In competitive power markets based on locational marginal pricing (LMP), the facts sometimes conflict with popular belief. Most notably: 1. When there’s congestion, the books don’t balance, and...
RECs Get Real
Green credits are maturing to become real, tradeable assets.
By displacing electricity produced from fossil fuels, renewable power plants produce two distinct products—commodity electricity and a set of environmental attributes (particularly avoided emissions). These environmental attributes can be packaged into a product called a renewable energy certificate, or REC, and sold separately from the electricity.
In states or regions that have an REC program, one REC represents the environmental attributes generally associated with one megawatt-hour (MWh) of electricity from renewable resources. REC buyers are not only electric utilities, but now include such large and respected companies as Starbucks, DuPont, Wal-Mart and Whole Foods, which are leveraging public awareness of sustainability concerns to become leaders in this area.
Currently, the United States has two distinct REC markets—the compliance market and the voluntary market. 1 The compliance market is driven by state government regulation, while the voluntary market is driven by consumers interested in supporting renewable energy or reducing their environmental footprint.
Besides having different drivers, these two markets for renewable energy also differ in pricing. Within the voluntary market, pricing typically reflects the additional cost of renewable generation above conventional resources. Additional factors affecting voluntary REC prices are the resource type and location, and whether the generator is new or already exists. Prices within the compliance market reflect the supply-and-demand balance for the commodity value of 1 MWh of renewable energy. Because each state designs its own renewables program and corresponding REC market, prices vary across compliance markets.
Currently 25 states and the District of Columbia have enacted renewable portfolio standard (RPS) programs, and 10 states have established tradeable REC markets. Moreover, voluntary REC markets operate in another five states, with no enforcement requirements. As more states adopt RPS and REC programs, the use of RECs will become more widespread, and the issues surrounding program implementation will become more important to ensure success for utilities and regulators working to achieve public policy goals.
As REC markets develop, key issues are being addressed regarding market interaction. The first issue involves certificate verification, with respect to both verification of the renewable attributes of power and the ownership of those attributes. Second, developers and utilities focus increasingly on protecting the revenue stream produced by REC sales by directing the revenue toward the expansion of renewable power generation. Finally, utilities and regulators across the country will focus on standardizing REC programs, to capture the value of consistency and homogeneity for healthy REC trading markets.
REC verification involves verifying two different aspects of the certificate: 1) that generators of renewable energy are actually producing “green” power that satisfies state RPS requirements; and 2) that ownership of the renewable attributes is severed from the underlying electricity. The former question essentially is a regulatory question, while the latter is a question of property ownership.
In states that have implemented