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

3p Contributor | Tuesday March 16th, 2010 | 6 Comments

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.

—————–
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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  • http://www.pointcarbon.com/ Lisa

    This article is great, but please beware of its posting in the series on CARBON TRADING – the market for renewable energy actually has nothing to do with carbon trading, and this mixup is often a source of great confusion! RECs are not carbon offsets – a REC is a totally different unit than a carbon allowance or a carbon offset traded in greenhouse gas cap-and-trade programs. As Dan explains, a REC represents a megawatt hour of renewably-generated electricity, not a tonnage amount of carbon dioxide equivalent. People constantly get RECs and carbon offsets confused, and there is even some (intentional or not) double-counting, where firms get paid for generating renewable energy in REC markets and for the carbon reduction that renewable energy might evoke in carbon markets – that is not ok, so the more people understand the difference between these two products, the better we will be at using market incentives to achieve environmentally beneficial outcomes! For an in-depth look at carbon markets vs REC markets, check out this report from Point Carbon: http://www.pointcarbon.com/research/cmana/cmana

  • Lee

    Dan-
    Excellent article! Lisa makes a good point that folks should be aware of the distinction between RECs and offsets, however, I'm OK with posting this article in the Carbon Trading section. The Green-e Climate program allows for a mechanism to generate Carbon Offsets using Renewable Energy. For more details, visit: http://www.green-e.org/getcert_ghg_re_protocol….

    “The Green-e Climate Protocol for Renewable Energy determines the eligibility of renewable energy projects in the US to generate offsets, as well as defines a method for determining the carbon value (in tons of greenhouse gas) of renewable energy generation.”

    Kudos to 3Degrees. Keep up the great work!

  • dankalafatas

    -Lisa:

    You are absolutely right, RECs and carbon offsets are different, and sometimes people confuse them. We do have to be careful, and make sure we make it clear that while RECs represent the generation of renewable energy, carbon offsets represent real, quantifiable, additional and permanent greenhouse gas (GHG) emission reductions. As far as double-counting, I find Green-e does an excellent job in preventing this from occurring, though of course there is always potential for people to break the rules.

    Nonetheless, I do believe this post belongs in this series on carbon trading, because, as I note above, the vibrant and mature U.S. REC market supports the argument for the passage of legislation creating a national carbon emissions compliance market. Keep in mind that both RECs and carbon offsets are designed to realize specific environmental goals through the use of market-based policies. As such, the success of the U.S. REC market, like the success of the EPA’s sulfur oxide (SOx) market, demonstrates why we should be implementing federal market-based policies with specific national environmental goals for carbon emissions and renewable energy generation.

    Moreover, the legislation currently being debated in Congress, such as American Clean Energy & Security Act, seeks to be comprehensive, and would enact both a national renewable energy standard (RES) and a market-based pollution reduction program (cap-and-trade). This would result in the creation of both national REC and carbon emissions compliance markets.

    If you would like to read more on why I believe environmental markets are a powerful tool for climate change mitigation and renewable energy development, please read my guest commentary titled “The Case for Environmental Markets” in the February 26th issue of Carbon Markets North America (see below). I hope it, and the post above, will help encourage you and others to make the case for more aggressive use of environmental markets in the United States.

    http://www.pointcarbon.com/news/cmna/1.1417551

  • http://www.pointcarbon.com/ Lisa

    This article is great, but please beware of its posting in the series on CARBON TRADING – the market for renewable energy actually has nothing to do with carbon trading, and this mixup is often a source of great confusion! RECs are not carbon offsets – a REC is a totally different unit than a carbon allowance or a carbon offset traded in greenhouse gas cap-and-trade programs. As Dan explains, a REC represents a megawatt hour of renewably-generated electricity, not a tonnage amount of carbon dioxide equivalent. People constantly get RECs and carbon offsets confused, and there is even some (intentional or not) double-counting, where firms get paid for generating renewable energy in REC markets and for the carbon reduction that renewable energy might evoke in carbon markets – that is not ok, so the more people understand the difference between these two products, the better we will be at using market incentives to achieve environmentally beneficial outcomes! For an in-depth look at carbon markets vs REC markets, check out this report from Point Carbon: http://www.pointcarbon.com/research/cmana/cmana

  • Lee

    Dan-
    Excellent article! Lisa makes a good point that folks should be aware of the distinction between RECs and offsets, however, I'm OK with posting this article in the Carbon Trading section. The Green-e Climate program allows for a mechanism to generate Carbon Offsets using Renewable Energy. For more details, visit: http://www.green-e.org/getcert_ghg_re_protocol….

    “The Green-e Climate Protocol for Renewable Energy determines the eligibility of renewable energy projects in the US to generate offsets, as well as defines a method for determining the carbon value (in tons of greenhouse gas) of renewable energy generation.”

    Kudos to 3Degrees. Keep up the great work!

  • dankalafatas

    -Lisa:

    You are absolutely right, RECs and carbon offsets are different, and sometimes people confuse them. We do have to be careful, and make sure we make it clear that while RECs represent the generation of renewable energy, carbon offsets represent real, quantifiable, additional and permanent greenhouse gas (GHG) emission reductions. As far as double-counting, I find Green-e does an excellent job in preventing this from occurring, though of course there is always potential for people to break the rules.

    Nonetheless, I do believe this post belongs in this series on carbon trading, because, as I note above, the vibrant and mature U.S. REC market supports the argument for the passage of legislation creating a national carbon emissions compliance market. Keep in mind that both RECs and carbon offsets are designed to realize specific environmental goals through the use of market-based policies. As such, the success of the U.S. REC market, like the success of the EPA’s sulfur oxide (SOx) market, demonstrates why we should be implementing federal market-based policies with specific national environmental goals for carbon emissions and renewable energy generation.

    Moreover, the legislation currently being debated in Congress, such as American Clean Energy & Security Act, seeks to be comprehensive, and would enact both a national renewable energy standard (RES) and a market-based pollution reduction program (cap-and-trade). This would result in the creation of both national REC and carbon emissions compliance markets.

    If you would like to read more on why I believe environmental markets are a powerful tool for climate change mitigation and renewable energy development, please read my guest commentary titled “The Case for Environmental Markets” in the February 26th issue of Carbon Markets North America (see below). I hope it, and the post above, will help encourage you and others to make the case for more aggressive use of environmental markets in the United States.

    http://www.pointcarbon.com/news/cmna/1.1417551