What are Renewable Energy Credits and How do they Help?
Renewable energy is the talk of the town! As governments continue their efforts to make energy as clean and green as possible, people can do their bit by purchasing renewable energy credits (REC).
According to the International Energy Agency (IEA) the demand for green and clean energy will likely skyrocket and there would be a 597% increase in solar, wind and geothermal energies by 2035. When other sources of green and clean energy such as biomass, hydropower and nuclear are included, the demand would be 58% more by 2035.
Why use renewables?
Everyday lives create numerous carbon footprints with greenhouse gas emissions. Per the Union of Concerned Scientists, each person emits 17.62 mT of carbon in the United States which can keep 3.7 passenger cars on the road for an entire year! Apart from using lights and electric plug-ins, most of which comes from fossil fuels, 12,000 miles in a year is the driving time on an average per person. About 19 lbs of carbon dioxide is generated from one ton of gasoline. Besides all of these, the trash generated that goes into the landfills also emit huge volumes of greenhouse gases.
Other ways of contributing to greenhouse emissions are traveling by air which is a major consumer of fossil fuels and the use of plug-in gadgets that guzzle up power.
Residences and buildings that use electricity for heating and power are the largest emitters of greenhouse gases. Industries, agricultural activities, and transportation account for other major carbon producers. The major greenhouse gas generated in all these activities is carbon dioxide.
Other greenhouse gases include methane, nitrous oxide and fluorinated gases such as hydrofluorocarbons (HFCs), sulfur hexafluoride (SF6) and perfluorocarbons (PFCs). These gases and the heavy metals released during the processing of fossil fuels are well known for the health hazards they carry. Mercury is a known toxin that has entered the food chain in multiple ways. Eating mercury-laden fish and seafood is known to result in birth defects, neurological complications among others. Heavy metals including lead can cause a wide range of conditions ranging from asthma, allergies, respiratory illnesses, cancers, to liver and kidney damage. About 90% of greenhouse gas emissions come from the use of petrol in the transport sector.
Moving towards renewable energy credits
Most Americans are aware of the ever-looming threat of greenhouse gases and climate change. Seven in ten participants in a survey conducted by the Associated Press-NORC Center for Public Affairs Research and the University of Chicago said that climate change was real and is happening. A majority of the respondents while expecting the government to take measures to curb greenhouse gas emissions said that they would support such policies.
For businesses and corporates as well, reducing carbon footprints not only is in line with the corporate social responsibility but can boost profits as well. A recent report by WWF and CDP showed that there can be savings of up to $190 billion by 2020 with just a reduction of 3% in emissions in the corporate sector.
With growing emphasis on increasing use of sustainable, clean energy sources, individuals and corporates are keen on cutting down on carbon footprints. But installing windmills and solar panels may not be easy or practical in many cases. Lack of space, excessive shade or inaccessible rooftops are some of the many reasons why installation of solar panels difficult. RECs are also ideal in states where renewable energy is not available.
In such cases, renewable energy credits or certificates are the best way to switch over to green energy. RECs are a way to also show there are no carbon emissions tied to the electricity use. Carbon credits are another way to cut down on carbon footprints. Carbon footprints are to do with miles driven to methane production while RECs deal with only electricity consumption.
The difference between carbon credits and renewable energy certificates is that while the former helps reduce greenhouse gas emissions, RECs help cut down on electricity from fossil fuels. The carbon credits measure carbon reduction while RECs measure the offset in kilowatt hours.
Growing use of RECs
The energy movement is not new but slowly but steadily picking up the pace. Way back in 2007, the United States Environmental Protection Agency used renewable energy to power 100% in all its offices.
The University of Pennsylvania and the Air Force are other major purchasers of RECs. Retailers like Whole Foods and Intel have been the other major supporters of RECs. In 2016, Intel Corp. bought more than four billion kWh of renewable energy.
States like California and New York are committed to achieving their targets for renewable energy use and cut down on carbon emissions. The Clean Energy Standard (CES) of New York has set a target of sourcing 50% of electricity from green energy sources including wind and solar by the year 2030. The progressive phase in programs is taking off in 2017.
California has gone a step ahead with a target of sourcing 100% of its energy from renewable sources by 2045.
What are RECs?
