Making sense of the REC-age
On a grassy sandhill in eastern Colorado, Wray School District Superintendent Ron Howard parks his truck and points to the spot where his district's new wind turbine will stand. "Right there, top of the hill," he says. "The wind comes from the north, funnels through the canyon, then shoots up over this rise." We get out and take the air. "Feel it?" he says. A persistent breeze combs over the hill, strong enough to make a street sign tremble.
Howard rattles off the specs. "It'll be 335 feet high to the top of the propeller. Put out 900 kilowatts, enough to power the school district and most of the town, too," he says, pointing behind him to the farm town of Wray, population 2,100, about 16 kilometers from the Colorado-Nebraska border. "You come back this time next year, it'll be here turning."
The Wray turbine will be turning thanks in part to renewable energy certificates-also known as RECs or green tags-which helped finance the project. When a renewable power source like a wind turbine generates a megawatthour (MWh) of electricity, it also produces a 1-MWh REC, which is an electronic financial instrument representing the green attributes of renewable energy (mainly, the fact that little or no carbon dioxide or other pollutants were released during its generation). Customers buy the electricity, of course, because it's the most flexible and useful form of energy ever harnessed and can do myriad jobs that once required muscle power. But the RECs are worth something too-anywhere from US$1.50 to $20 per MWh on the retail market. Sold separately, they offer a way for individuals or companies to support renewable energy even if they cannot buy it directly from their local electric utility-plus they create a separate income stream for the power generators producing the renewable energy.
RECs were invented in the late 1990s as an offshoot of "green pricing" programs. With green pricing, customers paid an extra 1-5 cents per kilowatthour (kWh, or 1/1000th of a MWh) to buy energy from renewable sources, mostly wind, biomass, geothermal, and solar. (The same sources, especially wind, supply the REC markets; see chart, page 16). Not all utilities offered green pricing, though, and some didn't have nearby renewable sources from which to buy. By splitting the product of a renewable power source into two commodities-the electricity and its renewable attribute-RECs gave utilities and consumers the ability to support green energy generation without actually hooking up to a green power source. The hope and assumption is that RECs will encourage increased investment in renewable generating capacity.
RECs remained little-known instruments until 2004, when big companies discovered them as a convenient way to "green up" their power. Thanks partly to huge purchases by corporations like Wells Fargo, Whole Foods, Vail Resorts, and Starbucks, REC sales more than doubled between 2004 and 2005, from 1.6 million MWh to 3.8 million MWh. REC retailers estimate they sold more than 6 million MWh last year. Officials who track green energy markets at the U.S. Department of Energy's National Renewable Energy Lab (NREL) in Golden, Colorado, expect yearly REC sales to hit 20 million MWh in 2010. Earlier this year the National Football League bought RECs to make Super Bowl XLI the first NFL championship game to use 100 percent renewable energy. Shoppers can now buy RECs at the checkout line at Whole Foods.
"We've seen explosive growth in the last two years," says Blair Swezey, NREL's principal policy advisor for green energy markets. "Larger companies are using RECs to green up their power company-wide, doing it with one national buy rather than negotiating utility-by-utility. Those huge deals are really driving the market."
RECs have become so convenient and popular, in fact, that some green energy leaders are now having second thoughts. Are RECs really bringing new wind farms and solar arrays online? Are green tags too cheap and convenient? Do people really know what they're buying in a REC?
The debate began in 2006, fueled in part by the clamor for carbon neutralization. Companies and individuals snapped up RECs as a way to "offset" the greenhouse gases generated by electricity use (see "Carbon Offsets 101," p. 9, for a discussion of carbon offsets). REC marketers obliged by using complex formulas to convert a REC's megawatthour into carbon offsets and selling them for around US$12 per ton. But at the end of the year, Clean Air-Cool Planet, a nonprofit global warming group, released "A Consumer's Guide to Retail Offset Providers," a report that questioned the use of RECs as carbon offsets.
