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Mandating Federal Renewables

The importance of getting the REC markets right.

Fortnightly Magazine - January 2010

clearly isn’t ideal. Nonetheless, it has allowed RPS goals to be fully, or almost fully, achieved. The overall level of RPS compliance in 2008 was an estimated 96 percent, and a few states achieved renewable energy deliveries, exceeding 97 percent as a proportion of RPS targets.

Although RECs are used widely as one of the preferred ways to comply with RPS mandates, REC definitions aren’t uniform. Each state has defined REC in a different way. These differences are based on eligible resource definitions, generator vintages, limitations on generator location and electricity delivery, and whether or not emissions credits, if any, must be retired with the REC for RPS compliance. The result is that there are multiple state and regional markets for RECs, and fungibility across RPS markets is limited.

Consequently, the market is fractured and REC contracting practices vary considerably across states. In some states, RPS markets focus on the short-term trade of unbundled RECs. This is the case in the majority of states where retail choice is allowed and load obligations of individual LSEs are more uncertain. In other states, REC markets focus on a mix of short-term and longer-term purchases, where long-term purchases might be for unbundled RECs or RECs bundled with the underlying electricity supply. Finally, in a third group of states, where no retail competition exists, utilities rely on long-term contracts for RECs that remain bundled with electricity.

Additionally, there’s the issue of tracking certificates. Thus far, reliance on unbundled RECs for state RPS compliance often goes hand-in-hand with the development of regional certificate tracking systems. Although several states rely on manual attestations and contract audits, states increasingly are using electronic certificate tracking systems to issue, record, track, and retire RECs. No matter the system, a clear audit trail is needed to demonstrate transparency and protect market participants from fraud.

A national REC market would mitigate such problems—or possibly eliminate them—while increasing the depth of the market by creating fungible assets that could be traded more freely. Fundamentally, a nationwide market would allow market forces to balance disparity in resources and technology maturity. Furthermore, this national market would replace the state level feed-in tariffs. Under a nationwide REC system, each state would agree to a level of electricity generation from renewables, based on the availability of the renewable resource in question. Certificates would be provided to renewable generators, who then would sell them on the proposed trading platform to suppliers unable to meet their renewable obligations in their respective states.

Another benefit of a nationwide REC market is that it would facilitate the trading of international RECs, particularly RECs that are also carbon offsets. This is important since domestic offsets—with an estimated pipeline of 20 million tons per year relative to 6,000 million tons of carbon generated—hardly will be able to fill the gap. Once the REC standards are set nationwide, international REC prices can be adjusted easily, further increasing the depth of the market. International RECs are abundant and cheap now because of the global recession. However, once the economic forecast changes and emission caps are in