What the HEC is a REC?

A lot of industries have a main product that they sell, and a secondary one as well. Corn farmers sell their leftover husks as animal feed. Lumber yards sell the bark they strip off their wood as mulch. Clothes manufacturers sell their rags and scraps to paper mills.

RECs give green energy providers a secondary product they can sell to help make them more competitive. And for you, the buyer, it’s like buying a breath of fresh air.

What do you get when you buy a REC? According to the official definition, you are buying the environmental attributes of a certain amount of electricity generated by green energy. These environmental attributes are often described as being the equivalent of a certain amount of greenhouse gas NOT being released into the atmosphere.

Confused? A lot of people are. It’s important to remember that RECs don’t change your electric bill or your electric service. They do allow someone who has generated clean, green electricity to take the thing that makes it so good, the clean air, and sell it to you. You then own an add-on that makes your electricity better; more environmentally responsible.

Here are some comparisons people have come up with to describe RECs:

• A REC is like buying the hub caps and hood ornament from a luxury car and using them to “trick out” a compact car. You still driving the compact, but you’ve spent a bit extra to give its “street appeal” an upgrade. Your REC gives your electricity an environmental upgrade.
• A REC is like buying a new video card and sticking it in your out-of-date computer. For a little extra money, your old machine runs like it is state of the art. Your REC gives your electric use a state-of-the-art carbon footprint…though it probably won’t make your video games run faster.
• With RECs, it’s like the green energy provider has produced a certain amount of clean, emissions-free air, and you own the lease on it.
• Another good description is that buying a REC is like spending a bit more when you go to a game to buy the team jersey. It doesn’t make you a member of the team, but it makes you feel like you’re part of the team, and it tells the world what team you support. Your REC purchase says that you are part of the team that wants clean, green, greenhouse-gas-free electricity.

Of course, a REC is better than any of these other purchases, because it also makes the world a better place. Your REC purchase is giving direct financial support to green energy in America, and to all the good things that green energy promises for our future: cleaner air, cleaner water, energy independence and stable energy prices. It also tells our government and our business and industry that this country is ready to do what it takes to make a cleaner, greener America happen.

So, how did something as abstract as an “environmental attribute” turn into something that you could buy as an add-on to your electricity? We’ll tell you the story here. As you can see, it’s a pretty long story! But it helps you to understand how energy and energy policy work in this country, and how green energy has become part of our energy supply and our energy policy. It will help you understand how the issues are being debated right now, and how this debate will develop in the future.

If you trust that your REC purchase helps promote green energy in America…which it does…and that it reduces the environmental impact of your electric use…which it also does…then you can stop here. If you want to know the whole story behind RECs, then read on.

The Story of RECs

Believe it or not, greenhouse gases and global climate change weren’t involved in the creation of RECs. Acid rain was.

RECs were first proposed in the 1990s, when America wasn’t thinking about global warming. But acid rain, which results from the release of sulfur dioxide (SO2) into the air, was considered a serious enough problem that the Clean Air Act had set strict standards to reduce emissions.

Green energy from solar, wind and biomass was emerging as a promising new technology. These green sources could have a substantial impact on lowering overall SO2 emissions, since every megawatt generated by one of these clean sources would be a megawatt not generated by a polluting power plant. An electric utility only uses as much electricity as it needs to meet demand, so when one power plant produces more, another must produce less.

To help push utilities to use more clean, green energy, legislation was proposed, called a Renewable Portfolio Standard (RPS). An RPS requires utilities to generate a certain percentage of their electricity using green energy sources.

It was great legislation then, and it remains a vital part of promoting green energy today. Twenty seven states and the District of Columbia have already adopted some kind of renewable portfolio standard since the idea was first proposed, and more are coming on the books every year. But in America in the 1990’s the RPS idea ran afoul of something else that was happening: the deregulation of America’s electric markets.