The original goal of RECs, the report said, was to promote more renewable energy generation, not to offset the production of greenhouse gases (GHGs). The point of GHG offsets is to fund carbon sequestration that might not otherwise happen. RECs, on the other hand, may be generated by wind turbines in which the REC plays some part in the financing of the project-or none at all. "RECs and GHG offsets are fundamentally different environmental commodities," the report concluded, "subject to different qualification criteria that prevent them from being mixed and matched."
Green bloggers then set off a round of REC criticism and soul searching. "What, exactly, are buyers buying?" asked ClimateBiz.com founder Joel Makower. "There are no standards for offsets, and more than a little disagreement on what constitutes a ‘quality' offset." Mark Trexler, a climate change risk consultant and coauthor of the Clean Air-Cool Planet report, worried about cheap RECs undercutting the market for pricier "pure" carbon dioxide (CO2) offsets. Randy Udall, a longtime renewable energy advocate, weighed in with a rant posted and forwarded in green energy circles. "I was there at the beginning, when we invented this idea, and I'm beginning to think we should have strangled it in the crib," Udall fumed. His chief complaint was that REC marketers had essentially become priests selling indulgences, letting people and companies throw easy money at the problem instead of doing the hard work required to cut back on energy use. Udall also questioned whether RECs were getting any new wind farms built at all.
Many in the REC markets counter that those critics are missing the point. Udall's worry-that some RECs are being generated by already-existing wind farms, and sold on the cheap-"just isn't a very sophisticated way of thinking about what we're doing," says Ted Rose, director of business development at Renewable Choice Energy, a REC marketer based in Boulder, Colorado. The point, say Rose and others, is that RECs offer a way to support renewable energy generation for those who can't build or plug into their own wind turbine or solar park. REC marketers also argue that bringing more renewable energy sources online decreases the percentage of power produced by coal and natural gas fired power plants, thereby reducing the amount of CO2 pumped into the atmosphere.
The one thing that nearly everyone familiar with the REC market can agree on is this: it's not easy to understand. "When you wander into the weeds of this, things get complicated in a hurry," says Randy Udall. For starters, there isn't just one REC market. There are two: the voluntary market and the compliance market.
The RECs that Whole Foods and the Dave Matthews Band buy are known as voluntary RECs, which are traded on the voluntary market. Nobody is compelled to buy them, and no government agency regulates the market.
The compliance market was created a few years ago when some states began enacting Renewable Portfolio Standards (RPS), which forced power suppliers to include a certain percentage of renewable power sources in their overall portfolio (see map). "Compliance REC" markets developed in states that allow power companies to meet their portfolio standards by purchasing RECs.
Because states usually require power companies to buy RECs generated in-state or in-region, compliance markets often operate independently. REC prices rise and fall depending on the strictness of the RPS standard, the state's renewable energy supply, and the penalty for noncompliance. For example, a 1-MWh REC on the national voluntary market sells for $1.50-$20. Massachusetts has a tough RPS standard, few renewable power sources, and a $55-per-MWh noncompliance penalty, and Massachusetts RECs currently sell for around $54. In Maine, where power companies find it easy to meet the RPS with abundant wood-product biomass and hydro facilities, compliance RECs sell for 54 cents.
While prices in the compliance REC markets are widely known, prices in the voluntary market are closely guarded secrets. In the words of one REC marketer: "If I told you what we pay for a REC, per project, my competitors would find that information very useful." It's not a pure buy low-sell high situation, because most REC marketers want to buy from power producers at a price that will help the producer sell his power into the grid at a competitive rate. At the same time, REC marketers aren't nonprofits. So prices vary according to the "quality" of the REC. So-called "old vintage" RECs, produced by already-existing wind farms, can be had on the cheap if purchased in bulk. Prices for the Wells Fargo and Whole Foods deals were never released, but in industry circles it's widely believed that those RECs went for about $1.50. Higher quality RECs, usually tied to projects just being built, can go as high as $13 for wind, $30 for solar.
It's the price differential, and the forces behind it, that set critics like Randy Udall on edge. "The REC market is following Gresham's Law," he says. "Gresham says when you have two kinds of money circulating, the bad money will drive out the good. When you have low-quality $1 RECs available, the high-quality $10 RECs have great difficulty finding a market."
