Renewable energy credits
Renewable energy credits (RECs) are certificates that represent the environmental benefits of generating electricity from renewable sources, such as solar, wind, and geothermal. Issued by government agencies, RECs are tradable on the open market, allowing for flexibility in how renewable energy is accounted for and incentivized. Each REC corresponds to one megawatt-hour (MWh) of electricity produced from renewable resources, facilitating compliance with renewable portfolio standards (RPS) in various states. While RECs offer opportunities for companies to profit from renewable energy production, they also face challenges, such as financing new projects, verifying claims, and addressing consumer perceptions about their value. Prices for RECs can vary significantly based on market conditions, with compliance markets typically commanding higher prices than voluntary ones. Despite critiques regarding their effectiveness in driving new renewable energy generation, RECs support consumer demand for clean energy and help promote broader environmental goals. They are increasingly recognized as a vital tool for governments and utilities to meet renewable energy targets, making renewable energy more accessible to a diverse range of consumers.
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Renewable energy credits
Summary: Renewable energy credits are certificates for electricity generated from a renewable energy source distributed by government agencies to power companies.
Renewable energy credits (RECs)—also referred to as renewable energy certificates, green tags, or tradable renewable certificates—may be sold or traded on the open market separate from physical electricity and have become a flexible currency in the renewable energy market because they impose no geographic or physical transmission limitations. They provide incentives to companies that produce green power and support customers that hope to reduce their emissions. While RECs face a number of challenges, such as financing of projects and verification of environmental claims, they meet the demand for renewable, or green, energy from customers and support utilities’ compliance with renewable energy regulations.
How RECs Work
RECs are issued by participating state government agencies to utilities generating renewable energy. Another party sells the energy generated to obtain the REC, and the consumer receives the certificate. RECs were first proposed during the US energy-restructuring debate in the mid-1990s as part of a discussion for designing renewable portfolio standards (RPS), a requirement that utility providers generate a specified amount of electricity from renewable sources. While a federal RPS was not passed, RECs were adopted by states in defining their own RPS policies and by states initiating voluntary green-power markets.
An REC is proof of the production of one megawatt-hour (MWh) of electricity generated from a renewable energy source and forwarded to the power grid. For example, six RECs are given for generating 6 MWh of electricity using solar panels. Qualifying sources of renewable energy include solar, wind, geothermal, biomass, biodiesel, some fuel cells, and low-impact hydropower. Each credit is given a distinct number to allow for tracking and to ensure no double counting. The power is fed into the electrical grid, at which time the company can offer the credit for sale or trade. REC markets are verified by a certified third party to ensure legal compliance.
RECs typically contain the following data for identification and tracking: the type of renewable resource producing the electricity, the date the REC was created, the date the renewable generator was built, the generator’s location, eligibility for certification or renewable portfolio compliance, and the greenhouse gas (GHG) emissions associated with the renewable generation. RECs are sold at different prices in different markets, depending on the region, resource type, and volume. The price is expected to reflect the difference in costs for generating electricity from renewable resources compared to the market price for conventional energy. In 2021, an REC was worth $32.22. Some states also issue solar renewable energy certificates (SRECs), which also vary in price depending on the market.
Compliance market prices are generally higher than voluntary markets. Compliance markets exist in states with RPSs, requiring electric companies to supply a certain percentage of electricity from renewables by a specified date. Currently, 30 states and the District of Columbia have RPSs. In voluntary markets, customers (corporate and household) drive the market for renewables. Utilities that generate renewable energy outside compliance states (those with RPS’s) can sell RECs at a cheaper price in the voluntary market.
Challenges and Benefits
RECs face a number of challenges, particularly in voluntary markets and because of a lack of federal regulation. Some of these challenges include financing for new projects, communicating purpose and value, verifying integrity and tracking, specifying ownership, identifying emerging markets, presenting and verifying environmental claims, and developing a consistent definition across states. In addition, many consumers may not find RECs acceptable for meeting their renewable energy demand, given that they are essentially a piece of paper and do not provide a visible renewable energy generation resource. In addition, some critics also claim that RECs do not provide additionality, meaning that the project or energy generation would exist in the absence of the REC, and no new renewable energy is brought onto the electricity grid.
RECs are also proving to be beneficial for meeting consumer demand and promoting renewable energy generation. Because RECs can be traded and sold on the open market, there is an incentive for companies to produce renewable power. Buying and selling of credits also provides renewable energy access to companies and consumers who do not have direct access to these sources through their utility providers. RECs provide more choices for consumers at competitive prices because they are not constrained by where energy is created or by transmission-related expenses and bottlenecks. Generators of renewable energy benefit from the program, as many cannot compete with subsidized nonrenewable energy sources, and RECs serve as an investment in their products. As consumers demonstrate demand for renewable energy through voluntary markets, the companies can invest in more plants or increase production with the funds raised through selling RECs.
Federal, state, and local governments are increasingly using RECs as a means to meet renewable energy generation goals and regulations. Moreover, all utility customers currently have access to and may buy RECs.
Bibliography
Bergamo, Enzo. "Renewable Energy Credits: Decarbonizing the Grid or Just a Corporate Messaging Tool?" Kleinman Center for Energy Policy, 15 June 2024, kleinmanenergy.upenn.edu/news-insights/renewable-energy-credits-decarbonizing-the-grid-or-just-a-corporate-messaging-tool/. Accessed 1 Aug. 2024.
Berry, David. “The Market for Tradable Renewable Energy Credits.” Ecological Economics 42, no. 3 (2002).
Database for State Incentives for Renewables and Efficiency. “Federal Incentives.” www.dsireusa.org/. Accessed 1 Aug. 2024.
"Renewable Energy Credits (RECS)." US Environmental Protection Agency (EPA), 15 Jan. 2024, www.epa.energy‗rs‗34940gov/green-power-markets/renewable-enenergy‗rs‗34940ergy-certificates-recs. Accessed 1 Aug. 2024.