Renewable Energy Credits (RECs): A Beginner's Guide
In today's ever-evolving power market landscape, creative revenue structures like "renewable energy credits (RECs)" or "solar renewable energy credits (SRECs)" are receiving more and more love in the media. But what exactly are these credits, how do they work, and why are they important? In this blog post, we’ll break down these somewhat abstract constructs into more digestible terms.
What Are Renewable Energy Credits (RECs)?
One helpful way to explain RECs is to use an analogy. In this case, let’s imagine you want to attend an outdoor concert in a beautiful venue by your favorite musical artist. Before getting to the analogy, take note that there are a few key concepts to know with respect to RECs: Renewable Energy Generation, Certificate Issuance, Certificate Tracking and Retirement, Renewable Energy Claims, and Market and Trading.
Renewable Energy Generation: The musical artist represents renewable energy generation from solar or wind power.
Certificate Issuance: Your concert tickets are equivalent to RECs. Just as each concert ticket represents admission to the concert to see your favorite artist, each REC represents the generation of one megawatt-hour (MWh) of renewable energy.
Certificate Tracking and Retirement: The concert organizers keep track of the tickets issued while ensuring that each ticket is used only once. Similarly, once a REC is retired, it signifies that the associated renewable energy has been used and can’t be claimed by another party.
Renewable Energy Claims: By holding a concert ticket, you can claim that you attended the concert. The same is true for RECs. By using a retired REC, individuals or organizations can claim that they supported the generation of renewable energy.
Market and Trading: Just like how concert tickets can be bought and sold between parties, RECs can be traded in a marketplace, The sale of RECs allows those who can’t generate renewable energy themselves to support renewable energy directly by purchasing RECs. You can think of this as someone attending a concert by purchasing a ticket from another person.
In short, a REC is a certificate representing the environmental attributes of electricity generated from renewable energy sources like solar or wind power.
How Do RECs Work?
When renewable energy produces electricity it creates two things: the actual electricity flowing through the distribution and transmission line system to serve customers and the environmental attributes associated with the electricity that’s been produced electricity. RECs are a way to track and prove the creation of these environmental attributes.
A REC is created for each MWh of renewable electricity produced. These RECs can then be bought, sold, or traded in a market, just like a commodity. The supply and demand of RECs ultimately determines their value in a marketplace.
RECs Explained: The Solar and Wind Connection
RECs come in various forms, including solar renewable energy credits (SRECs) and wind RECs. As you might have guessed, SRECs are RECs produced by solar projects, while wind RECs represent electricity generated by wind projects. Other RECs you may come across include Zero-Emission Renewable Energy Credits (ZRECs) or Offshore Wind Renewable Energy Certificates (ORECs). All of these RECs are a subset of RECs generally produced by a particular renewable energy resource.
Why Do We Need RECs?
Incentives play a key role in power markets. In particular, RECs play an important role in promoting the buildout of more renewable energy generation. Some US states have approved renewable portfolio standards (RPS) that require a certain percentage of their state’s electricity generation to come from renewable energy sources. Utilities and energy suppliers then use RECs to fulfill their RPS obligations set at the state or local level. In other words, RECs are an incentive lever to promote the buildout of more renewable energy.
Benefits of RECs
Participating in onsite renewable energy generation, community solar, or signing a power purchase agreement (PPA) may not be an option for all customers. This is where RECs can come in to play a pivotal role. RECs provide a way for customers to contribute to the buildout of renewable energy who otherwise may not be able to participate in the market.
Final Thoughts
In a world where the power markets are offering customers more and more procurement options, renewable energy credits (RECs) provide a simple way to support the buildout of more renewable energy resources. RECs represent the environmental attributes of the renewable electricity that’s been generated. So, the next time you hear about RECs, remember that these instruments play an important role in incentivizing more renewable electricity generation.
