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Understanding the Complexity of REC Contracts and Why IT Systems Struggle to Manage Them

Renewable Energy Credits (RECs) represent the environmental attribute of 1 MWh of energy generated from eligible sources of generation. They can be bought or sold together with energy, in which case they are referred to as “bundled” RECs, or without the energy component, in which case they are referred to as “unbundled” RECs.

COMMENTARY

There are varying perspectives over the effectiveness of unbundled RECs toward long-term sustainability impact, but regardless of their type, RECs are a tool for managing risk for energy market participants. Depending on their position in the electricity value chain, market participants use RECs to manage one or more types of risks:

  • For retailers, RECs enable them to manage compliance risk (by providing a cost-effective way to meet Renewable Portfolio Standard (RPS) obligations), operational risk (by allowing them to meet renewable energy (RE) targets without operationally integrating RE assets in their portfolios), and reputation risk (by swaying public perception due to environmental concerns).
  • For generation owners, RECs allow them to manage investment risk (by improving the financial viability of their investment), revenue risk (by creating additional revenue streams), and market access risk (by enabling them to sell into additional markets).

A retailer serving a 100,000-MWh load in Pennsylvania and claiming to source 100% of its energy from wind must procure 8,000 Tier I RECs (including 500 solar RECs), and 10,000 Tier II RECs, to meet its 2025 compliance requirements. Additionally, to support its 100% wind claim, the retailer must procure 100,000 wind RECs. However, if the retailer had specified wind as the RE source while contracting for all its Tier I RECs (excluding solar RECs), it would only need to procure 92,500 wind RECs.

Suyash Agrawal

Similarly, a wind generator located in Pennsylvania can certify its assets in Pennsylvania, New Jersey, and Maryland. By doing so, RECs can be sold as a PJM Tri-Qualified product, which commands higher prices and offers access to a more liquid market.

The RECs are transacted under long-term contracts (power purchase agreements, or PPAs) and spot market contracts (mostly unbundled RECs are traded in the marketplace). However, REC contracts are fundamentally different from energy contracts, and one key distinction is that unbundled RECs are not tied to the delivery of physical energy. Instead, they are tied to the intermittent generation of renewable energy and have attributes like vintage (which indicates when the associated energy was generated) and qualification (which indicates their eligibility for specific state’s RPS program or voluntary targets).

The nuances of REC contracts have increased in the past and will likely continue to do so as state and regional regulations evolve and get diverse, innovative financial strategies emerge, and sustainability goals adjust to align with customer expectations, cash flow needs, and market volatility. Managing the delivery against these contracts adds another layer of complexity, primarily due to the existence of more than 10 disparate REC tracking systems in the U.S. It is not uncommon to lose track of RECs—whether by accepting or initiating deliveries that don’t align with contract terms, retiring RECs that don’t meet regulatory requirements, or worse, completely losing them when they are past their shelf life. All these have financial implications, which are at times far bigger than operational costs.

Many market participants have used in-house Excel spreadsheets to manage RECs, as many legacy systems are not equipped to handle these products. While some newer Energy Trading and Risk Management (ETRM) systems have functionality to support environmental attributes, they often come with three major challenges.

  • High upfront implementation cost, sometimes reaching millions of dollars.
  • Not being nimble or flexible enough to keep pace with the fast-evolving REC markets.
  • Built by IT-focused experts, lacking a deep understanding of energy markets.

As a result, the market participants end up with a rigid and expensive IT solution that lacks adaptability and does not effectively address the unique requirements of the industry it is meant to serve. CES’s ETRM platform—RED (Renewable Energy Dashboard)—is a cloud-based platform built with deep domain and technology expertise to support the entire REC contracts lifecycle starting from deal capture to retirement.

This platform has a modular architecture that significantly reduces the enhancement time, ensuring it stays aligned with evolving market needs, which are captured by CES’s team of energy experts. The inbuilt market reports—such as Alternative Compliance Payment, Market Price, etc.—enable REC traders/managers to formulate an optimal procurement strategy and track their overall REC position in real-time. CES’s RED is well-positioned to enable market participants to meet their financial, compliance, and sustainability goals.

Suyash Agrawal is a product manager at Customized Energy Solutions, specializing in developing software platforms to support energy market functions for CES’s retail and renewables clients.