A no-holds-barred interview with the electric industry’s chief architect of wholesale electric market design.
RECs Get Real
Green credits are maturing to become real, tradeable assets.
REC programs, renewable attributes that once merely increased generation costs and obstacles to market competitiveness now have become valuable commodities. In fact, the value of a REC representing 1 MWh of electricity can be greater than the value of the megawatt itself, such as when the REC is based on the attributes of high-cost solar power. This situation exposes the renewable energy market to opportunities for fraud and subjects state RPS programs to the risk of futility and frustrated compliance.
The North American Association of Issuing Bodies (NAAIB), which is attempting to create national standards and protocols for REC issuing and trading, stated in its conceptual model that one of the primary functions of an issuing body (such as the Massachusetts Department of Energy Resources or the Texas PUC) is to verify the renewable attributes of energy produced by generators claiming those attributes. 2 The responsibility for ensuring renewable energy generators actually are producing green energy ultimately will lie with the issuers of the RECs themselves. Future REC programs likely will use state or regional inspection and certification programs similar to those in place in Texas, Massachusetts, and the Western Interconnection—and the best practices proposed by the NAAIB.
The second verification issue commanding attention is determining the actual ownership of renewable attributes. In October 2003, FERC declared that in contracts for the sale of capacity and energy from “qualifying facilities” pursuant to the Public Utility Regulatory Policies Act, RECs do not automatically transfer to the purchaser as part of the energy purchase, absent a contractual provision stating otherwise. 3 FERC’s rationale for this rule was that because RECs are creations of the states, the states themselves must determine ownership of RECs. Also, to avoid fraud and double counting, ownership of RECs must be tracked from their initial issuance to their retirement for RPS fulfillment. State and regional issuing authorities are the natural choices for this responsibility.
REC tracking programs generally come in two varieties: contract-path systems and certificate-based (REC) systems. Contract-path systems use bilateral contracts and receipts to verify the quantity and characteristics of renewable attributes purchased and sold. An example of a contract-path tracking system is the one established in New York, where the New York Independent System Operator tracks all flows of power from source to sink. Contract-path systems keep renewable attributes linked to their underlying source of electricity, which is a feature of such systems that may make the systems appear more “credible” than other REC programs. However, actually tracing renewable energy through the power grid is enormously complex, if not impossible, and so the “credibility” of contract-path systems likely carries no greater weight than REC systems.
Moreover, certificate-based systems carry with them benefits not provided by contract-path systems. Contract-path systems rely on third-party reviews of contract receipts, sworn attestations, and other proofs of generation and ownership. 4 REC systems are administered through automated programs, which provide a lower-cost solution over the long-term than contract-path systems, which ordinarily require great personnel expenditures. Automated systems also prevent double-counting of RECs in a more accurate and expeditious manner, thereby lowering the