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What is a Renewable Energy Certificate?
A Renewable Energy Certificate (REC) can be issued when one (net)[1] megawatt-hour of electricity is generated and supplied to the grid from an eligible renewable energy resource. RECs are environmental commodities that can be traded separately from wholesale electricity markets. In Europe, an analogous environmental instrument is referred to as a Guarantee of Origin (GO).
RECs are described as representing environmental or renewable “attributes” or “benefits” associated with renewable energy generation. Unfortunately, what is meant by “attribute” and “benefit” is typically ambiguous and unspecified. Despite this ambiguity, RECs and GOs are also often treated as if buying them is the same as buying green power (e.g., electricity produced solely by renewable generation resources). Yet, there is no empirical evidence for such an ownership claim. However, some regulatory language has been crafted that attempts to treat such claims as legitimate.
The original purpose of RECs was for tracking compliance with legislated electric utility renewable generation quotas (i.e., Renewable Portfolio Standards (RPSs)). But they are now also used in a voluntary context by companies and consumers to claim they have “purchased” renewable electricity. It is important to recognize that there are numerous “flavors” of RECs and REC markets. The two major categories are:
- RPS Compliance RECs: An example of which is the RECs that are often purchased by electric distribution utilities as part of a wholesale purchase power agreement (PPA) to comply with an RPS regulation. These RECs can only be issued to renewable energy facilities that meet the eligibility requirements of a jurisdictions’ RPS legislation. Many U.S. states have created classes (i.e., “flavors”) of RECs that have different definitions, include quotas for purchase by utilities, and therefore differentiated prices by REC class.
- Voluntary market RECs: Electricity consumers are typically advised—for example by the US-EPA Green Power Program or the World Resources Institute’s series of GHG Protocols—that they can “buy” electricity from renewable energy generators, versus fossil fuel-fired generators, through purchasing voluntary market RECs (see What am I receiving if I buy a voluntary REC or GO?). These voluntary RECs (and GOs) are issued to wind farms or hydroelectric generators in jurisdictions where they are not eligible to be sold for RPS compliance or because the REC market in that jurisdiction is oversupplied (i.e., the RPS goals set by lawmakers in that region are too weak to drive investment in new capacity). These RECs are typically registered with a certification program (e.g., Green-e) and may be registered with regional certificate tracking systems.
Location
Compliance RECs can be purchased from jurisdictions with RPS regulations. Voluntary RECs and GOs can be purchased by any entity anywhere, although some markets encourage purchases to occur from generation local to the buyer.
Cost and Management Burden
Cost per metric ton of CO2e (2019 data):
- Compliance RECs: prices vary across regulatory jurisdictions due to differing and changing program rules. For example, the emission reduction cost of retiring New England region (MA, CT, NH, & RI) RPS compliance RECs is estimated at roughly US$55 to $110 per metric ton of CO2. Costs are in a similar range from retiring compliance RECs from the U.S. mid-Atlantic region (PA, NJ, MD) under the PJM ISO.[2] Note, that some compliance REC markets are oversupplied due to weak RPS quotas as set by the government. Retiring a type of REC that is oversupplied is not a legitimate claim for avoiding emissions. Like with allowances, you can identify if a type of REC is oversupplied if its price is far below a regulatory alternative compliance penalty (ACP) value (i.e., a shortage can be identified when RECs are trading near or at the ACP value). Some RECs that come from solar generation are specifically designated with their own RPS quotas and can in some states trade at significantly higher prices.
- Voluntary RECs: The cost per ton of CO2e does not exist for voluntary market RECs because as shown below, the voluntary REC market does not affect renewable energy investment or generation. The voluntary REC market has always been massively oversupplied, and research has concluded that it is highly likely to remain so indefinitely. Voluntary market REC (wholesale) price is roughly $0.5 to $4 per MWh.
RECs that are eligible for RPS compliance can be acquired through environmental commodity brokers.
Environmental Integrity
Environmental integrity differs dramatically between purchasing voluntary market RECs and purchasing compliance REC:
- The most common underlying objective in purchasing voluntary market RECs would be to report the indirect emissions associated with its consumption of purchased electricity (i.e., Scope 2 emissions) as zero. The problem with this zero-emissions claim is that REC purchases do not reflect, nor do they necessarily alter, the emissions physically associated with or caused by a firm’s electricity use. Research has shown that there is no causal relationship between the purchase of voluntary market RECs or the growth of the voluntary REC market overall and the amount of renewable energy generated in the United States. Consequently, the evidence does not justify assigning emission factors or claiming avoided emissions based on the purchase of voluntary market RECs. The evidence clearly shows that the voluntary REC market, in its current form, lacks environmental integrity.
