With the current passage of the Inflation Discount Act, the federal authorities has taken a daring step in the direction of a carbon-free future for America. There stay crucial obstacles; together with rising rates of interest, supply-chain points, tariffs, and module prices. However we’ve got embarked.
States trying to comply with the federal authorities’s lead on local weather -a refreshing change- have a strong framework to leverage and replicate: renewable portfolio requirements (RPS) and corresponding renewable vitality certificates (REC) markets. Firms trying to offset their carbon footprint, particularly Scope 2 however not directly additionally 3 emissions that symbolize the Scope 2 emissions of their provide chain, can (and may) interact in updating these markets to make sure the markets are designed to attain their carbon-free objectives.
This text takes a recent have a look at RECs, why they’re essential, how they’ll drive additionality and emissionality, and the way RECs will be an integral a part of prospects’ carbon-free objectives.
PART I: What Is a REC?
A REC is an intangible certificates that represents the environmental advantages related to a certain amount of electrical energy produced by a renewable vitality useful resource, usually one megawatt-hour (MWh)[1].When renewable electrical energy is produced, it enters a shared electrical energy grid and turns into indistinguishable from electrical energy generated by different sources – just like water flowing right into a community of pipes. Though particular person electrons can’t be tracked on the grid, RECs allow renewable vitality to be independently measured, tracked, and traded like different commodities. REC markets additionally guarantee integrity as a result of the environmental good thing about a REC can solely be counted as soon as when a buyer “retires” the REC to assert it.
Every REC will be tagged with details about the venture that produced it, the venture’s location, expertise sort, and the time interval when the electrical energy related to the REC was generated. The electrical energy manufacturing is first recorded by a venture’s electrical meter and is then communicated electronically to third-party environmental registries or regional transmission organizations (RTOs) who validate and award the REC.[2]
There are usually two varieties of RECs in america: compliance RECs and voluntary RECs.
Compliance RECs have been first launched within the Nineteen Eighties as a part of an extremely profitable state market-based mechanism, the Renewable Portfolio Commonplace (RPS), for driving the enlargement of renewable era. In these RPS compliance markets,[3] retail electrical energy suppliers and utilities are mandated to buy an outlined (often growing) share of their electrical energy provide from renewable sources. These consumers are usually known as “compliance consumers,” and they’re required to both produce renewable electrical energy themselves, the place allowed, or purchase RECs with a view to fulfill their RPS necessities. If these consumers don’t meet the RPS requirement, they’re required to pay an Different Compliance Fee (ACP), a non-compliance charge that acts as the worth ceiling for RECs inside a given compliance yr.
Demand inside a compliance market is about by the RPS and usually will increase yr over yr. If demand is excessive and provide (renewable vitality tasks producing RECs) is low, REC costs will rise in the direction of the ACP. As extra renewable vitality will get constructed throughout the market, REC provide will improve, and REC costs will decline.
Renewable vitality tasks that don’t promote RECs into compliance markets can nonetheless promote RECs to companies, owners, governments, and non-profits who’re concerned about buying these RECs on a voluntary foundation. These voluntary prospects could buy voluntary RECs to fulfill their renewable procurement objectives, or to mix these RECs with “brown” electrical energy from coal and different fossil fuels and “inexperienced” their vitality provide. If a household purchases inexperienced vitality by way of their utility or retail vitality provider, this provider is probably going combining their preexisting brown electrical energy with voluntary RECs to supply renewable vitality to prospects.
Voluntary market pricing has been growing over the previous couple of years, largely pushed by company urge for food for RECs to fulfill Environmental, Social, and Governance (ESG) objectives. Not like the compliance markets, the pricing in a voluntary market just isn’t tied to an ACP. It capabilities extra equally to a conventional market; as demand for renewable electrical energy goes up (relative to produce), costs comply with till provide begins to fulfill that demand. Conversely, as demand for RECs goes down, so do costs. Elevated company demand has helped incentivize the event of renewable vitality tasks in non-compliance markets, offering one other income supply for these tasks.
The proprietor of a renewable vitality venture can both promote the electrical energy and the RECs produced by the venture collectively (referred to as a “bundled” product) or promote the electrical energy and RECs individually. The worth of a REC can differ relying on the kind of renewable venture that produced it, the period of the contract to buy it, whether or not the RECs are being bought right into a compliance market or a voluntary market, and what the ACP – primarily the worth ceiling in compliance markets – is about to.
For instance, photo voltaic RECs are usually bought at a premium; longer period contracts are often signed at decrease costs; and RECs usually commerce at greater costs in compliance markets than in voluntary markets. Costs in compliance markets vary from $3 per REC for some varieties of applied sciences to tons of of {dollars} for photo voltaic RECs in some compliance markets. Compliance RECs compose wherever from 25-80 % of a venture’s income relying available on the market. Voluntary RECs usually compose 10-20 % of a venture’s income.
