quality standards. For REC purchasers in a compliance market, it ensures that the REC was not previously used to meet a quota.
The verification process is essentially an ex-post audit. It ensures that the green electricity was actually placed into the grid by making sure that all REC sales are linked to specific REC generators, and that the certified GU is performing as expected.
Verification is essential to claiming the product’s environmental benefit, and assures customers that they get what they pay for. Tracking systems are used to monitor and verify the creation, sale or transfer, and retirement of RECs.
Certification and Verification
The Center for Resource Solutions (“CRS”), a national nonprofit organization, has developed an independent certifying organization called Green-e Renewable Energy (“Green-e”). Green-e is a voluntary program that certifies and verifies renewable electricity products such as RECs. It increases consumer confidence in renewable energy by adding transparency and preventing double counting.
Green-e has set standards concerning each project’s level of environmental degradation, electrical connection to the grid, level of air emissions (if applicable), and ethical conduct of suppliers in marketing and advertising the green power products.
Green-e’s verification process consists of an annual “Verification Process Audit” of renewable energy sales and supply and a bi-annual “Marketing Compliance Review” of marketing materials. The Verification Process Audit requires REC retailers to contract for an independent certified public accounting firm to audit their renewable energy purchases and sales. It also involves outside verifiers to ensure that the amount of electricity reported is accurate. Similarly, its marketing compliance review ensures that providers meet specified ethical marketing and disclosure standards.
Since certification and verification are voluntary, there is no reason that several separate certifiers could not come into existence. For example, The Small Wind Certification Council (“SWCC”) is an independent certifier of small wind turbines. SWCC certifies small wind turbines according to the American Wind Energy Association’s (“AWEA”) Small Wind Turbine Performance Standard, which addresses turbine energy and sound performance.
A universal standard is a huge step towards mainstream acceptance of alternative energy sources, especially wind. However, multiple overlapping standards impede market homogeneity. A unified standard has the potential to expand the REC market to all participants nationwide.
Overall, certification ensures standards for GU type and installation, whereas verification ensures that the GU system is operating as expected.
A GU of wind energy can create RECs for sale nationwide, but there is currently no national registry of RECs. Therefore, the possibility for fraud exists unless the RECs are tracked from their point of creation to their final point of retirement.
In order to protect against “double sales” each REC must be independently certified and verified through an audit. This is especially important for REC sales or purchases from outside an individual's state or region.
A regional tracking system is an electronic database that is used to track the ownership of RECs, “much like an online bank account.” The system issues a uniquely numbered certificate for each mWh of electricity generated by a generation facility registered in the system, tracks the ownership of certificates as they are traded, and retires the certificates once they are used or claims are made based on their attributes or characteristics.
Because each mWh of electricity has a unique identification number and can only exist in one owner’s account at any time, this eliminates ownership disputes and diminishes the potential for double counting.
A tracking system can be used to verify compliance with an RPS and to substantiate voluntary green power or environmental claims. Tracking systems only monitor the transactions, and are used in conjunction with certification and verification.
The tracking systems that are currently in operation function on a regional basis, with 48 states presently covered.
The Western Renewable Energy Generation Information System (WREGIS) covers most of the western portion of the country; the Midwest Renewable Energy Tracking System (M-RETS) covers the northern midwest; the Electric Reliability Council of Texas (ERCOT) is focused primarily on Texas; The North American Renewables Registry (APX NARR) tracks RECs on the central midwest and southeastern portion of the Unites States; the PJM Technologies’ Generation Attributes Tracking System (PJM GATS) covers the northeast and midwest states between New York and Indiana, and the New England Power Pool (NEPOOL) covers New England.
M-RETS, for example, tracks renewable energy generation and assists in verifying compliance with RPSs as well as servicing voluntary REC purchasers. M-RETS uses an internet-based system that creates, verifies, manages and enables trading of RECs. The system allows users to create unique certificates, enable transfers and transactions, enable compliance reporting with a full audit trail, and track serial numbers, certificates in company accounts, and certificate retirement. M-RETS’ territory consists of seven states and the Canadian province of Manitoba.
In sum, M-RETS creates one REC for every mWh of renewable energy produced in the region, tracks the life cycle of each renewable certificate created, and ensures against any double-counting or double-use of each certificate. The system allows renewable generators located within the M-RETS footprint to register an account to track and monitor their RECs.
The registration process is the largest hurdle that a generator must clear in order to have its RECs tracked under M-RETS. The generator owner must have their GU certified and verified by third party much like title insurance companies provide historical assurance for purchasers.