Also called Green tags, Tradable Renewable Certificates, Renewable Electricity Certificates, or Renewable Energy Certificates, these credits are not visible but can be traded. The energy credits offer an indirect way of participating in and contributing towards sustainable energy initiatives.
Per the Global Corporate Renewable Energy Index (CREX), more than 70% of global renewable electricity was purchased through voluntary REC markets by companies.
Renewable energy sources include both solar and wind energy systems that produce power on a commercial scale. Although solar and wind are the most common references for renewable energy, green energy sources can also include:
- : Biogas or biomass includes tapping the methane produced by bacteria through anaerobic digestion. All living beings including plants and animals emit methane during the process of decomposing. Biomass plants convert the methane into usable energy.
- Landfill Gas: Landfill-gas-to-energy (LFGTE) projects also use the methane gas from biological sources to produce electricity.
- Geothermal Energy: The natural thermal or heat energy stored in earth’s crust is used by geothermal plants to produce renewable energy.
Renewables can also include hydroelectric power generated by making water turn turbines and nuclear power plants.
One REC provides proof 1000 kWh (kilowatt-hour) or one megawatt-hour (MWh) of power was produced from renewable energy sources. Each REC has a unique identification number that eliminates the possibility of a double count.
The renewable energy produced by wind or solar goes into the same grid that also has energy supplied by non-renewable sources. Once all the electricity produced gets into the grid, much like filling a bathtub with water from different taps, they are not distinguishable in terms of their source. REC provides a way of tracking how much of energy in the grid is from renewable sources.
There are incentives and penalties to encourage traditional power systems to cut down on greenhouse gas emissions. For green energy sources, the more they produce, the more their production gets subsidized.
The Renewable Energy Credits purchased from the grid can be traded in the open market. It can be used by the end consumer, a utility provider or another marketer. Once the REC is used up it is considered as “retirement” of the credit. The retirement of the credits occur in any one of the following scenarios.
- When utilized by the end-user customer, utility provider, another marketer or company to meet regulatory standards
- A claim by end-user consumer in public domain about the use of REC
- When any component of the REC is sold
If the REC is used up or “retired” by any of these three above mentioned factors, it cannot be reused or re-traded.
In the U.S. most RECs are purchased along with the non-renewable energy that comes from nuclear power, natural gas or coal. The combination of energy is termed as “null” energy and when the non-renewables are purchased along with REC, it can amount legally to buying of renewable power.
Solar Renewable Energy Certificates (SRECs) refer to credits obtained from energy produced specifically from solar systems. One SREC is worth 1000 kilowatt hours (kWhs) of solar energy. The Renewable Portfolio Standard or RPS regulated the SRECs until 2015 in many states. Under RPS, utility providers in states that came under the SREC program were required to mandatorily purchase and retire a proportion of energy from SRECs.
States including Maryland, Massachusetts, Delaware, Ohio, New Jersey, Washington, D.C., and Pennsylvania have open markets for SREC. In these states, any individual can sell excess solar energy generated as SRECs to make profits. For example, an individual that owns a 5 KW solar power system generates five SRECs in a year and sells them each for $250. He or she would make a profit of $1250 in a year besides earning tax credits and other benefits.
Types of renewable energy credits markets
The compliance and voluntary markets constitute the two markets for renewable energy in the U.S.
Compliance markets were in force in twenty-nine states under the Renewable Portfolio Standard. Load-serving entities (LSE) or utilities that supply power were required to supply a mandatory proportion of power from green sources. While in California the mandate was 33% of power to be supplied by renewable sources by 2020, New York had a requirement of supplying 24% from green energy by 2013. The utilities or LSEs would have to purchase RECs to meet these goals.
In voluntary markets, the end consumers opt to purchase green power as they desire to switch over to renewables to contribute towards the reduction in carbon footprints. Corporates such as Intel, retailers such as Whole Foods and many households are voluntarily going in for green energy sources.
Corporates are creating most of the demand for voluntary REC trading. In 2015, companies including Procter & Gamble, Johnson & Johnson, Walmart, and Starbucks, joined the registry of companies which get 100% energy from green sources. Called the RE100, the registry includes details of other companies that have already achieved the 100% targets globally. Infosys, the Indian IT company and Elion Resources Group from China are others in the 100% clean energy bracket.