In 1992, the National Energy Policy Act (NEPA) made it possible for states to open up their electric markets to competition. Thirteen states and Washington, DC elected to do this (originally, there were fourteen, but California would later re-regulate). NEPA marked a fundamental change in the way America produced, and priced, its electricity.

Up until the 1990s, electricity in America was generated, transmitted and distributed by utilities. Utilities are an interesting hybrid in the business world: they are for-profit companies which sell stock and pay dividends; they have a monopoly for electricity in the grid that they oversee; and they are also strongly regulated by the government. Most business decisions require some kind of public review and approval by local politicians. These politicians, as you might guess, are keenly aware of how utility rates and utility oversight can affect their next election. Everyone is happier when energy prices stay low.

With deregulation, utilities turn the role of generating electricity over to private companies. The utilities are still responsible for transmitting and distributing the electricity in their grid, and they determine how much is needed to meet demand. There might be hundreds or even thousands of plants looking to sell their electricity to the grid.Some go directly to the consumers and sign people up by offering low prices. They get to meet the demand for their customers. The utility runs a continuous auction for the remaining demand; unlike a typical auction, the lowest price wins and gets to sell its electricity. The power plants use a wide variety of fuels: coal, oil, gas, nuclear, hydro…as well as the green technologies of solar, wind, and biomass.

Energy deregulation is an example of free market thinking: the philosophy that free markets can solve problems better than governments can. In America, in the 1990s, free market thinking was very popular. It has lost some luster in 2008, in the wake of the current financial crisis. But in the 1990s, it was what the American people wanted, and it was being applied to new areas. The energy market was one of these new areas.

Free market thinkers believe that when people work to make a profit in an unrestricted market, they will find ways to innovate, to be more efficient, and to bring the best ideas and the best processes into play. This should result in more productivity and lower prices. Everyone will benefit from the results; the best innovators, of course, will benefit the most.

Before deregulation, the public kept energy prices down by voting for officials who opposed utility price increases. After deregulation, the theory went, the public would keep prices down by choosing the power plants that were selling at the best price, and the utilities would keep prices down by picking the lowest bidder in an open auction.

But this was a problem for green energy, because green energy couldn’t compete in these new competitive markets. RECs were designed to fix this problem.

Why is green energy expensive? Construction and installation costs. While day-to-day generation costs are small, and the fuel source itself is free, construction costs for green generation sites are fairly high. Investors must be paid off in a reasonable timeframe or they will invest elsewhere, and green energy generators don’t operate at the high level of output that fossil fuel plants do. This forces them to set a relatively high price. In a truly free market, green energy will always be the last chosen.

RPS regulation would force utilities to use a set amount of expensive green energy. But RPS regulation flew in the face of the free market ideals behind deregulation. Was there, perhaps, a free market solution?

There was, and it involved something called commoditization. This is a another free market idea: that anything with value can be measured, broken up, and turned into a commodity that is bought and sold on the open market, like a stock or an option.

In the case of green energy, the commodity was its environmental benefit: all of the mining or drilling that don’t take place to obtain it, the pipelines and supertankers that aren’t needed to transport it, and the pollutants that aren’t released into the atmosphere when it is used to generate electricity.

Before free market thinking was applied to energy generation, we took that benefit for granted. RECs turned that benefit into something that green energy providers could sell.

This was a pretty radical idea at the time, but when you think about it, it makes sense. It’s about making the market truly fair. Remember, the utility is only going to accept enough electricity to meet demand, so if one plant doesn’t feed the grid, another one will. And in the language of the free market, each power plants actually produces TWO products: electricity and emissions. If you’re going to pay the same price for the electricity, then a fair market dictates that you have to allow each plant the same amount of emissions as well. This hadn’t been the case before. The assumption had been that green energy produced “no” emissions. Free market thinking challenged that assumption.

In the new plan, every plant was given an emission allowance. For every megawatt of electricity, they were allowed a certain amount of emissions.