The extra income earned by renewable turbines by way of REC gross sales is crucial for enabling renewable tasks to compete with closely backed fossil-fuel turbines. The REC markets in america are among the most refined environmental markets on the earth.[4] They’re significantly essential due to their integrity and their “traceability”—their capacity to hint the manufacturing of renewable vitality throughout a number of states, a wide range of applied sciences, and throughout a number of jurisdictions, and hundreds of thousands of homeowners.
The REC markets additionally allow governments, companies, and the general public to straight take part in valuing renewable vitality and assigning long-term worth to renewable vitality belongings – driving the vitality transition. Whereas giant organizations typically negotiate advanced digital energy buy agreements (PPAs) to acquire giant volumes of renewable electrical energy and RECs bundled collectively, unbundled REC markets allow people and smaller organizations, like church buildings and colleges, to additionally take part within the renewable vitality market and buy their electrical energy from clear sources even when they can’t procure electrical energy straight from onsite or offsite era. Provided that a buyer owns and retires a REC can a renewable vitality utilization declare be made.
PART II. REC Markets and Additionality
How REC Markets Drive Additionality
The financial idea of additionality is a bit just like the “however for” take a look at in tort legislation: however for a selected motion or intervention, a sure consequence wouldn’t happen. Within the renewable vitality business, additionality usually implies that however for a selected settlement to purchase vitality from a selected facility, that facility wouldn’t be constructed.[5] Many purchasers look to purchase electrical energy from new renewable vitality tasks to create additionality.[6] Some have raised considerations that present REC markets don’t successfully drive additionality or the event of latest renewable era. We disagree.
RECs and REC markets play a key function in driving new renewable vitality deployment and tasks by guaranteeing an revenue stream for brand spanking new tasks. Undertaking homeowners earn a good portion of their income by promoting their venture’s RECs, both to its electrical energy off-taker in a bundled sale or independently to 3rd events. In both case, revenues from REC gross sales typically present the crucial money flows that allow a venture to maneuver ahead.
Giant company and institutional prospects drive round 25 % of all large-scale photo voltaic construct in america. Most of those prospects procure their electrical energy by way of a monetary instrument referred to as a “digital PPA.” Below a digital PPA, a buyer commits to buy electrical energy from a selected venture at a hard and fast worth, and as a substitute of delivering electrical energy on to the client, the venture delivers its electrical energy onto the grid at a floating market worth. The client then pays to or receives from the venture proprietor the distinction between the fastened and floating costs, guaranteeing a hard and fast income stream for the venture,[7] making it financeable and therefore enabling the venture to be constructed.
Even when these prospects purchase a bundled product (the acquisition of each RECs and electrical energy) by way of a digital PPA, they’re nonetheless buying RECs. When the renewable venture delivers electrical energy onto the grid, that electrical energy is bought by way of the RTO or to the native utility, and the company buyer (purchaser) is basically transacting on a monetary swap. The venture then retains the inexperienced attributes related to era within the type of the RECs and people RECs are bought to the client for retirement.
Company consumers can (and may) nonetheless declare additionality (if that’s their crucial metric) if the digital PPA permits new era. Nonetheless, these consumers ought to acknowledge that this method is mostly a mixture of a monetary instrument plus a REC procurement; and also needs to acknowledge that different monetary devices could allow new renewable vitality tasks simply as meaningfully. For instance, if a buyer’s objective is to offer a financeable income-stream for a venture to drive new renewable vitality capability (additionality), they may alternatively buy RECs from the venture over a protracted time period or finance the venture with crucial tax fairness – or each.
Contemplate the next instance: A venture within the Southwest Energy Pool (SPP) could have the chance to promote its RECs unbundled from the related electrical energy. A venture proprietor within the SPP may discover that the voluntary REC market supplies a greater premium for its renewable vitality than the utility – which drives wholesome competitors in regulated territories. A company buyer hoping to acquire renewable vitality and drive new capability might contract to buy 10–15 years of RECs from the venture, offering a financeable income stream and creating additionality equally to a PPA. Additional, enabling tasks in SPP by way of such a REC strip could have a extra profound influence on lowering carbon emissions than transacting on a digital PPA within the California Impartial System Operator (CAISO) given the upper carbon depth of the SPP grid. Extra on that in a second.
In brief, by buying RECs, prospects can present crucial money flows to tasks that will not have been financially viable in any other case. During the last decade, Sol Methods has labored with over 20,000 prospects to offer long-term REC financing, and by doing so has facilitated the event of tens of 1000’s of latest tasks – that’s additionality.
