What Is a Renewable Energy Certificate (REC)?

In the fight against climate change, renewable energy certificates (RECs) are part of market-based initiatives that gained traction in the early 2000s as a tool for supporting clean energy production. RECs certify that one megawatt-hour (MWh) of electricity was generated from a renewable source and fed into the grid, enabling the REC owner to claim the environmental benefits—the reduced carbon footprint—of that clean energy. When RECs are sold, what's transferred is not the electricity produced by the attributes that make it clean energy, which is separate. It's like selling the right for a utility to take the label "clean energy" and apply it to 1 MWh of power it generated elsewhere. Also known as green tags or renewable energy credits, RECs are meant to provide incentives to support renewable energy production.

Below, we explain hoꦛw RECs work, how they can help reduce carbon emissions, an﷽d what they mean for the efforts against climate change.

When companies buy RECs, they provide financial support for the renewable energy projects that produce them, making those systems more economically sustainable and 澳洲幸运5官方开奖结果体彩网:producing even more green energy. This, in turn, is meant to reduce reliance on fossil fuels and decrease greenhouse gas emissions.

However, critics argue that RECs haven't led to as many new renewable energy projects as promised. They simply provide a way for businesses to claim they support efforts to transition to green energy without making meaningful changes in their operations. For example, a 2024 study reviewing almost 40 years of data argues that RECs tend to discourage companies from innovating to produce cleaner energy compared with other policies like environmental taxes and feed-in tariffs for solar energy. Other studies have argued that RECs have contributed significantly to building out a greater supply of renewable energy.

How RECs Work

RECs are a way to track solar, wind, and other green energies as they flow into the power grid. Since electricity generated from renewable energy sources is indistinguishable from what's produced by different sources, some form of tracking is required. Companies use them to offset their carbon emissions.

Batteries for storing electricity generated from solar and other renewable sources are still quite costly, especially for homeowners and small businesses. So, much renewable-generated power, such as from a home's solar system, is fed back into the power grid for use by the utility for other customers since it has nowhere else to go if there's no battery on site. The renewable electricity provider, such as a homeowner with rooftop solar panels, might receive a payment for each REC. These certificates can be sold but are typically used as a credit toward their power usage later on, for example, when the solar panels on the roof don't produce enough power for the home, and the house has to draw power from the electricity grid.

Requirements for RECs

Many states require power utilities to buy or generate renewable solar power, often called solar carve-outs. In addition, 30 U.S. states plus the District of Columbia have renewable portfolio standards (RPS) that require power utilities to use a certain amount of renewable power. These RPS requirements are behind the trading of RECs. A power company can purchase these certificates from homeowners and others to meet the state's renewable requirements.

While state laws vary on the use and sale of RECs, the certificates are recognized by many state and local governments, regional electricity transmission authorities, nongovernment organizations, and trade groups as a measure of a company's commitment to sustainability. Besides solar and wind-generated power, RECs are issued for energy produced from geothermal, hydropower without dams, biofuels, and hydrogen fuel cells.

Buying and Selling RECs

Utilities and other businesses buy RECs for a few reasons. One is to meet legal requirements. Many states require utility companies to produce a minimum amount of renewable energy. Buying RECs allows companies to get credit for renewable production to meet these standards. For example, in 2020, Massachusetts began requiring all electricity suppliers to produce or purchase RECs amounting to 15% of the electricity they provided to the state.

Typically, these laws have an "alternative compliance payment" that allow companies to pay a fee if they don't purchase enough RECs. The price of these payments, along with supply and demand, help set the market value of RECs.

RECs are typically traded by power companies and people who own residential energy systems such as solar panels. They can be bought or sold directly, but some thꦯird-party companies have created marketplaces to aid these transactions.

For example, SRECTrade helps residential solar owners track their RECs and sell them to utility companies and other buyers.

In late 2023, AES Corporation (AES), Constellation Energy Corporation (CEG), and tech giants Google and Microsoft (MSFT) partnered with energy marketplace administrator LevelTen Energy to form the Granular Certificate Trading Alliance. The alliance is set to form a new REC trading marketplace that would include detailed information on the time and location of renewable energy generation. This would be ꦦfar more detailed than what's available now, and also bღe on a far wider scale than REC marketplaces now.

These "granular certificates" would also be a step forward for RECs since they have typically lacked any specificity about the actual origins of renewable energy. This information could be quite attractive to corporate and utility energy buyers looking to meet their clean energy goals day and night while also being able to be far more specific with the public and customers about how they are sourcing their energy needs.

The new trading platform, slated to go live in 2024, could thus increase transparency and accessibility in the REC market. This, in turn, could provide clearer signals to renewable energy developers about where new projects are most needed, potentially influencing the location and development of future renewable energy installations.

Solar Renewable Energy Certificatess

Solar renewable energy certificates (SRECs) are for electricity produced by solar panels. These are found in these states, which differentiate them from other energy sources:

• Connecticut
• Delaware
• Illinois
  
• Maryland
• New Jersey
  
• Ohio
• Pennsylvania
• Washington D.C.
  

Example of a REC

REC 澳洲幸运5官方开奖结果体彩网:arbitrage is also called a REC swap. These trades involve the near-simultaneous buying and selling of RECs with differing prices. Traders try to profit from the disparity in prices to sell them for more than they bought them.

For example, 🎐suppose State A has higher RPS requirements and solar carve-outs than State B. The higher requirement drives demand for the price of RECs in State A. 

The state A provider, who must meet th♛e higher requirements, would have a reason to buy less expensive state B certificates. The provider can then use these credits to meet their requirements.

RECs all represent 1 MWh of electricity, wherever it's produced. However, the price may vary because of supply and demand. In practice, brokers are used to make REC arbitrage possible.

The Bottom Line

RECs are an important part of the drive for renewable energy in the U.S. and across the world. They are legal instruments that show that the electr🧔icity was produced using environmentally friendly methods. Many states have laws mandating that a certain percentage of power be produced using renewables, creating a market for RECs.

For green energy producers, RECs ♛increase the value of their electricity by allowing them to sell the excess power they generate and the RECs associated with it.

Correction—Dec. 25, 2024: This article has been corrected to state that in order to use the renewable electricity generated on your property by a solar panel, you must retain the REC. If sold, you lose that right.