Last Wednesday, I listened in on the monthly renewable energy teleconference co-sponsored by the American Council on Renewable Energy (ACORE) and the American Bar Association (ABA). This month’s topic: renewable energy credits (REC’s).
I have historically found REC’s a maddening topic. REC’s should be conceptually easy to understand, but they have a number of complexities that in actuality prevent them from being much of a factor in the real-world marketplace. The presenters provided an excellent overview of the nuances associated with REC’s:
- Inconsistent definition of REC’s among different states inhibits the ability for trade between renewable project developers/owners and “green” buyers (mandated or voluntary) beyond state borders. Thus, there are many illiquid REC markets across the U.S., rather than one possibly-liquid national REC market.
- Since REC’s compel the development of renewables, a REC is a “coupon” that is intertwined with not one but in fact several attributes simultaneously: reductions on various pollutants (CO2, NOx, SO2, particulates), and provision of energy from a permanent (as opposed to a depleting, fossil fuel) source. However, a persuasive argument can be made that the values of each of these attributes is better realized in an unbundled manner.
- These attribute values change immensely depending upon the renewable resource involved and the conventional energy source displaced — which in turn varies tremendously by geography and time of day/week/month/year. Without adequate liquidity, such volatility and lack of transparency make for an unattractive market for buyers, sellers and intermediaries alike.
- The accounting and legal ownership of REC’s is very unclear, making double counting very easy. This is further complicated by the fact that the intent of REC’s is to create a market for “new” renewables that promote further reductions in emissions and fossil fuel reliance, rather than to provide a means to monetize the desirable attributes of a pre-existing renewable source (e.g., a 1950’s hydro plant).
- Because of these concerns, various parties have emerged to validate the authenticity of REC’s so that buyers know what they are buying. The fact that authenticating organizations are necessary, and are competing to set standards, is not a good sign for the future health of a traded market.
With all of these issues surrounding REC’s, it’s no wonder that they haven’t made much of a contribution to further development of renewables in the U.S. I’m not bullish about their future. The future growth of renewables will be driven more by other factors — improved relative economics of renewables, mandated purchases of renewables by states or corporations — than by the existence of these clumsy REC’s.