In last week’s overview of Renewable Energy Standards, I briefly described the concept of Renewable Energy Credits (“RECs”).  Generally speaking, RECs are one of the most common mechanisms that states use to ensure that utilities are complying with the state’s RES.  A REC is essentially a certificate that gives the holder credit for developing a certain amount of energy from a renewable source.

However, because we are dealing with legislation and regulations, you can safely assume that the clean and easy description doesn’t tell the whole story.  With that in mind, over the next few days I’ll outline some of the various nuances of REC laws that legislators use to either strengthen or weaken particular aspects of the state RES, and how those slight changes can have significant impacts on your particular renewable project.

Because this is a large topic, I thought it would be best to break it into the following pieces:

  • Part 1  gives an overview of why states modify their REC laws and describes the concepts of “bundling” and “geographic sourcing.”
  • Part 2 will discuss the concepts of “rate caps” and the “shelf-life” of RECs.

Overview of REC modifications:  It’s politics, folks

Before we get into the nuts and bolts that make up the REC laws, it might be useful to step back and consider for a moment why a state would want to strengthen or weaken its REC requirements.

As we all know, there are a number of significant advantages to renewable energy: (1) reduced dependence on foreign oil; (2) greatly reduced environmental impacts; (3) sustainable energy source for the future; (4) economic development and job growth, etc.   However, because public utilities often have to make significant capital investments to generate renewable energy, it is possible that the average electricity rates in the state will increase as a result.

Every state addresses this balance between incentivizing renewable projects and avoiding increased electricity bills differently.  In essence, in the war over  the impact of the RES on renewable energy development in the state, the concepts that we will be discussing over the next few days make up the battleground.

Bundled Energy vs. RECs

One of the most basic principles that a legislature has to address when drafting a RES is whether it will allow RECs to be separated from the underlying energy.  This can be a difficult concept to wrap your head around, so let’s spend a moment fleshing it out.

Imagine a wind farm develops 1MW of energy.  That MW of energy is valuable two reasons.  First, the actual energy itself can be sold to a utility.  Second, because the energy was generated from a renewable resource, it counts towards compliance with the state’s RES.

This dual-value can be addressed by legislators in one of two ways when drafting the RES and REC laws.  They can either “bundle” the electricity and the REC together, or they can allow the REC to be sold separately from the underlying energy (or “unbundle” the REC from the energy).

If they “bundle” the energy and the RECs, a utility can only comply with the RES if it has purchased the actual energy from the renewable developer, like so:

If the energy and RECs are “unbundled”, the developer can sell the energy to one utility (for our purposes “Utility A”) and the REC to another (“Utility B”), like so:

Now, you may be asking yourself why unbundling doesn’t effectively double a developer’s profits, as they can sell the energy to count towards Utility A’s RES requirement, and sell the REC to count towards Utility B’s RES requirement.  States typically address this “double counting” by prohibiting the REC and the underlying energy from both being counted towards compliance with the state RES.

The actual impact of the bundling vs. unbundling decision on developers depends upon a number of factors.  If the RECs and energy are bundled, utilities are largely limited to purchasing energy from the renewable projects that are geographically close to their service area.  Therefore, if you are a developer that only has projects within a single state, you might be in favor of bundling because it limits the number of competing projects that can sell power to the utilities.

However, if you are a developer with projects scattered across the United States, you might prefer that the energy and RECs be unbundled.  That would allow you to sell your energy to utilities that are close to your projects, and sell the RECs to utilities in other states.

Geographic Sourcing

An issue that is often linked to bundling is “geographic sourcing.”  When drafting the RES, legislators have to decide whether and to what extent they should limit the geographic area for renewable projects that can comply with their RES.

For example, a RES statute can require that, in order to count towards the RES threshold, utilities must purchase renewable energy or RECs from projects located within the state.  Legislators might include this type of provision if they are particularly interested in encouraging renewable development within the state.

Let’s use Kansas as an example, because I really enjoy coloring it blue…

If the geographic sourcing provision requires that the energy be generated in Kansas, then obviously only Kansas projects will be allowed to count towards a utility’s RES threshold.

However, the RES statute could also require that the energy or RECs be purchased from projects located within the state, or that deliver their energy to utilities within the state.  This effectively expands the footprint to include renewable projects from the surrounding states.

Similarly, the RES statute could allow the energy or RECs to be purchased from any project located within a particular RTO…

Legislators could settle on either one of these provisions as a compromise position between those that are primarily interested in encouraging renewable energy development in the state and those that are worried about the cost impacts on the utilities and the ratepayers.

Finally, the legislators could draft the geographic sourcing provision very broadly, so the energy or RECs could be purchased from anywhere in the United States…

This is the position that is likely to lead to the least amount of renewable development within the state. The utilities will almost certainly be able to find RECs from resource-rich states like North or South Dakota which would be cheaper than those sold by in-state projects, and as a result the guaranteed revenue stream for in-state projects would dry up.  As a result, renewable energy companies that want to encourage development of project’s within a particular state tend to oppose particularly broad geographic sourcing provisions.

This concludes Part 1 of our overview of REC provisions, but be sure to stay tuned because tomorrow we will discuss the concepts of “rate caps” and “shelf-life.”

  • Adam Regele

    Thanks Luke. I appreciate the break down