What Is The Certificate Of Renewable Energy?

What is a Renewable Energy Certificate (REC)?

What is the certificate of renewable energy?

A renewable energy certificate (REC) is a market-based instrument that represents the environmental attributes of one megawatt-hour (MWh) of renewable electricity generation (https://resource-solutions.org/wp-content/uploads/2015/09/Center-for-Resource-Solutions_EPS-Draft-Public-Comments.pdf). RECs are issued when renewable electricity is generated and fed into the grid. The REC embodies all the environmental benefits associated with that unit of renewable energy.

RECs work by unbundling the environmental attributes of renewable energy from the physical electricity itself. While the actual electrons fed into the grid are indistinguishable from each other, RECs make the renewable aspect separately tradeable. Each REC has a unique identification number allowing it to be tracked and traced. REC tracking systems are used to avoid double-counting and provide proof of renewable energy use (https://resource-solutions.org/wp-content/uploads/2015/07/Center-for-Resource-Solutions-Comments-on-Draft-GRP1.pdf).

There are two main types of RECs – compliance RECs and voluntary RECs. Compliance RECs are used by utilities and load-serving entities to comply with state renewable portfolio standards and meet renewable energy targets. Voluntary RECs are purchased by companies and individuals wishing to offset conventional electricity use and support renewable energy.

Why Were RECs Created?

Renewable Energy Certificates were created in the 1990s as part of electricity deregulation and renewable portfolio standards (RPS). As energy markets opened up to competition, regulators wanted a way to track and verify renewable energy generation and consumption. RECs were introduced as an accounting and compliance mechanism to provide proof that renewable electricity was generated (1).

The purpose of RECs is to separate the environmental attributes of renewable energy from the physical electricity itself. This allowed renewable generators to sell both the electricity and the REC to maximize revenue. It also enabled consumers to support renewable energy whether or not they had direct access to it. RECs helped expand renewable energy markets beyond local utilities and brought in more participants (2).

By creating a tradeable certificate to represent the environmental benefits of renewable energy, RECs provide a flexible market incentive to drive growth in wind, solar, and other renewable generation sources. As more states adopted renewable portfolio standards requiring utilities to procure RECs, it further increased demand and helped overcome cost barriers for building new renewable energy projects (3).

(1) https://www.linkedin.com/pulse/10-billion-needed-fast-reach-2020-renewable-energy-target-adrian-hart

How Do Renewable Energy Certificates Work?

Renewable Energy Certificates (RECs) are created when renewable electricity is generated. For every 1 megawatt-hour (MWh) of renewable electricity produced, 1 REC is issued by a tracking system. This allows the renewable attributes to be sold separately from the physical electricity.

The RECs can then be sold on the open market and traded between buyers and sellers. When an organization or individual buys RECs, they are financially supporting and increasing demand for renewable electricity generation. Although buying RECs does not mean you are using renewable electricity directly, it leads to more renewable energy being added to the grid overall. According to the EPA, “the voluntary market for renewable energy is primarily served through REC sales.”1

RECs are important for accounting and tracking renewable electricity production. Each REC has a unique ID number and contains details like the source of generation, location, and vintage. RECs are retired once they are used, which prevents double counting. This auditable system ensures that the environmental benefits of renewable energy generation are only claimed once.2

Benefits of Renewable Energy Certificates

Renewable Energy Certificates provide a number of important benefits that encourage the growth of renewable energy. Some key benefits include:

Environmental Benefits
When businesses and consumers purchase RECs, they financially support renewable energy generation like wind and solar. This helps incentivize the development of new renewable energy projects and the growth of renewable energy overall, reducing reliance on fossil fuels. According to felpower.com, RECs help provide “clarity and transparency about the type and amount of renewable energy used.” https://felpower.com/solutions/cleanenergy/renewable-energy-certificates/

Economic Incentives
The REC market creates an additional revenue stream for renewable energy producers. This improves the economic viability of renewable energy projects. As explained by therpmgroups.com, “Many businesses and corporations have made commitments to reducing greenhouse gas emissions, but some are unable to install renewable energy systems on-site. Purchasing renewable energy credits allows these entities to meet their sustainability goals in a cost-effective manner.” https://www.therpmgroups.com/energy-services/renewable-energy-certificates/

Consumer Empowerment
RECs allow individual consumers, not just businesses, to directly support renewable energy. As cleartrace.io states, RECs give consumers “the power to choose clean energy and reward those generating it through their utility bills.” https://cleartrace.io/everything-you-need-to-know-about-renewable-energy-credits-recs/ This empowers people to take climate action through their everyday energy purchases.

Criticisms and Concerns About RECs

One major criticism of RECs is around the credibility and additionality issues. There are concerns that the purchase of RECs does not actually lead to additional renewable energy generation and instead just subsidizes existing renewable energy projects. Some view buying RECs as a form of “greenwashing” since the environmental benefits are questionable (source).

There are also concerns around potential double counting of RECs and outright fraud. Since RECs are tradeable instruments, there is a risk of double counting if the RECs are sold separately from the renewable electricity generation. There have been cases of fraudulent RECs being sold multiple times (source).

