What Are Green Certificates (RECs)?
The electricity from all power plants, such as coal, nuclear, natural-gas fired, wind, or solar, and whether in a regulated or competitive market, is mixed together in the transmission and distribution lines that deliver electricity to homes and businesses. Meters measure how much electricity enters the grid from each power plant, as well as how much is used by each end-use customer.
The renewable electricity can be broken into two major parts:
- The "energy", or actual electrical megawatt-hours (MWh) or kilowatt-hours (kWh) delivered into the electrical grid and are common to any power plant, whether powered by a renewable fuel or not; and
- The renewable "attributes", or "green certificates", or "RECs", representing the positive environmental attributes associated with the MWh or kWh of renewable power delivered to the grid.
Other Names or Acronyms for Renewable Energy Certificates
Renewable energy certificates (RECs) are known by a number of other names or acronyms, including:
- Tradable Renewable Certificates (TRCs)
- Renewable Energy Credits
- Renewable Resource Credits (RRCs)
- Tradable Renewable Energy Credits / Certificates (T-RECs)
- Green Certificates (GCs)
- Green Tickets
- Green Tags
RECs Represent a Non-physical Product
Renewable certificates are non-physical products, representing the air, water, land, and other benefits or avoided impacts associated with renewable energy production. A renewable generator delivers megawatt-hours into the electrical grid, where the electrons from renewable plants are mixed with the electrons delivered by every other power plant, and flow where physics dictate. The renewable certificates correspond to the meter reads of the generating plant, usually measured in megawatt-hours (MWh). The certificates are then traded at a price representing the premium for the renewable energy production.
How RECs are Tracked
The use of RECs greatly simplifies the process of measuring renewable energy usage. Renewable energy tracking systems provide a means of collecting the meter readings from renewable plants, verifying the output, and issuing the RECs into a generator's account (like a bank account). Each REC is typically assigned and identified by a unique serial number. This provides a means of accurately tracking the REC as it changes hands in REC markets, assuring that it has not been double-counted. The generator, or its agent, can then sell the RECs at a price representing the premium for the renewable energy production. The RECs are then transferred by the seller to the buyer's REC account, allowing for accurate accounting of the RECs.
Some REC tracking systems offer bulletin boards where REC account holders can view who wants to buy and sell RECs. Bilateral trades are also common in the overall markets. Brokers are active in REC markets, providing extra liquidity for these markets.
Where RECs Are Used
REC tracking systems are currently operating in Wisconsin, New Jersey, New England, the mid-Atlantic states, and Texas. The Midwestern states plan to expand the Wisconsin system in 2007, and the Western States will be implementing a multi-state system in 2007. The Wisconsin Renewable Portfolio Standard allows for electric providers to meet their renewable energy obligations by purchasing Renewable Resource Credits (RRCs) from other electric providers that have delivered excess renewable energy to their customers. In Texas and New England, the renewable energy program associated with the electric industry restructuring is built around the use of renewable certificates.
How RECs are Used
In most cases where certificates are used, a load-serving entity (such as a utility company or electric service provider) purchases power from the general commodity market, and couples it with RECs, to present a renewable energy product for their customers. Retailers have also emerged that offer a REC-only product to their customers, providing an easy way for consumers to support renewable energy development through their dollars in cases where they cannot or do not want to choose an alternative provider for their commodity electricity.
How Do REC Markets Work?
There are two main categories of REC markets: compliance and voluntary.
Compliance markets are those where utility companies and/or electric suppliers must deliver a certain percentage of renewable power to their customers through a "renewable portfolio standard", or RPS. In order to demonstrate compliance with the RPS, electric suppliers can either build their own renewable power plants, contract with independent renewable power facilities, or purchase RECs. Not all RPS programs allow RECs for demonstrating compliance, but the majority do, and others are moving in this direction. When RECs are used for compliance purposes, the electric supplier will "retire" RECs to meet the RPS obligation, thereby permanently taking them out of circulation.
Voluntary markets are those where consumers make a conscious decision to purchase renewable power. Retailers have emerged that offer REC products to their customers, providing an easy way for consumers to support renewable energy development through their dollars in cases where they cannot or do not want to choose an alternative provider for their commodity electricity. For example, if there is no RPS in a particular state, and the local utility does not offer a green power product, a consumer can continue to be a utility customer, but then purchase RECs from a separate company to "green" their own electricity usage. Through their purchase of renewable certificates, consumers send extra dollars directly to renewable generators, supporting their production of environmentally preferable power.
Advantages of RECs
There are many advantages that RECs provide to the renewable energy market:
- RECs can be traded across regional, national, and international boundaries without the complication or additional costs that result from trading energy across transmission control areas. This allows consumer to support whatever type of green generation they want, even if it is not local.
- Generators can avoid the expense and complication of "pancaked" transmission rates, which might occur when a generator sends its power from one area to another.
- Renewable generators can maximize their revenue by selling into the best markets for both energy and RECs.
- Intermittent generators, such as wind, solar, and run-of-river hydro, can receive full value for their RECs, without having to be concerned about time-of-delivery issues.
- Load serving entities that want to provide renewable power to their customers can easily meet their customer's demand for renewable energy. They can purchase scheduled energy to meet hourly loads, then purchase the aggregate amount of RECs equal to their total MWh of load without having to match the RECs on an hourly basis.
- Clear price signals are sent to the market as to the value of renewable generation compared to conventional generation. Additional, price signals are sent comparing the value of different types of renewable generation.
- Market entry for new retail suppliers of renewable products is made simpler and less risky. Most cannot enter into long-term contracts with renewable generators for energy and RECs, but they can purchase RECs separately from their commodity energy needs to satisfy their customer requirements for renewable energy.