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All About RECs

EPA Green Power Partnership - Understanding Power Markets

What is a REC?

Renewable Energy Certificates (RECs) were developed as an accounting mechanism to track the environmental benefits associated with the generation of renewable energy. A REC represents proof that 1 megawatt-hour (MWh) of electricity was generated from a renewable energy source. Essentially, it's a market-based instrument that certifies the bearer owns the environmental benefits and attributes of renewable energy generation. These benefits include the relative reduction in carbon emissions by a MWh generated elsewhere on the grid which includes fossil fuel-based generation.

RECs were created as an accounting mechanism to separate the environmental attributes from the electricity being generated. When renewable energy is produced, two things are created: the physical electricity and the environmental benefits associated with that production. RECs embody these environmental benefits and can be sold or traded independently of the electricity.

How are RECs procured?

RECs are either purchased with the power that was generated (called bundled RECs) or independently (called unbundled RECs). This means the environmental attributes of renewable energy are able to be traded separately from the physical electricity.

Unbundled RECs are typically purchased on spot markets. Spot markets provide flexibility and immediacy, allowing companies to buy RECs to mitigate their energy consumption based on their actual electricity usage. However, unbundled RECs purchased on the spot market are significantly less impactful than RECs procured through other means, as their purchase doesn’t necessarily directly support new renewable energy generation.

There are multiple ways to procure RECs alongside the purchase of electricity. Some retailers and utilities offer green power products, which give buyers the option to purchase a fixed volume of renewable energy in “blocks”, or to pay a premium on their price per kWh for a portion of their electricity to be sourced from renewable generation. Larger consumers mostly acquire unbundled RECs through power purchase agreements (PPAs) or virtual power purchase agreements (VPPAs). These agreements involve contracting with a renewable generation project to purchase a predetermined volume of power (along with the associated RECs) over a set period of time. When PPAs and VPPAs are signed prior to a project reaching its Commercial Operating Date (COD), they support bringing new renewable generation online, and have a greater impact than purchasing spot RECs. That impact comes with a cost, however - PPAs and VPPAs are complex agreements that take significant resources to set up, and they come with a host of limitations, considerations, and risks to manage throughout the term of the contract.

What does it mean to retire a REC?

Retiring a REC is the process of permanently removing it from the market and claiming its environmental attributes as a way of mitigating emissions from electricity usage. When a REC is retired, it is taken out of circulation and can no longer be traded or used by another party. This ensures that the environmental benefits represented by the REC are only counted once, preventing “double counting”. Retiring a REC signifies that the holder has claimed the environmental attributes of the REC and can count it against their carbon emissions.

The Impact of Spot RECs

Purchasing and retiring RECs is a simple and sometimes low-cost way to mitigate Scope 2 emissions and make a 100% clean energy claim. Because one REC represents the environmental attributes of 1MWh of renewable energy, an organization simply needs to purchase and retire RECs for each MWh of energy consumed in a given year.

While RECs serve as a vital tool for companies aiming to mitigate their Scope 2 emissions, reliance on unbundled spot RECs poses several challenges:

Geographic Relevance: The environmental impact of purchasing RECs can vary significantly based on the geographic source of the renewable energy. Unbundled RECs allow companies to claim renewable energy use regardless of where the energy was produced, potentially overlooking the benefits of local renewable energy generation and its direct impact on reducing regional carbon emissions.

Market Saturation and Price Distortion: The availability of cheap unbundled RECs can create a distorted market perception, where companies might opt for purchasing these certificates as a low-cost way to meet sustainability goals, instead of investing in direct renewable energy sources or PPAs that have a more tangible impact on renewable energy expansion.

Transparency and Credibility: The practice of buying unbundled RECs can sometimes lead to claims of "greenwashing," where companies might be perceived as merely buying their way to sustainability without making substantial changes to their energy consumption or supporting renewable energy development directly to “green the grid”. Transparently communicating your organization’s climate impact has become increasingly important to investors, and in some cases may be required under SEC guidelines.

Questionable Additionality: One of the main criticisms of unbundled RECs is the question of additionality – the extent to which the purchase of RECs directly contributes to the development of new renewable energy projects. Because unbundled RECs typically come from existing generation projects, their purchase is revenue to the owner of the renewable project with no obligation to use that income to invest in additional projects. This raises the question: how much of a positive environmental impact can really be made by just buying unbundled RECs?

Additionality RECs

RECs are an effective way for corporations to account for their mitigation of electricity emissions. PPAs and VPPAs offer a way to source RECs while supporting new clean energy generation, but are complex and have inherent risks. Purchasing unbundled RECs on the spot market is simple, but has a low impact in mitigating greenhouse gas emissions.

Additionality RECs, or ARECs, offer a way to add new clean energy to the grid while mitigating scope 2 emissions without the complexity and risk of a VPPA. ARECs are fixed-price future contracts for RECs from new generation projects with a term of 5 or 10 years. The Zettawatts AREC Market allows you to build your organization’s clean energy plan and name your price for ARECs to mitigate your scope 2 emissions in a simple and impactful way.


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