What is a Renewable Energy Certificate (REC)?
A Renewable Energy Certificate (REC) is a market-based tool used to certify that the holder owns 1 megawatt hour (MWh) of electricity generated by renewable energy. Once electricity providers feed energy into the grid, the RECs received can be sold on the open market as energy commodities. For example, RECs obtained may be sold to other polluting entities as carbon credits to offset their emissions.
RECs may use other names, including Green Label, Tradeable Renewable Energy Certificate (TRC), Renewable Electricity Certificate or Renewable Energy Credit.
- Renewable Energy Certificates (RECs) certify that the owner of an energy market instrument has 1 MWh of renewable energy; they describe the amount of renewable energy flowing through the grid.
- RECs could eventually be sold for profit to those looking to offset carbon emissions or to speculators betting on the value of energy credits.
- REC swaps include trading RECs to profit from the difference between buy and sell prices; this increases the chances of a swap because many states have different RPS standards.
How Renewable Energy Certificates Work
Renewable Energy Certificates (RECs) serve as a billing or tracking mechanism for solar, wind and other green energy flows into the grid. Since electricity produced by renewable energy is indistinguishable from electricity produced by any other source, some form of tracking is required.
This computation and returning energy to the grid is necessary because storing electricity in batteries is difficult and expensive. Therefore, most of the renewable energy not used by the creator is fed back into the grid for use by other customers. Renewable electricity providers, such as homeowners with rooftop solar panels, will receive RECs. Energy certificates can be sold, but are generally used as credits against their own electricity usage.
Eligibility to use a REC will expire at the end of the fifth calendar year following the year in which it was generated.
Requirements for Renewable Energy Certificates
Many states require power companies to purchase or produce renewable solar energy. These requirements are called solar stripping. Additionally, many states have Renewable Portfolio Standards (RPS) that require electric services to create a certain amount of renewable energy, which is increasing every year. These RPS requirements are an important driver of renewable energy certificate trading. Power companies can purchase these certificates from homeowners to meet the state’s renewable energy requirements.
While state laws governing the use and sale of RECs vary, these certificates are recognized by many state and local governments, as well as regional transmission authorities, non-governmental organizations (NGOs), and trade groups. In addition to solar and wind power generation, RECs can be issued for generators of geothermal, damless hydropower, biofuels and hydrogen fuel cells.
Example of Renewable Energy Credit
REC arbitrage is also known as REC swap. These transactions involve buying and selling RECs at different prices almost simultaneously. Traders try to profit from the difference between buy and sell prices.
For example, State A has higher Renewable Portfolio Standard (RPS) requirements and solar unbundling than State B. Higher requirements drive demand for State A Renewable Energy Certificate (REC) prices.
Therefore, state A providers who must meet higher requirements will have an incentive to purchase the less expensive state B certificate. Providers can then use these points to fulfill their requirements.
A Renewable Energy Certificate (REC) is always the same one megawatt hour (MWh) of electricity, no matter where it is produced. However, prices may vary due to supply and demand. In practice, brokerage intermediaries often facilitate REC arbitrage, but the market allows renewable energy suppliers to conserve energy production and reduce carbon emissions by encouraging more green energy production.