The Role of RECs in a Utility-Scale PPA

June 2, 2016 John Powers

 

Author: Author: John Powers has sold more renewable energy to companies than anyone working today.

While corporate, industrial, and institutional (C&I) buyers turn to utility-scale power purchase agreements (PPAs) for varying reasons, a common interest among many is how they can use their purchase to make credible environmental, reporting, and marketing claims.

Many C&I buyers desire to achieve additionality with a PPA contract, meaning that but for the action of the buyer, a new wind or solar project would not have been executed.  What is lesser known—or at least less understood—is that additionality claims themselves do not necessarily convey any environmental claim or benefit associated with renewable energy.  In order to achieve environmental claims—including for Greenhouse Gas Protocol or CDP Scope 2 emission reporting—the C&I buyer must also have ownership of energy attribute certificates (EACs).  In North America, these are renewable energy certificates, or RECs.

RECs are the mechanism by which renewable electricity is tracked and traded in North America and are at their core an accounting instrument.  While there are many ways to support the growth of renewable energy, it is only the role of RECs and other EACs that possess the environmental attributes of renewable electricity generation.  When electricity from a clean source such as wind or solar is created, unless it is bundled with the associated RECs, it’s just electricity.  Only when paired with RECs can the electricity be called clean/green.

One of the key uses of the environmental attributes conveyed by RECs is the ability to make a claim of carbon-free electricity for Scope 2 reporting purposes.  Many organizations interested in utility-scale PPAs report to CDP or GRI and seek to use their PPA to help them mitigate the carbon emissions reported to these agencies.  While a PPA can help organizations achieve and claim additionality—which CDP values as a leading management activity—only ownership of RECs will allow organizations to report lowered or neutralized Scope 2 purchased electricity emissions.  This is particularly salient starting in 2016, as CDP will now look for reporting organizations to disclose their market-based emissions in addition to their location-based emissions.

C&I buyers can treat RECs in one of four ways in a PPA:

  1. They can contract for the ownership of and retire the RECs generated from the project
  2. They can own and sell, or carve out, the RECs generated from the project and replace them with other RECs
  3. They can own and sell the RECs and not replace them
  4. They can choose not take ownership of the RECs in the first place

We advise our PPA clients to ensure that their contract includes the associated RECs, and that those RECs are either from the project itself or from a replacement project.  Without the RECs, the client cannot make environmental attribute claims, including zero Scope 2 emissions.

In the above scenarios, why would a buyer choose Option #2? RECs in specific markets can be expensive.  RECs are a tradeable commodity and their price is driven by supply and demand.  In these markets, RECs are in high demand due to state-level renewable portfolio standards, or RPS.  As a result, it can be economically infeasible for most organizations to buy PPAs and retain and retire the project RECs in RPS markets.  In these cases, it’s preferable to either sell or carve out the high priced RECs from the contract; replacing them instead with a lower-cost national REC. The alternative to substituting for national RECs would generally be not engaging in the PPA, and in turn not supporting the development of new wind or solar.

Substituting for lower-priced RECs is permissible because, as a tradable commodity, RECs are subject to the free market system.  The electricity generated and its corresponding RECs are separate.  But, because the electricity is delivered via a shared distribution network (the electricity grid), any buyer can purchase RECs on the market whether the electricity they are purchasing is tied to those specific RECs or not.

In a PPA, buyers that want to use their agreement for environmental claims are often faced with the choice of swapping RECs or not doing a project at all.  At Schneider Electric, we don’t believe perfect should be the enemy of good, and instead encourage our clients to buy the RECs they can afford and craft their associated environmental attribute and marketing claims to be credible.

The treatment of RECs in PPAs is a critical, nuanced decision that any PPA corporate off-taker will have to make.  To learn more about the role of RECs and additionality—and their associated attributes and claims—we invite you to download our white paper on this topic.

 

 

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