Renewable energy certificates (RECs) represent 1,000 kilowatt-hours of renewable energy generated. RECs can be sold separately from the underlying energy. RECs are purchased by energy suppliers and firms to comply with Renewable Portfolio Standards, which require a portion of energy come from renewable sources. RECs are traded in compliance and voluntary markets, with prices in compliance markets influenced by RPS policies. RECs help develop renewable energy by providing revenue guarantees for generators, connecting demand and supply, and increasing investments in renewable facilities. However, RECs depend heavily on RPS and price volatility poses challenges.

1. Tyuleubekov Sabyrzhan
Renewable energy certificates
Renewable energy certificates (RECs) are issued by renewable energy generators when
they produce 1000 kilowatt - hours. Renewable energy certificates may be sold with (so-
called bundled) or without (unbundled) underlying green energy itself. How it can be
done and what are these certificates for I will try to explain in this paper.
First of all, what are RECs? As written above, it is the statement of the renewable energy
generator that 1000 kilowatt-hours of green energy were produced and placed into the
grid. RECs are sold to energy suppliers, firms or households who want and/or need to
claim that they use renewable energy sources. The incentive for households to buy such
certificates is obvious – it is their desire to use green energy. But the reason why energy
suppliers or firms buy such certificates needs to be explained. When firm buys RECs, this
firm can claim all environmental, social, and other non-power qualities of renewable
electricity generation. In the United States, there is such regulation as Renewable
Portfolio Standard (RPS). RPS requires energy suppliers to have some fraction of their
energy to be produced from renewable energy sources. Since it is not easy for energy
suppliers to produce green energy itself, they can buy RECs and use them in order to
comply with the regulation. It is convenient for the energy suppliers, because they do
not need to produce green energy itself, this would require additional investments for
building new facilities. Some may say that it is kind of cheating. It is not, because RECs
are backed by 1000 kilowatt-hours and in the location of RECs’ issuer 1000 kilowatt-
hours of green energy are in fact used, but since electrons are indistinguishable no one
can claim that he uses pure green energy unless all energy in the grid is from renewable
energy sources (free-rider problem is discussed in later section). Likewise, RECs are
expired once they are claimed, for example, if the firm claims to the regulators that some
share of their energy is from renewable energy sources and used REC as a proof, this
certificate cannot be used again. At the point of issuance (i.e. 1000 kilowatt-hours of
green energy produced) each certificate is assigned with an identification number,
renewable fuel source (wind power, solar power etc.), geographic location of the
generator and etc. One more point, once REC is expired it cannot be sold.
Now I will explain how RECs are traded. There are two types of markets for RECs:
compliance market and voluntary market.
Compliance market is primarily for energy suppliers that need RECs in order to comply
with the regulation, by the way RPS is different in each state. Thereby, the demand in
such market will always be dependent from RPS, so the demand is inflated. Compliance
markets are created by RPS policies. In compliance markets mostly wholesale REC
transactions are involved.

2. Pricing in compliance markets depends on various factors. For instance, on RPS policy,
since there are different RPS policies in each state prices differ as well. For example, in
some states RPS policy allows RECs that are only from new renewable generators, i.e.
the facility was built after 2010 etc. such policies are implemented in order to incentivize
construction of new facilities. Furthermore, RPS may require some share of renewable
energy come from solar energy only; such regulations are implemented in order to
diversify renewable energy sources. RPS may require REC to be only from its state, so
no import of RECs is allowed. Liquidity and prices are dependent from RPS requirements
regarding the time validity of RECs. For example, RPS may require RECs to be issued not
more than one year ago, so holding RECs in the states with such RPS is lowering their
price. Magnitude of penalties for noncompliance affect prices as well, but the effect is
not big, since penalties do not vary much. Now penalties across the states vary around
50 $/MWh.
The size of compliance market in terms of energy produced is directly depends on RPS
policies in each state, but it is very likely to increase, since RPS in going to be more and
more strict. As for the size in terms of money it is more complicated to forecast the
development of the market, since prices for RECs appeared to be volatile (this issue is
addressed in the lower sections)
Voluntary market is the market where households or firms buy RECs just because they
want to use green energy. In contradistinction to compliance market, here we have
“natural” demand, which may be lower than in compliance market.
As a consequence of inflated demand in compliance market, prices in voluntary market
are lower.
In order to prevent room for issuers to cheat there are different tracking systems.
Tracking systems are verifying that into the grid 1000 kilowatt-hours of green energy
were placed. It can be even placed into the grid, which is not interconnected with the
grid of the end-user of the certificate. Since each REC has its own identification number,
the certificate is tracked by the system from the point of issuance up until the moment
of expiration, so one certificate cannot be used more than one time (by usage – claim of
using green energy is meant, certificate can be resold multiple times if it is not used). In
addition, audit can be applied in order to verify the certificate.
How do RECs contribute into the development of renewable energy generation?
First of all, via RPS investors get guarantees that RECs will be sold, since energy suppliers
give guarantees that they will buy bundled or unbundled RECs (or they may be forced to
give guarantees by RPS)
Secondly, RECs connect demand with supply, so even if in the location of the generating
facility there are no customers who would like to use and support green energy, the

