Should we rethink the additionality of unbundled RECs?
Opinions expressed are solely my own
The conventional wisdom in sustainability is that while unbundled RECs allow companies to claim “100% renewable” in their marketing per the GHG Scope 2 protocols, it’s not the highest standard of sustainability. The rationale went that your REC purchase wasn’t critical to the renewable energy asset’s existence as RECs were not a major source of revenue for most renewables projects. This concept is often referred to as ‘additionality’. This was certainly true when voluntary RECs traded at less than a dollar and renewables’ LCOEs were in the $50’s and $60’s. In the last 15 months, voluntary REC prices have shot up from less than $1 to more than $6/REC. With the LCOE of solar/wind now in the $20’s and $30’s, that means that voluntary RECs are now up to 20–30% of the revenue of a project. Is that still immaterial?
How could unbundled RECs create a price signal for developers? I see three primary mechanisms:
1. Unbundled RECs create a price floor for bundled RECs and compliance RECs
2. Unbundled RECs increase the revenue assumptions for the terminal value at the end of the PPA term
3. Unbundled RECs may allow developers to sell energy only PPAs and keep the REC upside for themselves.
While some may argue that $6/REC is not enough to send a meaningful price signal to developers to incentivize more renewables via mechanisms 1–3 above, it certainly does NOT hurt renewables. Economics 101 is that increased demand for unbundled RECs will increase their price. The last 15 months are proof of this as unbundled REC prices have surged 600%. Eventually this price is enough for supply to take notice and build more projects.
Don’t get me wrong, bundled energy PPAs are clearly a stronger market signal for renewables developers, but only about 100–200 companies and organizations globally have entered into PPAs, so it isn’t exactly accessible. Smaller companies and organizations also need a way to access the market that doesn’t require a 15+ year commitment and a renewable energy procurement team. So while unbundled RECs aren’t as good as bundled PPAs, they are still a market signal. As they say, “don’t let perfect be the enemy of good.” Maybe rather than being binary, additionality can be thought of as a spectrum?
Additionally, there are recent industry efforts underway to improve the quality of unbundled RECs. The EnergyTag initiative is seeking to define a new hourly-stamped REC to address the criticism of RECs that they are a blunt instrument as they are time agnostic. This would allow companies and organizations to achieve 24/7 time-matched renewable energy via unbundled RECs rather than with PPAs only. It also unlocks the possibility of determining how much carbon did 1 MWh of renewable energy displace from the grid in the exact hour it was generated. This could lead to a world where instead of trading unbundled RECs as a bulk commodity, each REC could have a price based on the amount of carbon it displaces or when it was generated. This more granular approach to time and location would cause significant price divergence in REC pricing as a REC generated at 6 pm in West Virginia could displace significantly more carbon than a REC generated at 3 am on a windy night in Oklahoma when wind is being curtailed. These more granular price signals would incentivize developers to develop in the dirtiest areas of the grid with generation profiles to displace the dirtiest hours. Would the sustainability community oppose such an instrument?
In summary, while I agree unbundled RECs were historically a poor instrument to incentivize renewables, the recent sextupling of voluntary REC prices paired with a new standard for a more granular hourly-stamped REC means that unbundled RECs could play an important role in helping to incentivize more renewables build out on the grid. I’d love to hear your perspective in the comments if you agree/disagree.
