Have you heard about renewable energy credits (RECs)?
They’re market-based instruments that certify the bearer owns one megawatt-hour (MWh) of electricity generated from a renewable energy source.
If a power provider feeds the energy into the grid, the REC received can be sold on the open market as an energy commodity.
When a renewable energy facility earns RECs, they can either keep them or sell them to other entities such as companies that are polluting.
Companies can then use these credits to offset their own emissions.
In this blog, we’ll discuss the basics of renewable energy credits and why you may consider using them.
1. What is a renewable energy credit (RECs)?
Renewable energy credits are tradable, non-tangible commodities that are present proof that 1 MWh of electricity was generated from a renewable energy resource.
This renewable energy source was then fed into a shared system of power lines that transport energy.
Originally, RECs were created in the early 2000s from utility “green power” programs.
In these programs, customers could voluntarily pay a little extra for renewable energy.
As the 2000s progressed, RECs were adapted as a way for utilities to comply with state renewable portfolio standards (RPS).
These standards required utilities to procure a set and rising amount of their power from renewable sources.
2. How do renewable energy credits work?
Companies are able to purchase RECs along with their electricity.
This certifies that a certain portion of their energy is from a renewable source.
3. Should my company buy RECs?
Here are all the scenarios when renewable energy credits may be a good fit for your company:
You want to support the renewable energy market
You’re facing difficulties installing solar panels
You’re having trouble implementing efficiency projects at your business
You want to reduce your energy usage or carbon emissions
You have ambitious environmental goals you want to reach as a company
4. How are RECs generated?
When a renewable energy source (wind, solar, hydroelectric, etc.) generates one MWh of electricity and sends it to the grid, renewable energy credits are produced.
So, if an onshore solar power facility produces 5 MWh of electricity, then they’ll have 5 renewable energy credits that they can either sell or keep.
5. What other names are RECs known by?
You may not always hear of renewable energy credits referred to as such.
RECs can be referred to as Green Tags, Tradable Renewable Certificates (TRCs), Renewable Electricity Certificates, or Renewable Energy Credits.
6. What are the benefits of renewable energy credits?
RECs are how businesses or individuals certify that they’re using renewable energy from the grid without having to install solar panels or other renewable energy at their homes or business.
Renewable energy credits can give you the flexibility to reduce your carbon footprint without solar panels.
You’ll know if renewable energy credits are a good fit for you if you want to reap the following benefits:
Supporting the renewable energy market without installing solar panels or other renewable energy technology at your home/business
Reducing your carbon footprint or environmental impact
Seeking to reach environmental goals as a business or individual
Knowing where your electricity is coming from
Producing no fossil fuel-based greenhouse gas emissions or other pollutants
7. What are the differences between renewable energy credits (RECs) and solar renewable energy certificates (SRECs)?
In this blog, we’ve primarily discussed RECs or renewable energy credits.
These credits represent energy generated by renewable energy sources (solar or wind farms).
These certificates transfer the “renewable” aspects of renewable energy to the owner.
Solar renewable energy certificates, or SRECs, are a specific type of renewable energy credits that are specifically generated by solar panels.
They are a tradable commodity just like RECs.
Some state Renewable Portfolio Standards have “solar carve-outs.”
These carve-outs state that a certain percentage of the state’s electricity production comes specifically from solar panels.
SRECs account for this energy produced by solar panels.
Furthermore, homeowners and commercial businesses earn one SREC for every one megawatt-hour (MWh) of electricity generated by installed solar panels.
An SREC can be sold to electrical utilities, and they’re worth $300 or more in certain markets.
For a typical 5 kW home solar installation, you could earn six SRECs in a year.
8. Who should buy RECs?
Those interested in buying renewable energy credits typically fall into two categories.
Voluntary credit buyers and compliance credit buyers.
We’ll detail each category below.
Voluntary credit buyers are environmentally conscious individuals or organizations who intend to reduce their greenhouse gas emissions.
These organizations have many motivations for purchasing renewable energy credits, including reaching emissions goals as a company or desiring to know where their electricity comes from.
Here are some well-known voluntary REC buyers: Whole Foods and Starbucks.
That said, homeowners can also be voluntary buyers, so if you’re a homeowner who is currently interested in RECs, know that you can support renewable energy at an individual level!
Buyers who fall into the compliance category are those that are obligated to have a certain percentage of their electrical generation come from renewable resources.
For instance, some states have regulations called Renewable Portfolio Standards (RPS) that set requirements for renewable energy use.
These laws mean that a utility must provide renewable credits as proof that they are sourcing a set amount of their electricity from renewable resources.
The utility may not be able to generate enough RECs on their own with renewable energy sources.
If so, then they have to purchase them.
9. What are the main strategies for acquiring RECs?
There are three main strategies for acquiring RECS.
Unbundled
Unbundled RECs are purchased separately from the electricity that produced them.