3. generating facility can deliver energy into the grid, notwithstanding that customers who
will claim that they use the green energy will not actually use it.
Thirdly, RECs increase investments into facilities among households and firms. Since,
generating facilities get money without actually selling the energy itself in most cases
(unbundled RECs), so it sells the energy separately, but without emphasizing of its
source. Sale of unbundled RECs is a good stimulus to households. Because they can
install a small generating facility, for example solar panels on the roof, and use the
energy generated for their needs and also sell RECs, in case with solar panels SREC. A 10
kW facility generates around 12 SRECs annually. Actually, households are installing
mostly solar panels, since prices for SRECs are the highest. Therefore, some households
can even take loans for the installation and repay them using revenues from sold RECs.
Nevertheless, the price fluctuation is the risk, which must be estimated.
Nonetheless, RECs are very dependent on RPS. If Renewable Portfolio Standard will be
ones dropped, compliance market will disappear. Compliance market is the major
market for RECs. However, I do not think it is possible. In addition, volatile prices of RECs,
and SRECs specifically, decrease investments among households into solar panels. Prices
for SRECs fell drammatically (in August 2009 price was 690$ per SREC, and in July 2011
price plummeted to the level of 151$ per SREC) and investors had problems with
repaying loans for the panels, since now it would take them longer to repay the loan.
The price fall of SRECs explained by increased installations of solar panels among large
energy suppliers, so amount of SRECs increased and this decreased their price. On one
hand, we can see that in fact amount of installed solar panels increased, but on other
hand, it revealed volatility of prices for RECs. And we know that assets with high price
volatility are not wanted by investors.
One of the remedies for financing renewable energy projects are long-term contracts
with governmental organizations, universities or some corporations. Whereas long-term
contracts are preferred by investors, since such contracts give a form of security of
future cash flows, they are not preferred by the signees, since if prices fall, signees will
be locked with uncompetitive prices. In fact, in some states there are regulations to sign
only long term contracts for bundled/unbundled RECs if they are used in order to comply
with RPS, for example in Colorado duration of the contract must be at least 20 years, in
Nevada – 10 years.
One more problem with RECs is that they are not easy to understand, so direct
advertisement is inefficient. The whole system must be explained and marketers must
invest into it more intensively.
Another problem is that there is no established national wide market for RECs and
transations are mostly done in the regional markets. National wide market will
significantly increase liquidity in RECs market. The problem of national wide market is
different RPS policies in different states. Most states are protecting their market, by

4. imposing restrictions on import of RECs. For instance, RPS of some state can count
certificate only if it is from local facility. Likewise, in voluntary markets consumers tend
to buy local RECs, because they probably want to support local facilities and to enjoy
environmental benefits in fact.
However, free-rider problem appears. Because when people in some part of the state
are buying RECs from another part, or even another state, they do not directly get the
benefits of renewable energy, fossil-fuel plants can still be located nearby and pollute
the air, whilst, people without buying RECs, but living near the renewable energy
facilities are directly benefiting from clean air etc. Moreover, RECs conception heavily
relies on tracking systems, so in the states without tracking systems it is very difficult to
implement RECs, issue of verification is crucial. This free-rider problem is resolved by the
imposition of restrictions on importing, which in turn creates obstacles for national wide
market. The free-rider problem can be resolved more effectively by relaxing the
restriction on import. The state may allow import of RECs only with the underlying
energy, so this energy will displace the energy created by fossil-fuel plants (not displace
in fact, but the fossil-fuel plants will need to produce less energy).
To summarize, we explained what are RECs: the main purpose of RECs is compliance
with RPS. RECs are traded on two markets: voluntary and compliance. We found what
affects prices for RECs: mostly RPS policy, and obviously the amount of certificates in the
market. Then we discussed how RECs can be controlled against double-counting: by
tracking systems and/or audit. Then we discussed how RECs contribute into the
development of renewable energy generation: (1) form of guarantee for investors, (2)
matching demand and supply, (3) increased investments among households. Finally, we
discussed problems of RECs: (1) almost complete dependence from RPS, (2) difficult
concept of RECs, (3) weak national-wide market for RECs, (4) free-rider problem.
References:
- Emerging Markets for Renewable Energy Certificates: Opportunities and Challenges –
Ed Holt and Lori Bird; National Renewable Energy Laboratory NREL/TP-620-37388,
January 2005
- Solar panel investors upset as SREC values drop – Rebecca Forand; NJ.com, October
2011
- http://www.srectrade.com/srec_markets/introduction
- http://www.epa.gov/greenpower/gpmarket/tracking.htm
- http://www.epa.gov/greenpower/documents/gpp_basics-recs.pdf