RECs 101: An Intro to Renewable Energy Credits in 2021

Renewable Energy Credits (RECs) are a way to represent your investment in renewable, clean energy. Buying RECs is not the same as purchasing electricity, paying a power bill, or investing in a cleantech startup. RECs aren’t like stocks or bonds, either (though they might be represented that way, wrongly, by marketers or brokers.)

Instead, they allow individuals and organizations to commit to clean energy, even when solar panels or wind turbines aren’t an option. They’re especially valuable for US government contractors and sub-contractors who need to demonstrate that commitment to compete for contracts.

This article is the first of a small series on RECs. As we move forward with a new administration in the US — one that places a high priority on clean energy — it’s important to understand how RECs work and how some companies are positioned to make money with them. 

Before we get into all that, let’s sort out how energy gets into the grid with a very quick, high-level overview. Then we can talk more about certificates and kilowatt-hours and explain how the trading of RECs works.

How the Energy Grid Functions

Here in the US, our electricity grid is a complex and vital system. We rely on electricity at all hours, 365 days a year. With so much of our lives connected via the internet — especially since the pandemic — we rely on electricity more than ever!

As we move into a future that promotes electric vehicles (in California, all new vehicles will be electric by 2035), we know that need for electricity will grow exponentially. 

As it stands today, our grid is one of the most impressive engineering feats of human history. Still, it might not be capable of our future demands (and that’s a blog for another day.) Today’s grid transmits power generated at various facilities and distributes it to end-users over long distances. It powers our homes, schools, factories, server farms, and cell phone towers all the time. How does that happen? There are four components to our energy grid. 

Components of the Energy Grid

1. Individual Generators

These are the primary facilities that generate electricity, like coal and natural gas power plants, solar panel farms, wind turbines, hydroelectric dams, and nuclear power plants. They’re owned by electricity or utility companies and regulated by a state’s Public Utility Commission (PUC) or Public Service Commission (PSC). In some states, these generators need to prove they’re supplying or using X amount of clean energy. We’ll get to that in depth in a moment.

2. Transmission Lines

They carry high-voltage electricity over long distances and connect electricity generators with electricity consumers. You’ve seen them as power lines, but they can be underground power cables.

3. Distribution Network

Think of this as the wires that pick up where the transmission lines end. These networks start at the transformers and end at homes and businesses. Distribution is regulated by PSCs and PUCs who set the retail prices for electricity at the state level. 

4. End User or “Load”

Finally, the grid ends when energy reaches the consumer. The patterns of our lives create varying demand for electricity daily and seasonally, so the management of the grid is both complicated and critical.

Electricity pumped into the grid by individual generators is measurable but not specifically trackable. Think of it like dumping a cup of water into a sink full of water and then pulling a cup of water back out. There’s no guarantee (in fact, the chances are incredibly minute though not impossible) that the water you remove is the same water you dumped in. So, the electricity you’re using right now could have come from any of the individual generators. If your power is coming from the grid, there’s no way to tell if it came from a “clean” solar plant or an “unclean” coal-burning plant. 

Now, Back to Renewable Energy Credits

Most industry insiders will call them RECS, but you’ll also hear them called:

• Renewable energy certificates
• Green tags
• Tradable renewable certificates (TRCs), and
• Solar renewable energy credits (SRECs)

Renewable energy certificates prove that one megawatt-hour (MWh) of electricity was generated by an eligible individual generator and fed into the system. One MWh equals 1,000 kilowatt-hours (KWh) and is a little more than the average American family uses in a month during an ordinary, non-pandemic year.

Each REC has a unique ID number to make sure it doesn’t get double-counted (ideal for distributed ledger technology (“blockchain”)). The green energy is fed into the grid, and the accompanying REC can be sold on the open market. “Retirement” happens when the owner uses a REC.

Using a REC

Uses of a REC include (but aren’t limited to):

• Use of the REC by an end user, generator, or utility company to comply with a statutory or regulatory requirement
• A public claim associated with a purchase of RECs by a customer
• The sale of any component attributes of a REC for any purpose

Buying RECs

Any organization, corporation, non-profit, or single individual concerned about their carbon footprint can buy RECs. Your state’s market will affect the cost of RECs, and you might find a more attractive investment in another state. 

