Learnings & Applications: REC Arbitrage and Market Types

Based on Renewable Energy Certificate (REC) Arbitrage(PDF) and the Green Power Partnership’s page on the U.S. Renewable Electricity Market

REC Arbitrage to Reduce Project Cost

Due to state Renewable Portfolio Standards (RPS), the price of equivalent-capacity RECs may vary significantly between markets. RPS policies may mandate that RECs be from certain project types in certain geographic regions or in-state. “Solar Carve-out” policies drive up the price of solar RECs in certain regions as demand for solar RECs exceeds supply.

Playing on these solar-carve-out-induced price boosts for in-state solar RECs, certain projects could use REC arbitrage to sell their solar RECs and swap them with cheaper out-of-state RECs of equal capacity. This would allow the project to claim an equal amount of clean energy produced, while improving the cost of the solar farm by utilizing REC arbitrage. Additionally, projects could be coupled together in different markets to ensure REC arbitrage in their respective PPAs — where the high-priced-solar-REC project would buy RECs from the low-priced-REC project, and the cost benefits of arbitrage would be split between the projects.

The REC timeframe can be negotiated for a duration less than the PPA, allowing the project to quickly recoup capital investment before claiming its own RECs. So, in the case that investors would rather have their solar investment produce solar RECs (rather than, say, wind RECs purchased through arbitrage), the project could conduct REC arbitrage for a year then claim its own solar RECs.

Furthermore, projects could swap their RECs at a favorable ratio of energy equivalency (i.e., selling 1 MWh at $50 and buying 3MWh at $10 each) allowing that project to earn profit from REC arbitrage while also claiming more clean energy production than it produces.

Mandatory and Voluntary Markets

Mandatory markets exist because of policy decisions (i.e., RPS) and represent the natural floor. Voluntary markets (called ‘green power markets”) are driven by certain types of renewable energy and represent essentially unlimited opportunity above the natural floor. Regulatory bodies create market price distortion (i.e., large price differences for the same REC in different markets) by setting targets and penalties (fees for missing those targets). As a result, RECs are usually priced just below the penalty fee, making clean energy compliance the cheaper option and encouraging participation.

Evaluating state requirements and penalties for clean energy is important for evaluating the potential REC market for that area. If policies are set to expire, there could be a predictable drop in REC prices as the mandatory market would drastically shrink, flooding supply without sustained demand (unless there is a surge in the voluntary market).

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