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The Return of the Renewable Energy Certificate Zombie

By Mike Taylor

I like to think of renewable energy certificates (RECs) as a “policy zombie” — an issue that you think is settled and essentially dead, but keeps resurrecting itself when new solar business models are invented and start to gain traction.

REC Zombie

With a new wave of consumer electricity programs and technologies, such as community solar, battery storage, and evolving utility rate agreements, REC ownership has once again risen as an issue.

SEPA recently released an advisory piece to its members on REC ownership and community solar, and held a webinar on the topic. The notable number of follow-up inquiries, both from utilities and the renewable energy industry, was telling. If you manage any type of renewable energy consumer program or are involved in how the policies are developed, RECs can come back to bite when you least expect it. Social media can make the issues go viral…and then you’ve got a REC public relations pandemic to deal with.

What are RECs?

RECs, also known as renewable energy credits, represent the environmental attributes of renewable energy generation, which are separate from the physical electricity. For every one megawatt-hour (1 MWh) of electricity that is produced by a solar system, one REC is created. One kilowatt of solar will produce anywhere from 1 to 1.7 RECs per year. There are solar specific RECs, abbreviated as SRECs, where states have policies that encourage solar development specifically.

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RECs can be used in everything from marketing green power to consumers who offset their carbon guilt to utilities complying with renewable energy standards. REC ownership originates with the project owner, but can be assigned by government regulations or contract agreements to any other party.

Why Do RECs Matter?

RECs and their management matter for two reasons. One is money; the other is policy integrity.

REC prices vary wildly, primarily depending on state policies that create a market demand. Voluntary REC markets, where consumers or businesses purchase RECs for environmental goals cost less than a dollar each in most places. In Northeastern states, where REC trading is most active, REC values range between $15 and $500, depending on the state, and supply and demand conditions. Compare this to the $80 to $180 dollars a residential consumer might save on their electric bill from net metering each year from the equivalent electricity (1 MWh) that created the REC. In the future, carbon markets will not exponentially drive up REC prices. Carbon that trades at $8-25 per ton, converts to $5 to $15 per REC, depending on the location and the amount of carbon embedded in the local electricity mix (Figure 1).

MT REC Image
Figure 1

A utility’s compliance toward a state mandate, or a company’s purchase of RECs to allow it to market its ice cream as powered by renewable energy, is only as good as the verification systems to make sure there are actual solar panels and wind turbines producing power.

For utilities, the need for RECs is pretty straightforward – procure enough to meet the state policy or risk financial penalties. But even absent a violation, renewable energy advocates want to see RECs making a real impact in new project development. Brad Klein, an attorney at Chicago’s Environmental Law and Policy Center said, “Our concern is that under the Illinois state policy, RECs aren’t driving new projects. It’s a sponge to soak up excess RECs in other states. We want to understand where they’re coming from and if the state RPS (Renewable Portfolio Standards) policy is creating additional renewables development.”

For companies, they may have environmental goals or marketing needs behind REC procurement and integrity. An example from the Federal Trade Commission (FTC) green marketing guidelines is appropriate:

“An automobile company uses 100% non-renewable energy to produce its cars. The company purchases [RECs] to match the non-renewable energy that powers all of the significant manufacturing processes for the seats, but no other parts, of its cars. If the company states, ‘The seats of our cars are made with renewable energy,’ the claim would not be deceptive, as long as the company clearly and prominently qualifies the claim such as by specifying the renewable energy source.”

To violate these guidelines opens the company up to prosecution for false advertising.

When it comes to designing customer solar programs, like community solar, the utility or solar program developer can either retire the REC on behalf of the customer (to maintain their ability to make an environmental claim) or sell the REC to lower the program costs. If retired, they are acting as the steward of the REC integrity on behalf of the participants. In this case, it would be double-counting the retired REC to either count it toward a renewable energy requirement, or to sell it. It would be permissible for a developer to market the solar program as a ‘rate hedge’ or ‘bill reduction’ program – explicitly saying that it is not renewable energy – and be free to use the RECs elsewhere. But it would be important for the utility or solar garden developer to clearly communicate this arrangement.

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Even within a particular community solar program, customers may want different things. Some customers want the lowest price, and would advocate for a utility or developer to sell the RECs. Others would want to safeguard the environmental benefit. Commercial customers may have the strongest interests in this respect, for corporate environmental goals or marketing needs. Creating programs that provide for these varying interests, while keeping the program simple, is a balance…or an opportunity. Programs targeted to savvy commercial, educational, or government customers who have strong environmental brands could be a business opportunity. In Minnesota, for example, solar garden developers have to decide whether to sell or retire RECs on a project by project basis – half of a project’s RECs can’t be sold. It’s all or nothing for accounting simplicity with the utility and REC tracking. However, developers can then differentiate their projects by having lower costs or maintaining the environmental brand.

The distinction is a fine line, but the need to be intentional and transparent about the REC outcomes is not. “It’s just about being upfront and being honest and not trying to hide the ball. Community solar is big in Vermont and developers need to be upfront and not play games with the marketing,” said Jared Carter a Professor of Law at the Vermont Law School, who has floated the concept of a class-action lawsuit on behalf of community solar participants with REC concerns in Vermont.

Who Does Own The RECs?

In most cases, the project owner or the program originator owns the RECs. In green pricing programs, the RECs are most often retired on behalf of the customer, permanently locking in the renewable energy benefits from being sold or used elsewhere. In third-party rooftop solar lease arrangements, the customer is rarely receiving the RECs. The company retains in the contract and sells them en masse to create revenue to lower the participation costs (in theory). In group consumer programs like community solar, RECs are not generally passed down to participants, though some are retired.

That is not to say that consumer ownership is a panacea. In many states outside of the Northeast, the RECs would be stranded with consumers who might want to sell them, but have no mechanism to do so. Program managers and companies can provide liquidity and monetization to consumer RECs, albeit at a murky cost…there is rarely a line-item showing the REC value in the contract.

Where Does This Leave RECs?

REC ownership matters, sometimes passionately, because conditions or perceptions could emerge where voluntary program participants are cross-subsidizing all ratepayers costs for a renewable energy standard, an ironic reversal of net metering concerns, if RECs are used for two purposes.

Everyone I’ve spoken with on this topic agree that RECs are an esoteric product, which very few consumers, and not an inconsequential number of industry insiders, truly understand. Educating and communicating with consumers about RECs is difficult.

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“Customers don’t really understand RECs; even professionals have a hard time understanding them,” said Klein of the Environmental Law and Policy Center. “It’s challenging…Make sure that through program design, RECs have environmental value and are leading to the development of green energy.”

Going forward, new technologies and market changes will again require clarification on how RECs are managed. In one example, the physical placement of batteries and the efficiency losses of battery charging and discharging might influence how the total solar RECs are counted when the batteries are paired with solar. In another, changes in net metering rate design and the price utilities pay for all or excess solar power may or may not include the RECs. In this latter case, the debates could look very similar to net metering debates from fifteen years ago.

SEPA’s Community Solar Workshop and GRID Alternatives install are part of the 2016 Utility Solar Conference, April 11-14 in Denver. For more information, visit the conference website, here.

Mike Taylor is SEPA’s Principle of Knowledge and can be reached at [email protected].