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RECs Get Real

Green credits are maturing to become real, tradeable assets.

Fortnightly Magazine - November 2007

transaction costs for market participants.

Finally, REC systems provide compliance flexibility through banking and trading mechanisms not possible through contract-path systems. These benefits have made REC systems the preferred method of RPS compliance in current state systems, and the same is likely to be true for regional and, perhaps, national systems in the future.

Protecting the Revenue Stream

The desired goal of any RPS program is to increase the prevalence of renewable energy in a state’s or region’s power grid. Therefore, directing the revenues generated by RECs toward the establishment of new generation facilities is an essential part of any RPS compliance plan. Two major REC systems in the United States use different methods for protecting the REC revenue stream. Specifically, Massachusetts uses a central purchasing model, while Texas relies on long-term REC contracts between generators and purchasers to encourage development of renewable energy.

The central-purchasing model could be attractive especially to states whose REC programs are in early stages of development. States willing to expose themselves to risk in order to stabilize an active REC market, as Massachusetts and New York have done, will more readily allay the fears of wary potential renewable-energy developers. Additionally, central-purchasing programs expedite the impact of RPS programs through government action, while market-based systems take time to begin functioning.

In contrast, Texas has allowed its RPS requirements to prompt increased renewables development naturally. The more laissez-faire approach of the Texas model is perhaps more attractive as a long-term system because it carries fewer attendant administrative burdens than a central-purchasing model administered by the state government. Also, placing ratepayer consequences in the hands of the marketplace instead of with the state government is likely to be more compatible with the federal government’s current resistance to increased regulation.

Standardizing RECs

In the last 15 years, more than 25 states have adopted RPS programs, while Congress has considered, and rejected, more than 17 various proposals for a national RPS. Standardization of RPS and REC programs is a large problem, because each state’s policies, definitions, and programs on renewable energy are different. A recent report by the Network for New Energy Choices showed that no two existing state RPS mandates are alike. “In Maine, fuel cells and high-efficiency cogeneration count as ‘renewable,’ while the standard in Pennsylvania includes coal gasification and non-renewable distributed generation,” the report states.

Variations in RECs among states reflect state policies on renewable energy, but their lack of homogeneity poses a significant problem to the development of a well-functioning REC market. 5 To enhance liquidity in REC trading, regional markets should be integrated. For integration to be possible, a REC must represent the same attributes in one state as in another, a requirement that necessitates a standard definition of what constitutes a REC. Put simply, if RECs are to be successfully traded as commodities, they must be as fungible as any other commodity.

Standardization initiatives are developing on the regional and national levels (see sidebar, “State Certification for RECs”) . For example, the California Energy Commission and the Western Electricity Coordinating Council established the Western Renewable