RECs Get Real


Green credits are maturing to become real, tradeable assets.

Fortnightly Magazine - November 2007

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.

Validating RECs

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 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 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 Energy Generation Information System (WREGIS) to issue, register, and track RECs for the territory covered by the Western Interconnection. Other similar regional tracking organizations include the PJM Generation Attribute Tracking System (GATS), the Midwest Renewable Energy Tracking System (M-RETS), and the New England Power Pool Generation Information System (NEPOOL GIS). Each of these organizations issues certificates with unique serial numbers that represent the attributes of the generation for each megawatt-hour produced by qualified generators. States that are parties to the organization may use and exchange certificates within each tracking system.

Although the federal government has not developed a national RPS or REC trading program, private groups are developing tools that can be used nationally. In February 2007, The American Council On Renewable Energy (ACORE), two American Bar Association committees, and the Environmental Markets Association (EMA) announced the release of a standard form contract for national trading of RECs.6 The contract is technology-neutral and is usable in both the voluntary and compliance markets, regardless of domestic jurisdiction. Finally, the Center for Resource Solutions has released for peer review its GHG Protocol for Emissions Reductions from Renewable Energy. This effort seeks to enhance credibility for GHG reductions or offsets from renewable projects and develop the voluntary market for renewable energy.

The consequences of existing RPS requirements will drive REC markets upward in the near-term due to short supplies from eligible sources. This upward pressure on REC prices likely will enhance RPS programs’ intended effect on renewable energy development, while improving transparency and liquidity. In addition, rising REC prices in compliance markets should exert pressure on both compliance and voluntary markets to standardize REC programs beyond utility system and state geographic boundaries.

State efforts suggest the creation of a national marketplace likely will become a reality in the near future. Creating a nationwide, perhaps global, fungible REC commodity also could facilitate a national RPS, although significant obstacles remain. Nevertheless, REC advancements also serve as a foundation for national carbon trading. For companies actively engaged today, the desirable benefits of standard contracting, verification, and revenue stability will foster opportunities in regional and global carbon trading markets in the future.



1. Patrick Leahy and Alden Hathaway, Renewable Energy Certificates and Air Emissions Benefits: Developing an Appropriate Definition for a REC, Environmental Resources Trust, p. 2 (April 2004).

2. North American Association of Issuing Bodies Conceptual Model.

3. American Ref-Fuel Co., 105 FERC 61,004 (2003).

4. Customer Credit Account Research and Analysis Supporting the California Energy Commission's Renewable Energy Program Preparation of the Customer Credit Account Report for the Legislature, California Energy Commission, p. 15 (Jan. 23, 2003).

5. Peter Fusaro, Policy-makers Must Create Uniform Green Trading Rules, FUSARO FOCUS, Feb. 1, 2005, at 1.

6. ACORE Announces Publication of New Master Renewable Energy Certificate Purchase and Sale Agreement, Feb. 9, 2007, Press Release.