RECs are Important No matter Additionality
After all, RECs can be bought from preexisting renewable vitality tasks. Though income generated by REC gross sales will be crucial to an present venture’s continued operation, these purchases don’t drive new development and due to this fact usually are usually not related to additionality. Whereas we perceive (and assist) the desire for brand spanking new construct, preexisting RECs are additionally crucial to the business for a few causes.
First, RECs allow venture homeowners and prospects to trace and transact renewable vitality in a market during which electrons are liquid and unimaginable to trace. Second, buyers rely on service provider unbundled RECs (generally from the start and generally after a PPA time period) of their underwriting to finance renewable vitality tasks simply as they rely on service provider electrical energy. The chance to ultimately promote these “service provider” RECs is an important foundation for an proprietor’s preliminary funding in a brand new venture. Though the choice at this time to buy RECs from an operational renewable vitality facility doesn’t result in new construct (as a result of the venture has already been constructed) the present marketplace for unbundled RECs was a core a part of the preliminary underwriting and financing of the venture when it was developed years in the past.
Clients that buy and retire RECs from preexisting renewable vitality belongings can nonetheless declare renewable vitality use by offsetting their non-renewable or brown electrical energy consumption with service provider RECs. They need to simply be clear about what sort of RECs they’ve bought,[8] and about the truth that the REC buy didn’t drive new or further photo voltaic tasks. Shifting ahead prospects also needs to start to reveal the carbon “profit” of those RECs and evaluate that to the carbon footprint of their present electrical energy wants. An idea sometimes called emissionality or locational marginal emissions.
Half III: REC Markets and Emissionality
One criticism of REC markets is that they have been designed to drive renewable vitality, and have succeeded, however they don’t seem to be calibrated to essentially incentivize the end result we’re all making an attempt to attain – a internet zero economic system. This can be a truthful criticism, and one which turns into extra cogent and essential as we construct extra renewable vitality. We shouldn’t be incentivizing new renewable vitality construct in a market that’s already saturated with renewable vitality the identical manner we incentivize renewable vitality construct in a market that depends upon coal. REC markets have been crucial to supporting and catalyzing new renewable vitality capability. Shifting ahead, they have to higher seize, mirror and worth the carbon emissions that this new renewable vitality capability is displacing – additionally known as “averted emissions”.
The implicit environmental worth of renewable electrical energy corresponds to the carbon and different pollution related to the non-renewable electrical energy it displaces, often measured in CO2e.[9] The carbon depth of a grid modifications all through the day and is a perform of the gasoline sources (coal, pure fuel, bunker gasoline) utilized by era services on the grid at a selected time. Every gasoline supply has a CO2e influence, and the carbon footprint of every utility territory or RTO at a given second is an amalgamation of those totally different era services which are producing. Firms like Watt-Time are endeavoring to measure this influence in real-time.
REC markets are crucial instruments for this endeavor. These markets might (and may) tag every REC with the corresponding carbon depth of the grid on the time and site of their manufacturing to offer prospects with each the normal MWh displaced metric, and likewise a CO2e metric measured in tons.[10] That is precisely the data prospects have to measure, hint, and in the end worth the particular environmental influence of RECs with an purpose to totally displace carbon on the grid. This method to valuing renewable vitality primarily based on precise displaced emissions is sometimes called “emissionality,” and several other giant companies are working to develop higher strategies of accounting for this metric.
Whereas these modifications would add complexity to present REC markets, the advantages could be substantial.
First, utilities, retail vitality suppliers, companies and different shoppers might higher perceive the precise carbon discount related to every REC and worth RECs primarily based on the corresponding CO2e worth. This might incentivize renewable vitality improvement in utility and RTO geographies with the next carbon footprint, accelerating the transition to carbon-free electrical energy. This might additionally allow states to transition RPS packages into carbon-free packages by linking the language and metrics of carbon (tons offset) with the language and metrics of RPS markets (MWh produced and offset).
Second, the modifications would assist giant companies, teachers, and the SEC who’re combating the way to combine RECs into Scope 2 necessities as a result of RECs measure MWhs of renewable vitality produced, and Scope 2 necessities give attention to carbon displaced. Clients can presently offset the electrical energy they devour with RECs with out an understanding of the carbon depth of the grid during which they function, or the emissionality of the RECs that they procure. They might be procuring too many RECs or procuring too few.[11]
Tagging RECs with a carbon depth (in tons of CO2e) would allow these prospects to exactly match their REC procurement and carbon credit score procurement beneath one framework to attain verifiable carbon neutrality. Making a 7-year transition interval for purchasers and markets to combine RECs primarily based on their emissionality into their Scope 2 plans would allow each the market to evolve, and prospects to raised measure and plan for his or her carbon-free future.
