How policymakers can help create a more efficient, effective, and equitable renewable energy credit market
By Julia Benz
Policymakers play a crucial role in fostering an efficient, effective, and equitable renewable energy credit (REC) market that accelerates the decarbonization of both the grid and corporations. By addressing the limitations of the current REC market, policymakers can unlock their full potential to encourage the transition of the electricity grid to reach carbon-free energy 24/7. This article explores key areas where improvements are needed and proposes actionable steps for policymakers to facilitate the transition to a cleaner and more sustainable energy future through REC market improvements.
Why the current REC market is lacking and how it can be improved
RECs represent the “property rights to the environmental, social, and other non-power attributes of renewable electricity generation”. RECs place a price on renewable energy generation, or 1 MWh of renewable energy. The idea was to create a global market where businesses could buy and sell renewable energy on a global scale thus allowing a corporation to take credit for renewable energy produced. Using a market structure has helped put a price on renewables and help fund new sustainable developments.
However, the market system has not reached its full potential. There are four main limitations of the current market: lack of temporal information, lack of locational information, lack of granularity of REC value (1MWh), and lack of equitability and social value accounted for.
- Lack of temporal information: energy produced is priced the same even when produced at different times.
Ideally, renewable energy would be used at all hours of the day and where it is needed most on the grid. Without widespread, and more efficient batteries than we have today, solar and wind cannot provide consistent renewable energy; additional resources like hydropower are interspersed, while hydrogen remains in an early growth stage.
However, with information about when renewables are being used (temporal information), companies can understand this information and better plan to reach 24/7 carbon free energy for every hour, every day, throughout the year.
Companies, as well as electric grid planners and renewable developers, can benefit from this information. Temporal information can reveal the types of renewables best suited to cover the remaining times, or gaps of renewable energy throughout the day. For example, if solar was already prevalent, perhaps an investment should prioritize batteries or other renewables to supplement renewable generation at night when the sun is not shining and there is no solar production.
Times during the day or areas where more renewables are needed can be targeted for new renewable developments. Large companies like Google can make informed investment decisions on renewables to invest in and work with developers to implement them to cover all hours of the day with renewables. In this way, companies can fully, truly decarbonize and work towards using renewable energy all the time rather than simply offsetting the attributed cost.
2. Lack of locational information: renewable generation does not have to be geographically close to the REC buyer.
Therefore, “even with a 100% match of generation to load, that consumer (in fact, all customers) will rely on the existing grid for physical energy. Thus, the physical electricity mix delivered to a renewable energy purchaser will always include generation from a mix of renewable, carbon-free, and/or non-renewable carbon emitting generators, until the entire grid is 100% renewable and non [carbon] emitting.” At any given point, the company taking credit for a REC is very likely not using all renewable energy, as there is an energy mix. So, by understanding the energy mix and what energy is being used where (and when), utilities and companies can more effectively decarbonize by creating a cleaner energy mix based on the specific location and grid load needs.
With more data, a more perfect marketplace could be created to displace the most carbon-intensive energy resources first. In this market, RECs would be valued at higher prices for replacing higher carbon-intensive resources. For example, on a very hot summer day when the electricity grid is constrained since everyone is using air conditioning if a large solar farm was able to displace a carbon-intensive coal-powered “peaker plant”, it is more valuable to the grid and the renewable energy transition and should be represented as such through the REC price.
3. Lack of granularity and flexibility within a REC value: 1MWh can be large for some players
RECs are not broken down past 1MWh. Small businesses and individuals can’t easily participate in the market since 1MWh is a somewhat large amount: it is equivalent to 1.2 months of usage of an average American home. Renewable energy projects that are smaller must be aggregated (in order to be measured in the system). Introducing the granularity of RECs, or RECs on a smaller scale, say .05MWh introduces a difficult task: a scalable market with much more trading available. However, adding in smaller, more granular RECs also opens up the market and could further incentivize small-scale renewable development. In turn, this could improve the previous points by introducing more spread-out renewables to assist in decarbonization.
4. Lack of equitability: the market does not fully account for the benefits of communities having access to renewables
Renewable energy resources are expensive, though less expensive than they used to be. They have high upfront costs, even with rebates and tax credits, but the lasting community will benefit from lower electricity bills and potentially less blackouts. Contextually, underserved communities experience more blackouts than affluent communities. With more and more solar coming online, it must be tracked and accounted for as well as accessible to all communities. The social benefits must be accounted for within the cost of a REC. For example, if a community solar project is built in an affordable income area that directly benefits the community, it is more valuable, especially if the community experiences blackouts.
Overall, the current REC market needs significantly more information to be tracked, transparency to the system, and value the pieces of the market that benefit the grid and its users.
There are organizations that have already had success in starting to change the REC market. Some include:
- M-RETS is a digital platform that helps businesses match hourly consumption to renewable generation in the midwest. The system tracks renewable energy generation and records it on a traceable, digital certificate. This is the most successful and scaled granular REC case today.
- EnergyTag is a coalition working to create standards around granular certificates, or time-based EACs, or T-EACs.
- Powerledger’s TraceX platform uses blockchain to handle the trading of EACs
- Solar Stewards (not currently using blockchain) is working to adding the social benefits to the price of RECs by quantifying the benefits of building renewable energy generation in income-qualified areas.
These organizations and platforms have made significant strides in showing and offering the benefits of a renewed REC marketplace. However, there are still hurdles to overcome to create a scaled, equitable, and efficient market. Primarily these challenges are:
- Data access from utilities
- Coordination between utilities, corporations, and renewable energy suppliers
- Adoption and scaling of a global marketplace
- Environmental justice and adding the social benefits to the cost of a REC
The blockchain debate
As a technology, Blockchian is very good at removing middlemen and democratizing transactions, all while keeping a transparent record. With blockchain’s ability to verify information and record transactions, blockchain-based solutions seem like a natural way to record renewable energy generation and trading of RECs (like Powerledger mentioned above). There are barriers for blockchain solutions, such as misunderstanding of blockchain technology and its perceived relationship to cryptocurrency. However, similar to many blockchain and web3 use cases, it is not about the technology behind it, but the capabilities of the technology to create the desired end result. So whether it’s blockchain or software tracking RECs, policymakers should support granular, equitable RECs.
Policymakers’ Actions and Beneficial Results
- Provide support granular RECs through data standard requirements, encouraging use, project funding, and marketing
- Implement further incentives or requirements for the REC market, grid operators, and companies to efficiently decarbonize
- Assist in research and development of the most effective granular REC strategies and in helping provide standard project designs for the coordination of utilities, corporations, and renewable energy developers
- Give companies large and small the capability, incentives, and tools, needed to decarbonize more effectively
- The electricity grid will more effectively decarbonize with a truly free market where renewables are placed where they are needed in order to actually retire high emitting carbon resources like coal peaker plants
- Help facilitate change in the electricity grid and private sector at the same time
Creating a more efficient and equitable REC marketplace, though challenging, has significant benefits. Companies want 24/7 renewable energy, and grid operators want to effectively transition to more renewable energy. A multi-faceted approach by policymakers is needed to continue to encourage these outcomes while using data-driven, granular RECs to help stakeholders reach their goals.