A Light in the Dark: The Success of the U.S. Renewable Energy Certificate (REC) Market

By Dan Kalafatas, President, 3Degrees

It is tempting for environmental market advocates (like myself) to gnash their teeth as climate change misinformation and standard Washington gridlock continue to delay passage of climate change legislation that would create a national carbon market. However, in doing so, we are ignoring a bright light amidst the darkness – the stunning growth and impressive success of the U.S. renewable energy certificate (REC) market.

Driven by state Renewable Portfolio Standards (RPS), growing individual and organizational voluntary demand for renewable energy, and the development of a widely accepted standard and trusted registries, today’s vibrant and mature REC market is accelerating the development of a renewable energy economy. Perhaps if we are more vocal about the success of the REC market we can build the political support required to pass federal climate change legislation that uses markets to achieve our environmental goals.

For those who might be unfamiliar with the concept, a REC represents proof of one megawatt-hour of renewable energy delivered to the electric grid. Buying and “retiring” a REC on a tracking system removes it from the market and enables its purchaser to claim the use of that megawatt hour (MWh) of renewable generation and the associated environmental benefits for voluntary or state RPS compliance purposes.

Modeled after the successful sulfur oxide (SOx) markets created by the EPA’s Acid Rain Program, RECs allow renewable project operators to secure revenue for both the electricity generated by their projects and for the renewable energy attributes—the environmental benefits—associated with this generation.

Currently there are two main buyers of RECs: (a) voluntary buyers who wish to balance out the greenhouse gas emissions associated with their use of fossil-fuel generated electricity; and (b) utilities, which use RECs to meet state RPS mandates requiring that a certain percentage of the electricity they deliver is generated from renewable resources.

Verifying and certifying the REC market
Over the past ten years, the U.S. REC market has developed the verification and certification infrastructure required for its participants to confidently buy, sell, and trade RECs without questioning whether the RECs they are trading are real or being sold to more than one buyer. Green-e Energy, the nationally accepted certification standard for voluntary RECs, ensures the renewable energy attributes that RECs represent are real. Meanwhile, the development of REC registries—which track REC generation and ownership in all 50 states—prevent them from being double-sold.

RECs provide voluntary and compliance buyers with flexibility and convenience in meeting their renewable energy goals, while also cost-effectively channeling capital to renewable energy projects. Utilities can use RECs to meet RPS requirements without having to deal with complex supply contracts and difficult siting and transmission issues. In the same way, voluntary buyers can use RECs to balance out the GHG emissions associated with business operations (such as serving coffee to millions of customers nationwide) or everyday activities (such as using a computer or watching TV). And the hundreds of millions of dollars generated by RECs each year help put the investment returns of renewable energy projects on an equal footing with fossil-fuel energy projects, spurning further renewable energy development.

RECs and the growth of renewable energy
REC markets, along with federal tax credits and other incentives, have helped spur the growth of renewable energy in the United States over the past decade—as demonstrated in a recent report from the National Renewable Energy Laboratory (NREL), which estimates that new renewable energy capacity installed in the United States almost quadrupled from 2004 to 2008, to more than 25,000 MW. Federal legislation creating a national renewable energy standard would further expand the REC market, encouraging even more development of our solar, wind and other renewable energy resources.

Thanks to state mandates for renewable energy, voluntary initiatives to balance out greenhouse gas emissions related to traditional electricity generation, and the dedication of REC verification and registry organizations, we have created a successful REC market in the United States. This market demonstrates why environmental markets are a cost-effective means to realize specific environmental outcomes – from renewable energy generation to greenhouse gas emission reductions. Markets are the tool we need to fight climate change and build a renewable energy economy. We just have to use them.

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Dan Kalafatas is the president of 3Degrees, a leading global provider of greenhouse gas emissions reductions and the recipient of the 2008 Best Trading Company. Dan is a leading national expert on Renewable Energy Certificates, greenhouse gas emissions reductions, utility green pricing programs, and their confluence.

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