June 7, 2017
Think all Renewable Energy Certificates (RECs) are equally good for the planet?
Think again.
RE100 reported that in 2015 unbundled Renewable Energy Certificates (RECs) were “by far the most popular approach [for corporations to source renewable electricity], accounting for 85% of the total renewable electricity being obtained in the US.” There can be no doubt that unbundled RECs have played an irreplaceable role in the promotion of the renewable energy market throughout the United States. Nevertheless, as a number of corporations begin to achieve their 100% renewable energy goals, some are looking to move beyond unbundled RECs.
Some familiar faces are among those companies leading the charge. Microsoft has set its goal at directly sourcing 50% of the electricity used at its data centers from wind, solar, and hydro by next year, and 60% early in the next decade, and “then to keep improving from there”. Google, Autodesk, and Steelcase are taking similar approaches.
Greenpeace seems to support this evolution. In its recent report, “Clicking Clean,” it tracks how different companies in the IT sector are leading (or lagging) their industry counterparts in their commitments towards renewable power and, perhaps even more importantly, how they differ in their implementation of those commitments. Over-reliance on unbundled RECs takes its place among a set of “shortcuts” that some companies take to achieve their sustainability claims without actually promoting new renewable power or reducing Green House Gas (GHG) emissions.
When you switch on your lightbulb, there is no way of knowing whether the consumed electricity comes from a squeaky clean photovoltaic solar panel or a smog belching coal plant. Once electricity is generated, it is put onto the electric grid, which can be thought of like a big pool of electricity, whereupon it flows subject to Kirchhoff’s Voltage Laws until it reaches some downstream point of consumption. Given the inability to physically trace energy from clean sources once it enters the grid, RECs were created as a contractual mechanism to keep track of renewable energy production, not consumption, so that companies can claim rights to clean energy and promote the development of new renewable energy projects that would displace dirtier conventional energy production. A REC is created at the location and time at which one MWh is produced by a certified renewable energy source.
The value of a REC is primarily determined by three factors:
For more detailed information on RECs, please see SR Inc Member Advisory on International Renewable Energy Markets.
Unbundled RECs are those that have been disassociated from the electricity production originally represented and are sold separately from energy. Consequently, unbundled RECs are very flexible and have been an attractive way for companies to pursue their sustainability and renewable energy goals regardless of the location of and regulatory environment around their energy load. Bundled RECs, on the other hand, are ‘bundled’ into the same contract that finances the new renewable energy. with the development the energy and, consequently, are constrained by certain grid considerations.
Why does it matter? Both RECs were created with the generation of clean energy. Isn’t that enough?
It depends on what your goal is. If your goal is to claim rights to renewable energy at a potentially very cheap cost, unbundled RECs will do that for you. If your goal is to claim your enterprise is moving to renewable energy while it continues to purchase conventionally generated electricity, you need to do something more.
Imagine that in order to satisfy your RPM (or perhaps your shareholders), you could either: A) purchase a bunch of super cheap unbundled RECs from an oversupplied market in Texas from a ten year old wind farm or B) purchase bundled RECs from a renewable project that would not be as large but for your commitment to buy the resulting RECs. Which does more for the promotion of clean energy development? There is a right answer to this question: B.
In fact, if a company justifies an increase in consumption of energy conventionally generated with the purchase of RECs from an already existing renewable energy project, the result would be even greater GHG emissions. With this realization, an increasing number of companies, especially leaders in the Information Technology sector such as Google and Microsoft, are opting to purchase bundled RECs instead of unbundled RECs. The value that “grid-proximity” has on the promotion of renewable energy in their respective locations, as well as the brand and relational benefits towards the engaged stakeholders, is a value-add beyond the well-recognized and trusted RECs in the renewable energy market. For more information on how companies can push the envelope at the nexus of renewable energy and sustainability, please see SR Inc Member Advisory on Renewable Energy Impacts on Sustainability Reporting.
The Corporate Renewable Energy Buyers’ Principles were created by the World Resources Institute (WRI) to clarify driving principles that help corporations in their efforts to procure renewable energy in an effective manner. One of the six principles is the call for “access to projects that are new or help drive new projects in order to reduce energy emissions beyond business as usual”. Enabling the construction of new renewable energy projects, as well as the resulting saving of GHG emissions, beyond what would have occurred in the absence of action is called “additionality”. The question of what enablement entails, as well as what actually would have happened, is a little bit gray and can be argued to varying degrees. Fossil-fuel displacement, clean energy traceability, project financing, price point, tax incentives, emissions avoidance, and even project timing, could all potentially fall under the umbrella of additionality. Purchase Power Agreements (PPAs) have boomed in recent years, and are arguably stronger in terms of additionality than the purchase of unbundled RECs. The long-term contractual commitment to buy energy from a clean power source is very often the driving factor behind the development of a new renewable energy project in the first place. The only problem is that PPA’s don’t necessarily come with the certified recognition of clean power production. Only RECs serve that purpose. Thus, the purchase of bundled RECs along with the corresponding clean energy through PPAs is good for the clean energy recognition, good for the additional development of renewable energy projects, and good for the planet. But it doesn’t end there. Many corporations are not located near a suitable location that provides the favorable economic, regulatory, and renewably resourced environment to make a direct PPA possible. Virtual PPAs (VPPAs) have enabled corporations the ability to provide additionality to the regional grid, get bundled RECs, and do so at an off-site location that fits their financial requirements. The only thing that is needed now is a mechanism that can make accessible the benefits of a VPPA to the great majority of corporations that do not need an entire utility-scale renewable energy project all to themselves. Finally, the aggregated procurement of renewable energy with bundled RECs using a VPPA and contract-for-differences (CFD) transaction structure emerges as an attractive option for a large majority of corporations to gain all of the benefits while minimizing their financial risk. For more on this structure, please refer to SR Inc Member Advisory on Advanced Renewable Off-site Energy.
While the dropping costs of renewable energy technology and the grand entrance of PPAs and bundled RECs onto the scene surely make the renewable energy market an exciting one to enter, companies should step back and explore the space of options. The primary focus area for improvement should include energy efficiency and demand reduction. The cheapest and cleanest energy is the energy not used. On-site renewables provide, in no uncertain terms, the next best level of additionality. Various PPA structures with bundled RECs come in next, with unbundled RECs providing an essential stepping-stone for companies to engage in renewable energy markets. Ultimately, companies will need to construct portfolios of the available alternatives that best fit their sustainability goals, energy needs, risk profiles, and financial situations.
Erik Landry joins Sustainability Roundtable Inc as an MIT Sloan Sustainability Fellow. Pursuing a Master’s degree at MIT’s Technology and Policy Program of the Institute for Data, Systems, and Society, as well as a Sustainability Certificate from MIT’s Sloan School of Management, Erik approaches sustainability from a systems perspective. His current research within MIT Sloan’s System Dynamics Research Group pertains to capability building and resource allocation dynamics in complex social and technical systems. Before beginning his graduate studies, he spent two years at the U.S. Department of Energy’s Solar Energy Technologies Office – where he analyzed alternative market pathways for concentrating solar power as well as grid integration solutions for highly distributed photovoltaics – and one year at Argonne National Laboratory – where he studied the material chemistry of organic photovoltaics. Erik holds a B.S. in Chemistry from the University of Chicago.