Finally, RECs have high administrative costs associated with tracking, verifying, and trading the certificates. This bureaucratic overhead eats into the subsidies intended to support renewable energy development (source).

Types of Renewable Energy Certificates

There are two main types of renewable energy certificates (RECs):

Compliance RECs

Compliance RECs are used to meet regulatory standards and requirements for renewable energy. These are tracked and traded through tracking systems like NEPOOL GIS in New England and PJM-GATS in the Mid-Atlantic region (source). Compliance RECs are tied to the electricity generated from renewable sources and are required for utilities and load-serving entities to comply with renewable portfolio standards (RPS).

Voluntary RECs

Voluntary RECs are not required by regulation, but are purchased by individuals, businesses and organizations on a voluntary basis to offset conventional energy use. These are tracked through tracking systems like Green-e Energy (source). Voluntary RECs support renewable energy generation and allow organizations and individuals to claim they are using clean energy.

The key difference is that compliance RECs are required for regulatory standards, while voluntary RECs are purchased separately by environmentally-conscious organizations and individuals.

Renewable Energy Certificate Prices

Renewable Energy Certificate (REC) prices have been rising steadily in recent years. According to Got Rhythm, prices for voluntary RECs skyrocketed in the past year, now trading between $7 and $10 per MWh.1 Several factors are driving the increase in REC prices:

– Growing corporate demand – As companies set sustainability goals, demand for voluntary RECs is surging. This increased demand puts upward pressure on REC prices.2

– Limited supply – In some markets, the supply of new renewable energy projects is constrained, limiting the supply of RECs. Scarcity leads to higher REC prices.

– Policy incentives – Government policies like renewable portfolio standards create compliance markets for RECs, incentivizing renewable energy development and increasing REC demand and prices.

There are significant regional variations in REC market prices. According to Argus Media, voluntary REC prices in early 2022 ranged from $1.10/MWh in the Central region to $3.50/MWh in New England and $5.25/MWh in California.3 Regional supplies of renewable energy and differences in policy incentives drive geographic price differences.

Buying and Selling Renewable Energy Certificates

The major buyers of RECs are typically large corporations and utilities that need to meet renewable energy or emissions reduction goals. Companies like Microsoft, Google, and Apple purchase large amounts of RECs each year for sustainability initiatives. Utilities also buy RECs if they are required to have a certain percentage of their electricity come from renewable sources based on state laws and regulations. Individual households can purchase RECs from many electricity suppliers and third-party vendors to offset their conventional energy use.

REC trading takes place through online platforms and markets run by organizations like APX and Green-e Energy. These provide price transparency and connect buyers and sellers. The trading process involves listing the RECs for sale with information on type, vintage, location, and asking price. Buyers can browse listings and make offers to purchase. Once a transaction is made, the RECs are transferred to the buyer’s account in the tracking system. The trading platform charges a commission fee on transactions. Some vendors also sell RECs directly to consumers without going through a trading platform.

According to FinModelsLab, key aspects of operating a REC trading business include having an online platform for seamless buying and selling, staying aware of market pricing and competition, forging partnerships with renewable generators, and ensuring efficient REC tracking and retirement (Source).

The Future of Renewable Energy Certificates

The market for renewable energy certificates is expected to see strong growth in the coming years. According to one report, the global REC market size is projected to reach $5.7 billion by 2030, growing at a CAGR of 21.4% from 2022 to 2030.1 Rising demand for renewable energy along with increasing regulation around emissions reductions and carbon neutrality goals are driving factors behind this projected growth.

On the policy front, many governments around the world have set ambitious renewable energy targets. For example, the European Union aims for 32% renewable energy use by 2030. These types of policies are expected to spur continued investment and development of renewable energy projects. As more renewable energy comes online, demand for RECs to track and verify green energy usage will also rise.

There are also ongoing improvements in REC tracking technology, especially with blockchain-based solutions. For instance, EDF Group has partnered with REDEX and Rekursive Labs to develop a blockchain platform for more transparent and efficient REC tracking.2 The immutability and security of blockchain can address issues like double counting and verification that have hampered REC markets. As tracking improves, it can further boost REC trading and demand.

Key Takeaways on Renewable Energy Certificates

Renewable Energy Certificates (RECs) are tradable instruments that represent the environmental attributes of 1 megawatt-hour of renewable electricity generation. RECs help track renewable energy generation and enable individuals and companies to support and invest in the growth of new renewable energy projects.

RECs play an important role in renewable energy policy, markets and accounting. By providing a mechanism for renewables to be counted separately from standard electricity generation, RECs enable renewable generators to monetize the environmental value they provide. This helps spur investment in new renewable energy projects and is key for states to verify they are meeting renewable portfolio standards.

Individuals can buy RECs on their own, bundled with their home electricity service through their utility, or unbundled separately through REC retailers. Buying RECs is an effective way to reduce one’s carbon footprint and support the transition to renewable energy. Companies that make renewable energy or carbon-related claims should generally hold RECs to substantiate their impact.

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