In order to register a GU and link it to an account, an owner must provide extensive information including ownership type, GU location, installed capacity, type of technology, and whether there are multiple GUs aggregated under one meter. It even allows the facility a nickname. After all fees have been paid, the M-RETS administrator will notify the relevant state regulator.
M-RETS also requires the GU owner to execute an attestation allowing Green-e to certify the RECs. The attestation imposes reporting requirements on sellers of RECs, including an annual sales and supply audit detailing the chain of ownership of the renewable energy. The individual states may require additional information or fees.
Of particular benefit to small wind turbine owners is the availability of aggregate metering. Aggregate metering occurs when more than one GU is measured through a single meter and is part of a single revenue stream. M-RETS permits aggregate metering only if all of the generating units associated with the single meter have the same “essential generation characteristics.” For a small wind generator these include the generator type and the date that the GU first commenced operation.
Individual states can develop their own tracking systems as well. For example, North Carolina has issued a request for proposals for the development of NC-RETS, a statewide renewable energy tracking system. The system will be aimed at enabling residential GU owners to track state RPS compliance. It will also be compatible with the regional systems, and is expected to be able to facilitate the transfer of RECs to and from ERCOT, PJM-GATS, and M-RETS systems.
1^ Michael Gillenwater, Redefining RECs (Part 1) Untangling Attributes and Offsets, Science, Technology and Environmental Policy Program (2007), at Appendix A available at http://www.princeton.edu/~mgillenw/REC-OffsetPaper-PartI_v2.pdf (last visited Nov. 10, 2009) [hereinafter “Gillenwater Part 1”]. (For example, Texas, California, and New Jersey have all issued RPS rules that define RECs as including the environmental attributes of the renewable generator.)
2^ Gillenwater Part 1 at 3 (explaining that a REC represents proof that one MW/hr of electricity was generated from an eligible renewable energy resource).
3^ Patrick Leahy & Alden Hathaway, Renewable Energy Certificates and Air Emissions Benefits: Developing an Appropriate Definition for a REC, Environmental Resources Trust, April 2004,available at http://apps3.eere.energy.gov/greenpower/resources/pdfs/0404_ert_rec_position.pdf (last visited Jan. 4, 2009).
5 ^ Michael Gillenwater, Redefining RECs (Part 2) Untangling Certificates and Emissions Markets, Science, Technology and Environmental Policy Program (2007), at 8, available at http://www.princeton.edu/~mgillenw/REC-OffsetPaper-PartII_v2.pdf (last visited Nov. 10, 2009) [hereinafter “Gillenwater Part 2”].
6 ^ Native Energy, How Offsets Work, available at http://www.nativeenergy.com/pages/how_offsets_work/412.php (last visited December 22, 2009).
7 ^ The State of Missouri had recognized this issue in 2004 when its voters approved a local RPS for the municipal utility, Columbia Water & Light: “Electricity purchased from on-site renewable energy systems owned by Columbia Water & Light customers may be included to meet the standard. Resources must be close enough to Columbia that the power can be physically transmitted to the Water & Light system.” Clearly, the drafters of this standard were focused on local environmental benefits. See Report of DX Energy, LLC, at http://dxenergyllc.com/docs/Incentives.pdf (last visited Jan. 4, 2010).
8 ^ Generating power from renewable does back down conventional electricity generation and reduces the need for fossil-fueled plants, which leads to reduced GHG emissions. The problem is that the amount of reduction cannot be quantified or claimed, and only a general claim can be made about one’s GHG mitigation efforts.
10 ^ Energy “beyond metered use” would include the energy used in travel, or in the manufacturing and transport of purchased hard goods.
11^ U.S. Dept. of Energy, FY05 Renewable Power/REC Procurement Guidance: Third Party Verification, 2(b), available at http://apps3.eere.energy.gov/greenpower/pdfs/0705_eo13123_3party.pdf (last visited Dec. 29, 2009).
12^ Gillenwater Part 2, supra note 5, at 8.
13^ For example, the NOx emissions reduction attribute is sold as a NOx allowance in the appropriate market, and the CO2 emissions reduction attribute is sold on the national voluntary market. For further reading see National Wind Coordinating Committee, Design Guide for Renewable Energy tracking Systems (PDF) (2004), available at http://www.osti.gov/bridge/purl.cover.jsp?purl=/822444-QjXt5S/native/ (last visited Dec. 15, 2009).