Compliance and Non-Compliance States

In compliance states, electrical companies must generate a certain portion of their electricity from renewable sources. This is due to state regulation, or the Renewable Portfolio Standard (RPS). If the utility does not generate enough RECs through renewable energy, it must purchase RECs to make up the difference. Here are a few details to keep in mind:

• At the time of writing (January 2021), compliance markets exist in 29 states, Washington DC, and Puerto Rico.
• The RPS map linked above includes a helpful map.
• This might change under the new administration.
• The federal government will likely encourage remaining states to adopt this or a similar program. 

How the REC Pieces Fit Together

States with voluntary markets don’t require individual generators to produce X amount of energy from renewable resources. Even though your utility companies don’t have to buy RECs, residents can choose to purchase them. Note that among states where RECs are not mandatory for individual generators, the demand is usually far lower. So RECs cost less in voluntary market states. 

• The purchase of “green tags” always involves the generator and a buyer. But it may involve marketers and brokers, too.
• Once an REC retires, no one can sell, donate, or transfer it. No party other than the owner may make claims associated with it.

In the renewable energy trade, RECs specify that a unit of energy was generated “cleanly.” They track ownership of energy and bestow environmental and social benefits to the owner. 

Note that when RECs are purchased in combination with the creation of non-renewable electricity at coal or gas plants, this constitutes the legal purchase of renewable energy. This is how organizations and users trade electrical-grid-connected renewable energy in the US.

This grid-connected renewable energy is used by the individual generators we mentioned above to meet their regulatory requirements. It’s also used by corporations, organizations, and individuals trying to lessen their environmental impact. In a nutshell, RECs allow buyers to support renewable energy generation and apply the invisible hand to develop clean energy technology further.

Qualifying Technologies

As of 2021, the following industries are considered “clean” energy:

• Wind
• Solar electric
• Geothermal
• Biomass and biofuels
• Landfill to Gas (LFG)
• Fuel cells, when powered by hydrogen but not fossil fuels 
• Low Impact Hydropower — These are generally small run-of-the-river facilities that don’t rely on massive large dams and reservoirs.
• (In some states) Combined Heat and Power (CHP) systems

How to Buy RECs

850 individual generators in the US offer a green power program. You can buy RECs at any of them. Alternatively, you can think locally and purchase RECs through your electric company. They might charge you for the service. Most green pricing premiums cost around 1 to 2 cents per kWh. You can also purchase RECs through other suppliers, bypassing the utility company as the middleman. A quick internet search will provide you with plenty of options!

 Now that we’re clear on what RECs are and how they’re purchased, let’s talk a bit about SRECs. They’re the companies creating this renewable energy and making a killing selling it. 

Making Money. Making SRECs.

Solar renewable energy credits (SRECs) operate much the same as other green tags. In SREC state markets, the state requires electricity suppliers to use X amount of their electricity from solar panels. Like other RECs, the SREC program also provides a means to measure and trade that solar energy. This is what you need to know about SRECs:

• SRECs represent the “solar” aspect of electricity.
• The market/supply/demand determines their value.
• Electricity suppliers needing to meet their solar RPS requirements can buy SRECs.
• But the market is capped because utilities can make a solar alternative compliance payment (SACP) if they fall short of the requirement.
• In other words, generators can pay a fee if they don’t use enough solar power in their operations.
• Therefore, the selling price of SRECs will never be worth more than the cost of the fee for non-compliance.

It all boils down to the ability to harvest solar power and push it back into the grid. An individual homeowner can set up solar panels to power their home and send small amounts of excess (but important) energy back into the grid. It happens all the time! But what if a company leased the solar equipment to homeowners, counted all those small bits of extra power going back into the grid, and sold them to electricity providers? That’s where the real money is. And we’ll get to that next time when we look at the companies making a killing on SRECs. If you want to talk about the future of RECs and green energy in the meantime, let me know.