Our Conclusion: A New Structure for the Future
Over the previous 14 years Sol Methods has helped develop or finance tens of 1000’s of renewable vitality tasks all through america. In our expertise, REC markets present a confirmed and efficient framework for valuing, incentivizing, and transacting with renewable vitality assets. It’s crucial for purchasers, utilities, policymakers and different stakeholders to know the numerous potential of those markets and likewise attainable areas of enchancment. We urge teachers and policymakers, particularly those that could not really be actively concerned within the renewable vitality business, to hearken to and interesting with the practitioners and contributors presently constructing this business.
We advocate three main diversifications for our business:
- Redefine & Broaden the Idea of Additionality: Additionality is a core precept for a lot of giant companies in search of to catalyze the event of latest renewable vitality capability. Additionality just isn’t the identical as emissionality, but it surely does drive the displacement of carbon-intensive gasoline sources on the grid. We urge companies to rethink how they outline additionality with respect to renewable vitality procurement and undertake a extra versatile and broader method that might incorporate long-term REC procurement and/or tax fairness financing, which might symbolize 30-40 % of a venture’s financing wants. From our perspective, additionality ought to imply offering crucial further monetary certainty for a venture that allows that venture to maneuver ahead; and will be achieved by way of a number of methods.
- Combine Emissionality into REC Markets: RTOs ought to transfer shortly to combine emissionality into REC tagging and monitoring in order that market contributors can higher combine carbon depth and emissionality into their REC procurement. These RTOs ought to meet to debate an applicable and uniform utility of the idea. Market contributors, together with NGOs and companies, might help fund these efforts if wanted. This effort ought to start in america, however must be leveraged and replicated in different international locations, starting with these which are most crucial to decarbonization. Emissionality provides us the instruments and the language to speak constructively about renewable electrical energy manufacturing, RECs and carbon depth interchangeably.
- Combine REC Emissionality Into Scope 2 Necessities: We urge teachers and policymakers to leverage and adapt preexisting REC markets to architect and obtain the carbon-free future we’re all centered on creating. Present REC markets are environment friendly and clear platforms to transact each RECs and associated CO2e discount. Slightly than carving out REC procurements from Scope 2 compliance, as some have steered, REC markets must be a key device and instrument for implementation. Firms presently offset their electrical energy and associated carbon footprint with REC procurement. We advocate a 7-year ramp in the direction of a framework the place companies attain their Scope 2 necessities by way of the CO2e of their REC procurement, a extra exact methodology that bridges RECs (measured in MWh) and carbon (measured in CO2e). This allows the suitable improvement of this market structure.
[1] For scale, the typical U.S. residence makes use of round 7-10 MWh of electrical energy yearly relying on measurement, location and consumption
[2] For instance, PJM-GATS makes use of Power Attribute Certificates to trace the regional manufacturing of electrical energy by all era sorts in 14 jurisdictions from Illinois to North Carolina
[3] 30 states and the District of Columbia presently have compliance laws in place. A number of different states have enacted voluntary packages
[4] The mixed marketplace for compliance and voluntary RECs in america is valued at $5 – $10 billion yearly
[5] Additionality is a willpower of whether or not an intervention has an impact when in comparison with a baseline. Interventions can take a wide range of varieties however typically embrace financial incentives. The idea was initially utilized in carbon offset markets.
[6] Truly measuring the environmental influence of displacing this electrical energy in a sure location and at a sure time is a little more difficult, and new “further” construct in an electrical energy market that has no carbon footprint doesn’t present environmental advantages
[7] There are conditions the place this may be reversed
[8] For instance, “We’ve got offset all of our electrical energy for this facility with renewable vitality from an working wind farms situated in our utility territory.”
[9] Presently the environmental influence of electrical energy manufacturing and different human actions is measured in CO2e. This measures the influence of a given exercise on world warming (the worldwide warming potential) over a century and compares it to the identical influence of 1 ton of carbon dioxide over the identical time period. That is an try to standardize and measure the influence of human actions on local weather. Environmental markets should enhance monitoring and valuation of different pollution, e.g., mercury, nitrogen oxides, and particulate matter. CO2e is an efficient begin.
[10] Carbon depth of the grid could possibly be measured on the RTO stage, on the utility stage, or on the precise nodal stage. The larger the specificity, the extra exact the market will be in incentivizing localized environmental advantages, however the extra advanced the market monitoring and methods have to be. We might recommend using a RTO common as a begin.
[11] Offsetting electrical energy consumption with RECs is a crucial first step however doesn’t totally mirror the carbon depth displaced by renewable vitality or the carbon depth of the electrical energy consumed. Clients could possibly be over-purchasing RECs as a result of the grid they’re working in is has a low carbon depth in comparison with the place they’re buying RECs from; or under-purchasing RECs as a result of the grid that they’re buying RECs from has a low carbon depth in comparison with the place they’re working.