At the heart of the matter lies the debate over "additionality," the idea that incentives like RECs actively foster the creation of new renewable energy facilities instead of merely giving a bonus to the owners of already-existing enterprises. To understand the controversy, it helps to know how a REC qualifies as a REC. Five years ago, when the REC market was just getting started, San Francisco's Center for Resource Solutions began a REC certification program in an effort to give REC buyers a sense of quality assurance. Working with stakeholders in the power industry and the environmental community, the Center developed Green-e, an organization that sets REC standards, and certifies and audits producers and sellers.
"When we started certifying five years ago, there wasn't much renewable energy supply," explains Dan Lieberman, Green-e's policy director. "We had to allow RECs from a certain amount of already-existing renewables just to prime the market. The wind farms just weren't built yet. The idea was to eventually ratchet down the number of existing facilities we'd tolerate each year. We want to constrain the market to keep encouraging the construction of new projects. Those wind farms are getting built, so we ratcheted down to the 1997 standard."
Green-e has a number of criteria for certification, but its definition of "new" projects relies on timing, not on the role RECs play in the project's creation. As of this year, renewable projects that began operating after January 1, 1997, were eligible for Green-e REC certification. Green-e is currently drafting a new standard that would ratchet down to January 1, 2000. The idea is that updating the standard will keep RECs fresh and not dilute the meaning of "new" renewable projects. But some REC marketers are asking Green-e to do more, especially when it comes to converting RECs into carbon offsets, and the role additionality plays in that conversion.
Others assert that Green-e's timing standard is hardly enough to judge a project's additionality. "For a REC to be considered additional, you have to ask the question of whether the RECs are important to the project happening. Many in the renewables field will say that, frankly, RECs play no role in whether 90 percent of projects happen," says Mark Trexler. "They're simply gravy at the end of the day."
If you really want to see what's building renewable energy sources, Trexler says, look to the federal renewable energy production tax credit (PTC). With the PTC, wind producers realize a $19/MWh credit for the first 10 years of a project's life. PTC revenues dwarf most REC income streams, and it's the tax credit and the state portfolio standards, some say, that are the real drivers behind the expansion of renewable energy facilities in the past few years. "When the production tax credit goes away," Trexler says, "people stop building windmills."
This is where Ted Rose's "sophisticated market" approach comes in. Rose and others argue that a robust REC market does make a difference. Even RECs purchased from long-existing projects have an indirect effect, both driving up the price for RECs (by curtailing supply) and sending a positive signal about the demand for green energy to investors and companies considering new renewable construction projects. "This is a serious form of revenue for many projects, but it's not just about the individual projects," says Rose. "Our clients are smart. They understand that what they're doing is building a system that's helping to change the energy infrastructure of the country."
Still, it can be hard to prove that a REC bought from a six-year-old wind farm spurs the construction of new wind turbines. FPL Energy, the biggest wind producer in America, is a subsidiary of energy giant Florida Power & Light. FPL's Stateline project, a vast 300 MW wind farm on the Oregon-Washington border, has been producing RECs since it came on line in July 2001. FPL sells those RECs as part of its wholesale power price to PPM Energy, which in turn sells the power and RECs to the Bonneville Power Administration. Bonneville markets those RECs as green tags, available to individual consumers for $20 per MWh. On Bonneville's web site, PPM Energy CEO Terry Hudgens says that Bonneville's purchases of RECs from the Stateline project "have been a significant contributor to the project's economic viability." But when the Stateline project was being planned in the late 1990s, the REC market barely existed. And there's no rule that says FPL Energy has to take its REC money and invest it in new wind turbines.
In the final analysis, the REC market may be sustained mainly by belief: Each buyer's faith that his or her money will make a difference, however directly or indirectly, in building the renewable energy market. Certification programs like Green-e offer some assurance, but it's up to the REC buyer to ask the basic questions: What am I trying to do with my money? Where are the RECs coming from? Am I directly raising a wind tower or am I indirectly building demand for renewable power?
