Powering the Trend in Renewable Energy Credits
by Andrew Zorko, MBA '14
Over the past decade, companies' desire to become more environmentally friendly has grown. For example, California-based Kendall-Jackson Winery has chosen to purchase all of its power through renewable energy sources. Not only are the business operations run on renewable energy, but the winery also purchases 100 percent renewable energy for the homes of all of its employees. This is a first for any company and has earned it an EPA Green Power Leadership Award in 2011.1
Kendall-Jackson Winery accomplishes this through the use of renewable energy credits (RECs). A REC is a certificate that represents one megawatt-hour of power generated from a renewable source. For example, when the wind farm near Ocotillo, Calif., produces a megawatt of power, the electricity goes into the grid, and a REC is created for the owner of the wind farm. Because the electrons generated by the wind farm mix with other electrons on the grid, it is impossible to say which source is powering a building. A REC tracks the date, source of power generation, and location of the generation. This is done so that RECs can be accurately tracked and accounted for when used. These certificates are used to determine if individual states are meeting their renewable portfolio standards. By law, California must purchase 33 percent of its power from renewable sources by the year 2020 and measure progress toward that goal.2
The first RECs in the U.S. were issued in 2001. In 2007 the Western Renewable Energy Generation Information System developed the REC tracking system to help monitor the use of RECs.2
There are two primary types of RECs: bundled and unbundled. A bundled REC is a REC combined with credit to the entity generating the power. A bundled REC cannot be bought or sold, and only the party that generates the electricity can use the certificate. In 2010, California passed a law permitting unbundled RECs to trade on the open market.3 An unbundled REC breaks the bond between the power generator and the REC. This allows the power generator to trade RECs to a third party. Once the REC is unbundled, a company or individual can purchase it to help offset power generation. Utilities in California can purchase RECs to meet up to 25 percent of their required renewable portfolio standards. That amount decreases to 10 percent in 2017.4
In some markets such as Massachusetts or Connecticut, RECs sell for about $50 each. Separate solar RECs are sold in Massachusetts for nearly $500 each and more than $200 in New Jersey and Connecticut. In California, tradable RECs currently sell for about $2 each, and voluntary RECs can be purchased for about $1.5
Why Purchase RECs
The idea to spend additional cash to procure power from green energy sources may not make sense for all entities, but more and more are making the choice to do so. Many small-business owners and individuals purchase RECs to offset their energy costs for about $2 per REC on a purely altruistic basis. There may be no tangible effect on the bottom line, but owners see their businesses as a reflection of themselves and what they stand for. More commonly, small businesses buy RECs to promote their "green" brands. For many owners, the additional cost of purchasing RECs is viewed as a marketing cost. Many organizations help business owners decide if purchasing RECs will help their businesses.
As part of the Environmental Protection Agency, the Green Power Partnership (GPP) helps to build a network of entities that are dedicated to using renewable forms of energy. The program is a free voluntary partnership that aims to promote green energy leadership. It maintains a list of the various-sized businesses; local, state, and federal governments; and colleges and universities that have met the requirements to be part of the GPP. To become a member, companies must meet a minimum requirement of power procured from green energy sources. This can be done through on-site generation or through the purchase of RECs. With 7.8 percent of the city's power coming from green sources, San Diego is a member of the GPP.6
Blaine Collison, program director of the EPA's GPP, said in a recent interview that publicly traded companies have "fiduciary obligation; it is the law that they maximize shareholder return. That's supposed to be the basis of their decision making, so altruism is out the window." Collison added, "They might be doing it for reputational reasons, or branding reasons, but not altruism; altruism is illegal." Yet some publicly traded companies do buy RECs. This begs the question: In what way do RECs contribute to the bottom line?7
One example of a publicly traded company that purchases RECs or generates green energy to offset 100 percent of its energy consumption is Kohl's. Collison went on to add that "(Kohl's) is a publicly traded, for-profit retailer. Retail is characterized by pretty thin margins. Kohl's is the second- or third-largest user of green power in the entire U.S. economy." As a retail company with lower margins, Kohl's has found a way to justify the purchase of green energy at a premium to power its stores. This is based on a belief that the purchase of RECs improves Kohl's overall functionality as a company.7
One argument to be made against the purchase of RECs is that it actually hinders additional green energy generation. If a school or business can offset its energy consumption by buying green energy credits, there is no incentive to spend the capital to build additional renewable power stations. If entities can realize the benefits of using green energy without having to actually build a plant, green energy production will be slowed. This logic is misguided because the primary purchasers of RECs are not in the energy business or capable of constructing large-scale renewable energy sources. RECs are not intended to fully fund capital-intensive green energy installations.7
One of the most positive signs in the voluntary REC market is the growth. Organizations promoting the purchase of RECs are growing in size and influence. GPP has seen both growth and high levels of retention with its program. In addition, the volume of voluntary REC purchases is steadily increasing and is expected to continue on this path. As awareness and availability of RECs grows, the demand may continue to increase.
There is no one specific reason to purchase RECs. The reasons vary from small-business and individual altruism to a large company's strategic goals. Whatever the reason, more and more businesses are choosing to purchase their power from renewable sources. With the help of public-private collaboration and continued innovation, renewable energy will continue to thrive.
Andrew Zorko (Full-Time Class of 2014), whose background includes positions in quality control and engineering, focuses on innovation, entrepreneurship, and renewable energy resources.
- Boller, Robert. "What Are Renewable Energy Certificates?" Kendall-Jackson Winery. http://blog.kj.com/what-are-renewable-energy-certificates/.
- California Public Utilities Commission. 2012. "Renewable Energy Credits." http://www.cpuc.ca.gov/PUC/energy/Renewables/FAQs/05REcertificates.htm.
- LGC Consulting. 2010. "California PUC Authorizes the Use of Unbundled RECs to Meet RPS Requirements."
- "Renewable Energy Certificate Diversity." Platts. April 24, 2012. http://platts.com/newsfeature/2012/REC/index.
- U.S. Department of Energy. "Renewable Energy Credits (RECs): Retail Products." http://apps3.eere.energy.gov/greenpower/markets/certificates.shtml?page=1.
- United States Environmental Protection Agency. "Partner List." http://www.epa.gov/greenpower/gpmarket/rec_chart.htm.
- Collison, Blaine. GPP Program Director. Interview by Author, Phone Interview. San Diego, November 16, 2012.