In contrast, some RPS compliance REC markets are likely to be causing additional renewable energy investment due to the incrementally increasing RPS goals, as indicated by their far higher certificate price. There is moderate confidence in the additionality of RPS compliance RECs for the U.S. Northeast and Mid-Atlantic states. This confidence would be increased further if a buyer commits to a multi-year purchase contract.
So, purchasing and retiring compliance RECs is a credible option to claim avoided emissions when these RECs come from a REC market facing some scarcity and the REC is canceled (retired), thereby removing it from use by a utility for compliance. However, instead of claiming to have purchased “green power” and applying a zero-emission factor to a corporate GHG footprint, the purchaser should quantify the avoided GHG emissions associated with the marginal impact of this REC retirement. And, thereby quantify and claim the avoided emissions and offsetting effect of the REC retirement. The marginal impact can be estimated using a load dispatch analysis of avoided fossil generation using existing electric power industry models. There are also more simplified methods to quantify the effect of avoiding the building and operation of fossil generation. The quantification of the avoided GHG emissions would present some complexity but is unlikely to present a significant technical barrier.
Theoretically, if a cap-and-trade program overlaps with the jurisdiction of an RPS, then removal of a compliance REC from the market may not lead to additional avoided emissions. Instead, it would simply shift when and where emissions occur because total emissions are already capped. Additional avoided emissions are only achieved if the purchaser cancels allowances. If one wished to avoid any risk or criticism, a buyer could retire both compliance RECs and associated emission allowances in combination given the uncertainty in future ETS and RPS market rules. This option would result in higher costs.
Social and Environmental Co-Benefits
There is minimal risk of harm, as well as limited opportunity for co-benefits with this option of claiming avoided emissions.
Potential Risks
Voluntary market RECs present a significant reputational risk, given their proven lack of environmental integrity. Concerns around the environmental integrity of voluntary RECs have not gone unnoticed by leading companies. For example, in Google’s white paper discussing their approach to renewable energy purchasing they clearly state concerns with unbundled voluntary RECs:
“Our efforts must result in “additional” renewable power generation. We’re not interested in reshuffling the output of existing projects, and where possible, we want to undertake efforts near our data centers and operations.” (Google 2013a)
To address concerns about RECs, some companies have decided to pursue voluntary RECs bundled with long-term PPAs. Though this option is an improvement over voluntary RECs alone, companies could improve the environmental integrity of their approach by purchasing RPS compliance RECs. A long-term PPA with a renewable energy project is likely to have more environmental integrity, but it is not yet a proven approach that definitively leads to additional avoided emissions because there is little research on this approach. This lack of evidence or guidance on PPAs is a major gap that is in need of correction.
Nevertheless, several major companies purchase voluntary RECs to use them to claim they are meeting their GHG reduction and green power goals. Further, some environmental groups (e.g., Green-e, US-EPA Green Power Program, GHG Protocol Program) have been resistant to update their guidance for fear of contradicting past positions and continue to present information to companies that lack environmental integrity and leads to misleading corporate reporting.
In contrast, purchasing compliance RECs provides an opportunity to publicly distinguish an organization from the common practice of using ineffectual voluntary RECs to misleadingly claim to have avoided emissions and meet green power targets.
Conclusions
Voluntary market RECs, although currently promoted by many environmental organizations, present overwhelming environmental integrity problems. Too much of the guidance on voluntary green power purchasing and GHG emissions on this topic from organizations like the USEPA Green Power Program, CDP (formerly “Carbon Disclosure Project”), and the Center for Resource Solutions (CRS, the owner of the Green-e label) is, unfortunately, outdated and misleading. Most published guides focus on promoting the purchase of voluntary RECs and provide little or no substantiation or evidence of environmental integrity. Research shows that voluntary REC purchases are highly unlikely to result in actual environmental benefits.
The purchase of compliance RECs can be a sound option if the RPS creates a scarcity in its associated REC market. It would be equivalent to purchasing emission allowances (where the market is also not oversupplied) or high quality carbon credits. The challenge with compliance RECs involves some extra analysis to quantify the tonnes of CO2 avoided based on the MWhs of fossil generation that would otherwise have occurred. This extra layer of analysis is not necessary for the retirement of allowances or carbon credits.
[1] “Net” refers to the amount of MWh used by the generation plant for its own operations. For example, a wind farm uses some of the electricity it generates to run its own systems, hence the “net”.
[2] Price estimates are based on the assumption that the marginal unit displaced by additional Class I renewable generation is natural gas-fired. The cost per metric ton using solar RECs could be higher in some jurisdictions.