Navigating EAC Volatility, Pt.1: U.S. Market Illiquidity

June 13, 2018 Jenna Bieller

Global demand for energy attribute certificates (EACs), mainly from the commercial and industrial (C&I) sector, is at an all-time high. Due to a flurry of new corporate commitments to carbon reduction, and the increasing appetite of those who already have goals, this demand is poised to continue to increase in the future. Two impacts that we have seen from this increased EAC demand are higher commodity prices and lower availability. Nowhere has this been more evident than in the U.S. voluntary market with the primary EAC mechanism there, Renewable Energy Certificates or RECs.

Research by Bloomberg New Energy Finance found that demand for renewable electricity by companies making RE100 commitments vastly outstrips the current and projected global supply. Considering the pace of companies making RE100 commitments, combined with companies joining the Science-Based Targets (SBT) initiative and companies acting outside public commitments, this trend is only expected to intensify.

In the last quarter of 2017, the voluntary REC market in the U.S. saw a very unfamiliar phenomenon – illiquidity of supply. Much of the generated REC inventory in markets which traditionally supply most of the voluntary market, such as ERCOT and SPP, was completely sold out by late summer. As availability decreased, prices rose rapidly. By mid Q2 2018, the market witnessed a 3X average price increase. This unexpected increase, from historically low pricing to unprecedented highs, combined with a lack of availability, corporate renewable energy buyers’ budgets were—and continue to be—stretched, and some purchasing was even put on hold.

As we close in on the halfway point of 2018, we have seen a combination of more available supply matched with significant volatility. While increased liquidity is welcome, significantly higher prices appear to be the new normal.  In the context of a ten-year snapshot of the U.S. market, current prices are still relatively low. With ever-increasing demand, however, market participants should remain vigilant and explore opportunistic purchasing strategies including:

  1. Long-term renewable power purchase agreements (PPAs)
  2. Long-term REC contracting (3 to 10-year strip purchasing)
  3. Avoiding annual, large volume purchases in favor of smaller tranches

For many C&I organizations that have been able to buy renewable energy certificates for years to meet their U.S. renewable energy and carbon-reduction goals, this rising price environment signals a time of transition—and a chance to explore additional strategies and solutions. Though this market upheaval has presented challenges to traditional renewable energy procurement, it also opens the door for companies to diversify the impact of their renewable energy programs and even save money through options such as PPAs.

The EAC price situation is not isolated to the United States; rising EAC prices are becoming a global phenomenon. Stay tuned for part 2 of this blog where we will cover recommended purchasing strategies in other regions of the world where supply and prices are becoming strained.

To discuss the implications of the current REC environment in the U.S. for your company, or to explore the alternate strategies, get in touch with our team today.

 

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