Green energy worth 62 million megawatt-hours was purchased voluntarily in the U.S. in 2013 which was a 27% increase from the sales in 2012. In 2013, wind energy accounted for 75% of the total purchase of renewables in the U.S, with biomass being the second in the list. Hydropower, geothermal and solar energy sources were the other major green energies that were voluntarily purchased. In 2015, more than four million customers bought 77.9 million megawatt hours of renewable energy.
According to 2015 data, more residential customers bought green energy credits than non-residential or commercial entities.
There was a 6.5% increase in residential customers who purchased green energy credits. In 2015, forty-five thousand new customers bought green energy credits.
Through the Green Power NYC portal, residents in New York can purchase renewable energy certificates online. The Green Power NYC is a portal that has been developed by the New York City along with the Alliance for Clean Energy New York (ACENY) and the Natural Resources Defense Council (NRDC). Just three steps are enough to complete the purchase of REC from solar and wind energy through this portal. Businesses that need 100,000 kWh of green energy in a year can also purchase RECs through this portal.
In Massachusetts, the newly unveiled Solar Massachusetts Renewable Target or SMART is set to replace the SREC program. A host of new incentives and restructuring are on the anvil under the SMART program. One of the main features is the reduction in the cost of solar installation to $200 million from $500 million annually. The other is to generate 1600 megawatts of additional solar power.
The 3 tiers of renewables
Under the Clean Energy Standard plan adopted by the New York Public Service Commission (PSC), there are three tiers of renewable energy credits. Tier 1 refers to new renewable resources that are operational from 2015, while Tier 2 applies to existing ones. Tier 3 deals with qualifying nuclear power facilities.
The Clean Energy Standard replaces the Renewable Portfolio Standard (RPS) that expired in 2015. While Tier 1 and 2 are a continuation of the RPS, tier 3 is a new add-on under the CES. The Tier 3 has been included to utilize nuclear power plants to produce clean energy to achieve the 50% renewable energy target by 2030.
The Tier 1 in CES looks to promote qualifying new renewable energy sources. Those renewables that came into effect post January 1, 2015, are categorized under new renewables.
The Phase one of the CES plan took off in February 2017 with detailed eligibility criteria laid down for the Tier 1 new renewable resources. The criteria include specifications related to location, size, date of operation and energy delivery needs. Those sources that have been upgraded or relocated could also come under Tier 1 provided they meet the eligibility criteria laid down by the NYSERDA. There is a percentage obligation for energy delivery for the load serving entities (LSE) in the state that is calculated based on their electric load and percent requirement.
The Tier 2 deals with and supports existing green energy sources, that is, those that have been in operation prior to 2015. Tier 2 maintenance contracts are awarded to support hydroelectric power sources, wind and biomass that were operational before 2015.
Under Tier 3 of the CES plan, the operational nuclear power facilities are supported to achieve the target of 50% renewable energy by 2030.
Under the CES program, the NYSERDA will procure centrally the RECs from renewable energy sources but the LSEs are responsible for meeting compliance requirements. The load serving entities (LSE) or electricity utilities have an obligation to procure and retire a proportion of their load through RECs that they can buy from NYSERDA or from other green energy sources. The RECs purchased by LSEs are tracked by NYSERDA through its New York Generation Attribute Tracking System (NYGATS).
In the event any LSE is not able to meet the mandatory REC procurement and retirement standards, it has to incur an alternative compliance payment (ACP) to the NYSERDA. The penalty is to encourage future compliance towards meeting REC goals.
RECs are environmental commodities and can be traded like any other commodity on the Green Exchange or Nord Pool. While the Green Exchange is a collaboration between New York Mercantile Exchange (NYMEX) and many other such corporations. The Nord Pool is the European based international exchange forum for green energy certificates.
Globally, renewable energy certificates (REC) market is set to witness significant growth according to Transparency Market Research (TMR) report. With the rising focus and concern on global warming arising from fossil fuels, the attention of the world is likely to be drawn increasingly towards RECs according to the report. The trade of RECs international trading avenues supports the renewable energy industry development. The green certificates enable manufacturers an additional income which in turn boosts demand for clean energy.