Can Renewable Energy Certificates (RECs) Help Your Project Cross the Finish Line?

Karlynn Cory's picture

It is hard to finish an endurance race if you aren’t sure which direction to go. Renewable energy project development can be like a marathon in the dark, especially when one does not understand how to properly use renewable energy certificates (RECs). My NREL colleagues recently shed light on “The Role of Renewable Energy Certificates in Developing New Renewable Energy Projects.” This blog focuses on their insights on investor requirements, which are consistent with my knowledge of investor perception of RECs over the past decade.

A line chart showing volatile solar renewable energy certificate prices in the U.S. from November 2008 through March 2011.  New Jersey SREC prices hover mostly around $600/MWh, but they sometimes jump between a little less than $400/MWh up to $650/MWh.  New Jersey SRECs have the highest prices shown. The other states show more consistency in SREC pricing.  DC, Delaware, Maryland, Ohio, Pennsylvania, North Carolina and Virginia SREC prices seem to hover between $300/MWh and $375/MWh, but can jump almost to $200/MWh and as high as $500/MWh.

Figure 1. Solar REC WEighted Average Monthly Price ($/MWh), November 2008 - March 2011.

Source: PJM-GATS 2011 and NREL 2011.

What does a REC do?  It captures the environmental benefits of 1 MWh of electricity. RECs are most often used to prove compliance with renewable portfolio standards (RPS) or with voluntary green power purchases.  Prices range from $1-$10/REC for voluntary markets, from $2-15/REC for compliance markets (though they have gone over $50/REC at times), and the price ranges from $200- $600+ for solar RECs (SRECs). Prices for RECs vary significantly across the U.S. because of:

  • •    Different regions (see Figure 1),
  • •    A wide range of technologies (solar (see Figure 1), wind, biomass)
  • •    A wide range of project sizes (from 2-3kW solar to hundreds of MW at the utility scale)
  • •    Three distinct markets with different drivers:
  1. Voluntary green power purchases are based on the customer willingness to pay and lower REC prices are common.
  2. Renewable Portfolio Standards (RPS) generally have penalties; and REC prices will be at or below non-compliance penalties.
  3. RPS solar set asides ensure that solar does not have to compete with lower cost resources (i.e. it is a separate tier). Solar set asides also often have higher penalties for non-compliance, and thus higher SREC prices.

In the new NREL report, my colleagues attempted to answer questions about the role RECs play in the decision to build new renewable energy projects.  They relied on publicly available data, interviews with experts and data from NREL’s Renewable Energy Finance Tracking Initiative (REFTI)—a periodic questionnaire designed to aggregate and report on current renewable energy project financing terms.

REC value for new RE projects depends on a number of project characteristics, many of which are near and dear to investors’ hearts (and interests):

  • •    Wholesale electricity prices: if the expected wholesale electricity price paid to the developer is low, RECs are more critical to make projects economically attractive.
  • •    Cost-competitiveness of the project: if the project is small, lacks economies of scale, relies on more expensive technologies, or faces other cost challenges, then RECs will be more important in the project decision.
  • •    Proximity to supportive RE policies: the presence or absence of public policies supportive of new renewable projects is important (e.g. RPS and particularly solar set asides in RPS policies).
  • •    Contract duration: long-term contracts are important to getting new projects built (they are always needed for RECs, sometimes for energy), but long-term contracts are:
  •       o    More difficult to obtain in restructured states, and
  •       o    Generally not signed in voluntary markets.
  • •    Price transparency:  REC prices, as reported by brokers (the most available source of price information), tend to reflect short-term markets.
  • •    Perspective is also critical
  •       o    Developers value RECs as an additional revenue stream,
  •       o    Investors and especially lenders do not value RECs (or the associated energy for that matter) without the security of long-term contracts. While auctions, brokered transactions and even a few small, spot markets exist, investors assume the value of RECs is $0/MWh without a contract (or at the end of a contract).

The report points out a large number of options that could strengthen the role of RECs.  Several of them are directly related to conditions that would encourage increased capital investment in renewable energy projects, including:

  • •    Encourage long-term contracts for RECs
  • •    Host periodic solicitations for medium to long-term contracts with smaller projects
  • •    Adopt a REC price floor
  • •    Support greater price transparency.
  • REC markets, and particularly the perceived value of RECs by financiers, can be confusing for newcomers. Thankfully, the new NREL report can help demystify investor requirements for RECs so that more projects can successfully cross the finish line.