When fossil fuels generate a megawatt of electricity, this emission is full of pollution, including greenhouse gases. The emission from natural gas is pretty dirty; the emission from oil is worse; the emission from coal is the worst. Green energy sources gives you the same megawatt of electricity, but their emission is completely clean. Which would you buy?

Under the new plan, green energy providers were allowed to package their clean emission allowance into a commodity called a Renewable Energy Certificate, or REC. Sale of the REC would act as a subsidy for the green electricity, because the green energy provider could now sell their electricity at a lower, competitive price and use the REC sale to make up the difference.

Exact definitions vary from state to state and organization to organization, but a Renewable Energy Certificate (also called a Renewable Energy Credit or Green Tag) is best described as the “environmental attributes” of one megawatt hour of electricity generated by a clean, green energy source. A green energy provider is allowed to sell one REC for every megawatt hour they feed to the local electric grid. The energy sources which are allowed to use RECs are:

Clean, green wind is one of the power sources allowed to sell RECs.

• Solar electric
• Wind
• Geothermal
• Low Impact Hydro (facilities that run without requiring dams and other structures that alter water flow)
• Biomass, biofuels and landfill to gas
• Certain hydrogen fuel cells

A REC has a set life span: generally, within the calendar year in which the electricity was generated, plus a few months on either end. After that, it is retired. RECs can be purchased by utilities, or by certified brokers who then resell them. Brokers may break their RECs down into smaller units, as small as 100 kilowatt hours, and sell these REC packages, or REC blocks, at prices that small buyers, like individual people, can afford. Community Green Energy has packaged our RECs at a number of sizes, appropriate for both individuals and businesses.

When you purchase a REC, you can claim the environmental attributes of one megawatt hour of green electricity (or whatever the size of the package you bought). This is true no matter where you live, and whether or not you are in the same grid or even in the same state as the green energy provider who sold it.

Verification is very important for RECs. Anyone can sell you a certificate and claim it represents clean, green energy. That’s why Community Green Energy brokers our RECs through Green-e® Energy, the number one oversight agency for RECs in America..they certify almost 70% of voluntary REC purchases. They verify that all of our RECs come from certified providers, and that the money you spend helps to actively promote green energy.

While acid rain was the concern when RECs were introduced, most people today are concerned with greenhouse gases. Today’s renewable portfolio standard legislation targets greenhouse gas emissions. But RECs still play the same role, promoting green energy, because green energy is pretty much emission-free. No SO2, creating acid rain. No greenhouse gases, producing global climate change. It’s important to realize that your REC promotes not just a greenhouse-gas-free world, but a cleaner world in every way.

As RECs have become more closely associated with the issue of global warming, people have begun to describe the “cleanliness” of RECs in terms of carbon equivalence. This is an estimate of the amount of greenhouse gas that wasn’t emitted when the electricity was produced. Carbon equivalence is used to represent all the greenhouse gases, because carbon dioxide is the most common, even though some of the other gases are more troublesome. The estimate is based on the average emissions for all the power plants in the area where the REC was generated. Community Green Energy gets our RECs from all over the United States, so we use a national average when estimating the carbon equivalence for our RECs, rather than the average for one particular area. It is important to remember that this is an estimate.

Looking ahead, as more people buy RECs, this will give our government the proof it needs that Americans are willing to accept higher prices for energy in return for cleaner air and a future free of climate fears. They will increase the stringency of RFP legislation. Eventually, they will add a “carbon tax,” or a penalty for the dirty emissions from the fossil fuel plant, which will even out the costs by bringing more users into the mix. Your REC purchase makes you a leader in America’s energy future; others will simply have to catch up with you. Of course, by that point, the cost differences between green energy and fossil fuels may have changed. Green energy will only become cheaper, as improvements in technology and economies of scale increase efficiency and bring down costs. And fossil fuel prices got very high in 2008. Every indication is that these kind of prices will happen again, and will probably get worse.

So, that’s the story, though the story isn’t over yet. To learn more about why people buy RECs, continue on to the next section.