Legal & Regulatory

Unbundled Renewable Energy Credits and the Benefits of Standardization

Unbundled renewable energy credits and certificates (RECs) separate the renewable, or green, component of energy from the actual megawatt-hours of generation. RECs are traded on nine different regional markets, or “registries,” in the United States and Canada. Each market employs its own policies and procedures for tracking RECs. Some regions allow exchanges of RECs between markets; others do not.

A registry houses the REC until purchased. Certain registries have been created by individual states, such as Michigan, while other registries are amalgamations of states such as the Western Renewable Energy Generation Information System. Each registry functions and operates independently, and the registries are not currently set up to communicate with one another. The standalone process of REC registries frustrates inter-registry transfers of RECs, engendering economic inefficiencies and facilitating fraud. National standardization of the tracking of and accounting for RECs would provide great benefits.

States Create RECs

RECs track the source of green energy through financial transactions. Thus, RECs serve an important function for renewable energy in two ways. First, RECs provide a vital tool for utilities to meet state renewable portfolio standards (RPSs), which mandate that utilities obtain a certain portion of the electricity that they sell to retail customers from “RPS-eligible” sources. By stripping the renewable attribute from the physical energy, RECs allow utilities to purchase renewable attributes at lower prices, decreasing the costs of being RPS-compliant. Second, RECs allow corporations to meet their self-imposed green goals, which enable them to promote their entities and products as environmentally friendly, thus boosting consumer demand.

RECs constitute property rights, as they transfer property between parties. RECs also constitute contracts in the respect that they manifest the willingness of buyers and sellers to transact for the sale of property. Property and contract rights are generally governed by state law. However, the Federal Energy Regulatory Commission (FERC) could arguably have exercised jurisdiction over RECs as part of its overall regulation of the wholesale sale of electricity. FERC regulation would have provided some degree of national uniformity, but—reasoning that its jurisdiction is limited to just the physical attributes of electricity—FERC decided in 2012 that transactions involving RECs are subject to state law.

An Absence of Uniformity

REC purchasers must currently rely on attestations by sellers that they are transferring bona-fide RECs. A market system dependent on such self-attestations inherently increases the risk of fraud. For example, the biodiesel market similarly relied on sellers’ self-attestations regarding the value and integrity of the biodiesel—and that market experienced cognizable levels of fraud.

The potential for fraud in the REC market is further heightened by the absence of any formal exchange disclosing REC prices (by contrast, for example, the New York Stock Exchange sets prices for paper certificates through shares). In the REC market, brokers with “insider” knowledge of prices for REC sales serve as the de facto mechanism for setting prices in REC transactions.

Nonetheless, both utilities and corporations compete to purchase RECs listed on the registries. State regulations typically require utilities to procure RECs from suppliers listed in the regional registry. From an economic perspective, this artificial constraint on supply causes the demand for RECs in some markets to be higher than the limited supply of RECs in a registry. Economics teaches that any imbalance between supply and demand that exists independent of the workings of competitive markets triggers inefficiency.

As the nation continues to advocate for green technology and energy independence, the voluntary purchases of RECs and the number of states imposing RPS purchase requirements are anticipated to grow. The current system of siloed regional REC registries is sub-optimal and should be fixed, especially because the REC market is projected to increase substantially over the next few years.

Interconnected REC Registries

To be sure, RECs theoretically allocate resources more effectively and efficiently than requiring all retail sellers and users to generate or procure physical renewable energy. However, as set forth above, the splintered market in the United States relegates the benefits RECs provide to sub-optimal levels.

RECs could better achieve their full potential if consistent definitions for them existed across state lines, if RECs could be uniformly transferred across registries, and if transparent prices became publicly available for willing buyers and sellers. A simple technical fix exists in making the REC registries interconnected. Interconnectedness would enable each regional registry and prospective REC purchaser and seller to see in real time the active and purchasable RECs on the other registries.

This visibility should mitigate fraud risk because there would be transparency among the registries. The increased transparency should also decrease prices, as lower-priced RECs available in certain registries could be sold in higher-priced REC registry markets, thus creating a beneficial price impact. Once RECs have been harmonized and the registries have been networked together, hopefully the current system of fragmented and disjointed inter-registry transfers will become a thing of the past as regional registries see benefits from interconnectedness, including efficiency gains and the potential to mitigate fraud. ■

Lisa Koperski ([email protected]) is an associate in Davis Wright Tremaine’s Seattle office.

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