This means that companies can purchase nationally available RECs generated from electricity that is not produced locally.
The benefits of unbundled RECs are that they are the easiest and most flexible way to mitigate purchased electricity-related emissions.
They also have a minimal upfront cost with no long-term contract required, so buyers do not need to amend their existing power contracts.
That said, unbundled RECs have become so abundant that they are often a net cost to the REC seller, meaning that they have limited impact in financing renewable energy projects.
For this reason, not all stakeholders view unbundled RECs as a strong carbon-mitigations strategy.
Bundled
Bundled RECs are RECs bundled with the electricity that produced them.
Unbundled and re-bundled
The third option is RECs that are unbundled from the electricity that generated them and then contractually re-bundled with electricity from another project.
These may be called “sub-RECs” and “REC arbitrage.”
10. What are the qualifying technologies for RECs?
The following technologies qualify as producers of renewable energy credits.
Solar electric
Wind
Geothermal
For example, small run-of-the-river facilities, not ones that require large dams and reservoirs or those that affect river flows adversely.
Fuel cells
Only if powered by hydrogen produced by one of the above-approved generators (not fossil fuels).
Some states permit combined heat and power systems
11. How have renewable energy credits been criticized?
RECs have been criticized because they allow renewable energy producers to double count the clean energy contribution of the energy they represent.
When you separate clean energy “attributes” from the energy itself and sell them in the form of certificates to fossil fuel producers, you allow two entities to take clean-energy credit for the same electricity.
Thus, emissions are often reported as being up to 50 percent lower than they actually are.
This makes claims of progress in meeting climate goals confusing.
12. What are RECs not?
RECs are not a guarantee that any particular amount of fossil fuel electricity generation is avoided.
More importantly, they are not a guarantee that any particular amount of carbon emissions are avoided.
You shouldn’t think of it as an “offset.”
While it is possible to estimate how much fossil fuel generation or carbon pollution was avoided by an MWh of renewable energy, this requires a counterfactual.
How much would have been burned or emitted if the clean MWh hadn’t been generated?
Unfortunately, with any counterfactual, this involves some assumptions, valuations, and predictions, which aren’t always clear.
Additionally, while companies that sell RECs claim that a REC worth one MWh displaces or avoids one MWh of fossil fuel electricity, this is approximate.
What you should keep in mind with renewable energy credits is that the growth of renewable energy doesn’t necessarily affect fossil fuels.
However, it does affect carbon emissions at a system level.
You just shouldn’t try to reduce it down to a one-for-one MWh-for-MWh exchange.
13. Is buying and selling “greenness” the best solution?
A lot of people wonder if buying and selling greenness in the form of renewable energy is really the solution to a healthier world.
In many ways, it seems like a lot of paper shuffling and double counting.
With that, however, it’s important to remember that the system of RECs is well-established and tightly monitored.
Regional tracking organizations help to ensure that environmental benefits don’t get double-counted and that no one claims environmental benefits that aren’t due.
14. What REC reform ideas exist?
There are a couple of REC reform ideas floating around that may help to balance the system of renewable energy credits.
Currently, supply exceeds demand, which means that they have little market-moving impact.
Reform green e-standards: The more renewable electricity that exists the better.
However, it’s possible to contain the supply of voluntary RECs by simply tightening the standards they have to meet.
More and higher RPS: The best way to boost demand for RECs is to increase the stringency of existing Renewable Portfolio Standards (RPSs).
Not all states currently have RPSs, which means it should be a goal to add them in states where they are lacking.
Regions where RPSs are scheduled to rise (such as the Midwest – Minnesota, Wisconsin, Illinois) will slowly work their way out of an oversupply and help to rebalance the market in the next five years.
However, places like Texas have a fairly low RPS, and it’s already exceeded.
It’s not set to rise, which will only make the oversupply worse.
Final Thoughts
If you or your company aren’t in a place to invest in your own solar panels or wind turbines, then renewable energy credits may be the way to go.
These credits will represent the renewable energy resources that are associated with power production and help you to reduce your carbon emissions.
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Disclaimer: we are not lawyers, accountants or financial advisors and the information in this article is for informational purposes only. This article is based on our own research and experience and we do our best to keep it accurate and up-to-date, but it may contain errors. Please be sure to consult a legal or financial professional before making any investment decisions.
Prior to starting Gokce Capital, Erika received a Bachelor of Architecture from the University of Southern California and a graduate degree in Urban Policy from Columbia University. She worked as both an architectural designer and engineer in New York before joining the New York City Department of Housing Preservation and Development.
Erika currently lives in the New York Metropolitan area with her spouse, daughter and cat. She is originally from Chicago and still considers herself a midwesterner at heart.
Erika also loves to read, write and travel (fun fact, she has visited all 50 states and more than 30 countries!). Her new book, Land Investing Mistakes: 11 True Stories You Need To Know Before Buying Land, is now available on Amazon.