14^ Carbon Concierge is an educational and consultancy organization developed to create and implement climate reduction strategies. Carbon Concierge is a project of the Social Venture Network and Bainbridge Graduate Institute (BGI) and its operations are managed predominantly by BGI students and alumni. See http://www.carbonconcierge.com/learn/COPEM-Final.pdf.
15^ Oregon State Carbon Allocation Task Force, Carbon Allocation Standard Task Force Background Paper (2005), available at http://www.oregon.gov/ENERGY/GBLWRM/docs/CATF-Background.pdf (last visited Jan. 4, 2010).
16 ^ RPSs are also known as Renewable Electricity Standards (RES).
17 ^ Iowa requires exactly 105 mW, Arizona aspires for 15% by 2025, and Vermont aims to meet load growth by 2012.
18 ^ Robin J. Lunt, Recahrging U.S. Energy Policy: Advocating for a National Renewable Portfolio Standard, 25 UCLA Journal of Environmental. Law & Policy 371 (2007).
19 ^ Benjamin Sovacool & Christopher Cooper, The Hidden Costs of State Renewable Portfolio Standards (RPS), 15 Buffalo Environmental Law Journal 1 (2008).
23 ^ Ed Holt & Lori Bird, Emerging Markets for Renewable Energy Certificates: Opportunities and Challenges (2005), 15, National Renewable Energy Laboratory, available at http://apps3.eere.energy.gov/greenpower/resources/pdfs/37388.pdf (last visited Dec. 9, 2009) [hereinafter “Emerging Markets”].
25 ^ U.S. Environmental Protection Agency, Guide to Purchasing Green Power (2004), 29, available at http://www.epa.gov/greenpower/documents/purchasing_guide_for_web.pdf (last visited Dec. 19, 2009).
26 ^ U.S. Environmental Protection Agency, Guide to Purchasing Green Power (2004), 29, available at http://www.epa.gov/greenpower/documents/purchasing_guide_for_web.pdf (last visited Dec. 19, 2009).
28 ^ Green-e, Green-e Energy Verification, available at http://www.green-e.org/getcert_re_veri.shtml (last visited December 19, 2009). “The Verification Process Audit uses company contracts, invoices, and billing statements to verify the following:  that the provider purchased enough renewable electricity or RECs in quantity and type to meet its customer demand for each product;  that the electricity or RECs were purchased from eligible renewable generators, as defined in the Green-e National Standard;  that the information provided to customers on the product's annual Product Content Label is accurate;  that the company did not make any specific purchases of nuclear power;  that the renewable electricity or RECs purchased and sold by the provider were not sold to more than one customer;  that the provider has purchased no electricity or RECs from fuel sources for which negative marketing claims were made; and  that any non-renewable portion of the product meets the emissions requirements set by the Green-e National Standard.”
32 ^ See American Wind Energy Association, AWEA Small Wind Turbine Performance and Safety Standard (Jan. 8, 2009), available at http://www.awea.org/smallwind/standard/Small_Turbine_Standard_Draft_Document.pdf (last visited Jan. 2, 2010).
35 ^ Hawaii and New York are excluded. The New York State Energy and Research Development Authority (“NYSERDA”) is currently exploring options for developing a regionally compatible certification tracking and trading system. See http://www.nyserda.org/rps/714FinalAgenda.pdf (last visited Jan. 4, 2010).
39 ^ States include Illinois, Iowa, Minnesota, Montana, North Dakota, South Dakota, and Wisconsin.
41 ^ Midwest Renewable Energy Tracking System, Operating Procedures, 55-65, available at http://www.mrets.net/resources/M-RETS-Operating-Procedures-07.02.2007.pdf (last visited Dec. 17, 2009) [hereinafter “Operating Procedures”].
42 ^ Midwest Renewable Energy Tracking System, Operating Procedures, 55-65, available at http://www.mrets.net/resources/M-RETS-Operating-Procedures-07.02.2007.pdf (last visited Dec. 17, 2009) [hereinafter “Operating Procedures”].
44 ^ Operating Procedures, supra note 41, at 66.
45 ^ Operating Procedures, supra note 41, at 66.
47 ^ Press Release, Interstate Renewable Energy Council,North Carolina to Develop Regional Tracking System (Oct. 19, 2009), available at http://irecusa.org/2009/11/north-carolina-to-develop-rec-tracking-system/ (last visited Dec. 12, 2009).
48 ^ Press Release, Interstate Renewable Energy Council, North Carolina to Develop Regional Tracking System (Oct. 19, 2009), available at http://irecusa.org/2009/11/north-carolina-to-develop-rec-tracking-system/ (last visited Dec. 12, 2009).