The track record of renewable energy credits (RECs) is spotty, with several high-profile market misfires leading many to be skeptical of their utility.
Conceived as a mechanism for enforcing a state renewable portfolio standard (RPS), RECs – and the solar variety, SRECs – are produced by qualifying renewable energy generators as proof of compliance. Moreover, RECs have a market value and can be sold to utilities and power providers that use them for compliance in lieu of investing in renewable generating capacity.
Roger Rosendahl, a partner in the Washington, D.C., and San Francisco offices of Stoel Rives LLP, says the potential volatility of REC markets limits their usefulness as a source of revenue for project financing purposes.
‘I was involved in a solar project in New Jersey in 2011, and the RECs were more valuable than the power,’ Rosendahl says. ‘Our financing was going to be based on returns from SRECs, but then the prices collapsed and the deal collapsed. The whole concept collapsed. Nobody tries to use RECs anymore to do project financing because you need a long-term income stream that's reliable. RECs don't give you that. They are too unpredictable and variable.’
The volatility of RECs makes it reasonable to question their usefulness at all, particularly in states that take a hard line on enforcing their RPS mandates. However, Rosendahl says RECs have their uses and that it is way too early to write them off. In fact, he believes that RECs could have a vital role to play in regional and even national renewable energy policies.
‘My view is that it is very premature to be making a conclusive assessment of any kind on the value of RECs,’ Rosendahl says. ‘The value that I see is as a flexible alternative to compliance. You get it by means A, generating the renewable energy yourself, or you get it by means B, buying RECs from somebody who has generated it. Why not have two ways to get the result? If we're matching the mandate, that's the goal.’
Rosendahl says the success of REC programs must be viewed on a state-by-state basis. States such as Massachusetts that take a hard line with RPS compliance tend to have more successful REC markets. In such markets, Rosendahl says, the REC price typically sits just below the noncompliance penalty – effectively forming a market ceiling. This creates more stability.
Although RECs may not work as a transparent, fluid market as originally envisioned, this doesn't mean that they will never do so. Looking ahead, Rosendahl envisions regional markets for RECs along the lines of New England, where RECs can be sold across state lines.
‘It is easier on a regional basis because the market is bigger,’ Rosendahl says. ‘Eventually, the goal should be RECs trading like on a stock market.’
Any successful REC market will depend on the diligence of individual states in setting and enforcing their RPS mandates. Groups of such diligent states may combine to form regional REC markets where grid operators make this feasible. It is possible that RECs could be useful for enabling some of the multi-state emissions targets described in the U.S. Environmental Protection Agency's Clean Power Plan.
‘The conclusion in my analysis is that this is an evolving market,’ he says. ‘Right now, it's like the Middle Ages, where you had lots of little principalities. That's how RECs work, and it varies widely by state. But don't scrap them. It's still early.’