Wray of Hope
To answer the most fundamental question-do RECs help any new renewable energy projects get built?-it's helpful to return to Wray, Colorado.
Wray is losing population. The head count at the local high school is falling, which means the district gets less money from the state. Faced with budget cuts, Jay Clapper, the Wray High School vocational agriculture instructor, came up with an idea: Why not harness the wind?
Clapper's notion wasn't half bad. A steady 20-30 kilometer-per-hour wind strafed the bluffs on the edge of town. The town council and Y-W Electric, the local utility, volunteered to buy all the power the turbine could supply. The district could cut its $80,000 annual electric bill to near-zero and make an additional $100,000 a year from selling the excess power. AWE (Americas Wind Energy), a Toronto-based turbine manufacturer, had the perfect machine to fit Wray's conditions: the AWE 54-900. There was just one problem. When District Superintendent Ron Howard ran the numbers he found the district about $200,000 short of the AWE 54-900's price tag: $1.6 million, installed.
Then somebody told him about the REC market. "They said we should look into these things called ‘green tags,'" Howard said. "So I called Tom Stoddard at NativeEnergy."
Stoddard, cofounder and vice president of the Charlotte, Vermont-based energy company, explained the REC market to Ron Howard. The two of them did a little back-of-the-envelope math. A 0.9-megawatt turbine, running 2,600-3,400 hours per year, could produce 2,300-3,000 MWh of RECs. Extrapolate that out over the 20-year lifespan of the turbine, and the money could add up.
The Wray project wasn't a sure thing for NativeEnergy. Tom Stoddard had to take some calculated risks. To bridge Wray's financing gap, Stoddard would have to price the RECs fairly expensively. But he had one thing in his favor: a good story.
In the REC market, story has value. NativeEnergy is known in green power circles for its hardcore green energy clients and management team. The company's client list reads like a roster of America's leading eco-friendly corporations: Ben & Jerry's, Seventh Generation, Annie's Homegrown Foods, and the Dave Matthews Band. To a company like Ben & Jerry's, the Wray story is worth something. The ice cream maker features NativeEnergy-financed wind farms in its "Lick Global Warming" campaign. The homespun farmers of Wray are going to play better than, say, FPL Energy's Stateline project. And additionality was there on its face: the Wray turbine wouldn't happen without the REC money. Ben & Jerry's might be willing to pay a bit of a premium for the Wray RECs.
Stoddard offered Superintendent Howard a deal. NativeEnergy would buy all of Wray's RECs for a set time period (the deal's specifics remain confidential). The Wray School District would use that up-front money to help purchase their wind turbine. In exchange, the RECs produced by the Wray turbine belong to NativeEnergy. This setup, known as forward purchasing, carries additional risk for NativeEnergy and its clients. Something could go wrong with the Wray turbine-the wind might not blow as much as anticipated, or the project could fail and the RECs might not get produced at all.
"We're up front about the risks and benefits," says Stoddard. "If you buy a REC from an existing wind project that's putting out power this year, you don't cause that project to generate more energy. The wind causes that. You haven't caused an incremental benefit to that project, although you are sending a market signal that demand is there for these RECs, and for wind energy. You're making it marginally more likely for others to invest in wind projects down the road. With a forward purchase deal like Wray, what we're offering our retail clients is the chance to have a direct impact on a project that gets built because of your purchase."
Soon after sealing the deal, Ron Howard placed a call to Frank Pickersgill, vice president of AWE in Toronto. We'll take that AWE 54-900 turbine now, Howard said.
Great! said Pickersgill. Then he told Howard, in so many words, to get in line. AWE could sell Wray a turbine, but the little plains town would have to wait months for delivery.
This too was a result-perhaps direct, perhaps indirect-of the REC market. Wind power had become so popular, Pickersgill said, that his company had a one-year backlog of orders. They couldn't make the blades and towers fast enough.
Bruce Barcott is a contributing editor at Outside magazine and a Ted Scripps Fellow in environmental journalism at the University of Colorado in Boulder.