united states: December 17, 2009
For the past 15 years, Renewable Energy Credits (RECs) have been the primary financial instrument used by corporations to offset their electric loads. Although the definition of a REC is still in debate in some circles, the widely used definition is that one REC represents one megawatt hour (MWh) of certifiably renewable electric generation and all environmental benefits of generating that MWh as opposed to burning fossil fuels. Corporations have purchased RECs for a variety of reasons, but usually for purposes of public relations (PR) or corporate social responsibility (CSR).
RECs trade over the counter in two markets: mandatory and voluntary. Twenty-eight states currently have requirements for Renewable Energy or Renewable Portfolio Standards (RES or RPS) that mandate a certain percentage of the state’s electric load come from renewable sources. Participants in these programs (i.e., largely utilities) purchase RECs generated in their state or region in the mandatory market. Corporations buy voluntary RECs and can purchase them from generators in any state or region.
The potential for some form of a cap and trade scheme, such as the Waxman-Markey bill to be considered by the Senate sometime in 2010, will change the landscape for renewable energy products. Cap and trade would create carbon allowances that industrial emitters would be mandated to buy if they exceed a pre-determined emissions ceiling. Much of the money raised would be disbursed to renewable generators in the form of tax rebates and subsidies.
Such a regulatory regime could mean the demise of the voluntary market as industrial users of fossil fuels become participants in cap and trade. Corporations that are not subject to an emissions cap may see marginal increases in their costs for materials and may feel that they are participating by proxy and could view RECs as an unnecessary expense. Utilities passing through the costs of compliance will further reduce demand for RECs.
Even if Waxman-Markey is passed in 2010, which many observers doubt, the program will be phased in slowly and “pre-compliance” measures may be included in any climate bill which would reward early participants. There will likely be at least a three year gap between passage and implementation. In the meantime, REC prices have collapsed and they are a cost effective instrument to meet PR and CSR goals.