What the HEC is a REC?

Back in the 1970s, there was a movie called The China Syndrome. A nuclear power plant narrowly avoids a meltdown (the term “China syndrome” was based on the theory that a molten nuclear core would sink through the earth until it came out on the other side), but the owners decide to cover it up and go on as if nothing had happened. One of the technicians at the plant (played by Jack Lemmon) grabs a gun, takes the control room hostage, and demands a TV interview to tell the public what really happened. But when the cameras start to run, his inner technician takes over and he gives a long-winded, highly technical and overly-specific explanation. Even though he’s telling the truth about a potential catastrophe, nobody understands what he’s talking about or believes what he’s saying.

This being a Hollywood movie, you know what happens next: the police burst in, Jack Lemmon is shot dead, and the nuclear plant picks that particular moment to go into meltdown mode again. NOW everybody understands what he was talking about!

We’re faced with a similar problem in explaining Renewable Energy Certificates, or RECs. There is a very simple explanation for what they are and what they do; there is also a very complicated and comprehensive explanation. The simple explanation gets to the point, but might leave you curious about some of the details. The comprehensive explanation gives you the whole story…but you might get lost in all the details. A complete explanation of RECs involves a bit of science, a bit of history, a bit of politics, and a lot of economic theory.

So we’re going to give you the simple explanation of RECs first, before the police burst in with guns blazing. Then we will give you the not-so-simple explanation. Choose the one that works for you. Either way, when you’re done, we think you will understand the importance of RECs for green energy in America.

RECs: The Simple Explanation

RECs are a way to financially support green energy.

In fact, they are the only way you, the energy consumer, can spend your money to directly support green energy being generated in America. RECs “green up” your electric use. You can buy enough RECs to green up as much as 100% of the electricity you use. You can also buy RECs to cover the electricity used by other people: your family, your friends, your associates, your community, your business. The money you spend on RECs help green energy be more competitive in the energy market.

RECs are measured and priced by the number of kilowatt hours they cover. For every block of REC you buy, you can claim that that much of your electricity came from a renewable source and did not result in the emission of greenhouse gases or other pollutants.

You buy RECs separately from the actual electricity you use. This gives you the freedom to purchase them from anyone you want, without having to change your electric service. Some utilities and providers make it possible for you to buy electricity and RECs at the same time as part of a “green choice” plan. Your purchase is a voluntary choice to spend a bit more money to support green energy, and has no effect on your electric service.

RECs remain in effect for the calendar year in which they are generated, so you must renew your REC purchase every year to keep your claim valid.

RECs: The Not-So-Simple Explanation

Every business has a product that it sells. Smart businesses figure out ways to sell the byproducts of their production process on the side, as well. Steel mills sell the slag left over from smelting as raw material for cement manufacturing. Lumber yards sell the bark they strip off tree trunks as mulch for gardens; some even sell the sawdust they sweep off their floors. Clothes makers sell the scraps they trim from this year’s fashion as rag for paper mills. Did you know that the newspaper you read this morning might be made, in part, from last year’s blue jeans?

For some industries, selling a byproduct is the difference between success and failure.

Renewable Energy Certificates, or RECs, are byproducts of green energy. Every time a green energy provider sells a megawatt hour of electricity to an electric grid, they are allowed to sell a REC as well. Without the extra income that REC sales provide to wind farms, solar installations and other renewable power generators, there would a lot less green power in America.

But what do you actually own when you buy a REC? This is where things get interesting. Let’s start with the official definition:

A REC is a certified document and a
tradable, non-tangible energy commodity
in the United States that represents proof
that 1 megawatt hour (MWh) of electricity
has been generated by an eligible renewable
energy resource. A REC owner may claim the
environmental attributes associated with
renewable energy generation equal to the
kilowatt hour (or megawatt hour) total of
the RECs they own.

Quite a mouthful! Not surprisingly, many people who buy RECs are not sure what they own. So let’s break down the official definition one phrase at a time, and explain:

• What an energy commodity is, and why it is non-tangible.
• What you own when you “claim environmental attributes.”
• Why you would want to own “proof” that clean, green energy was produced, rather than just buying the energy itself.
• What the HEC a REC is.

What is an energy commodity, and why isn’t it tangible?

A commodity, simply put, is a piece of paper that makes you the owner of something else.

That “something else” could be an agricultural crop, a supply of raw materials, a lump of precious metal, or any of the thousands of other things that are traded on commodity markets. The important thing about a commodity is that it separates ownership from physical possession: with a commodity, you can own something that you might never touch or see. You can own something that exists far away from you. In fact, you can own something that might not exist at all.

Commodities were created hundreds of years ago to help farmers pay for their seed. Farming is a tough business, and in the early days most farmers lived crop to crop and season to season. They didn’t get paid until their harvest was sold in the Fall, which meant they were often short of cash in the Spring, when they needed money to get their next planting in the ground.

Commodities, in the form of futures contracts, allowed farmers to pre-sell the crops they were about to plant. Anyone who had money to spend could negotiate a price for the next Fall’s crop, pay the farmer in the Spring, and collect on the contract when the crop came in six months later. The negotiated price was usually a bit below the expected market value of the crop. The farmer got cash in hand when he needed it most, as well as a guaranteed income for the year. The investor made a tidy profit at harvest time.

A REC, as a commodity, is a way for you to own something you don’t physically possess in exchange for giving money to the person who will create it.

Commodities have played a vital role in the growth of America’s economy, because they allow people with extra money to invest it anywhere they want, and people with no money to get it when they need it most. Investors didn’t have to grow, harvest or store the crops they owned through futures contracts. They didn’t even have to live in the same state as the farmers who grew, harvested and stored the crops. They rarely saw what they owned, because they would sell the corn or wheat to nearby mills as soon as the harvest came in.

Investors could hold their contracts until harvest time, or turn around and sell them to someone else. That’s the freedom that a “tradable” asset gives an investor. Licensed REC brokers buy RECs from green energy generators, and then sell them to buyers like you. Since you are not a licensed REC broker, the trading ends with you. You just get to own them.

“Tangible” means something you can see or touch. Corn is a tangible thing. You can hold it in your hand and eat it off the cob. But when speculators paid for their futures contracts, the corn they owned wasn’t tangible yet, because it hadn’t been planted. It stayed non-tangible right up to harvest time. Until then, the speculator owned just the promise of a harvest in the Fall. And for many speculators, their corn never became tangible, because the corn crops often failed. They paid for their contract because they believed that the farmer could be trusted to bring in a profitable crop.

A REC is a way for you to own something you want and value, even though it is non-tangible, which means you will never see it or hold it in your hand.

Commodities, like most investments, entail a measure of risk for people looking to make a profit. RECs are different from other commodities in this way: green energy producers aren’t allowed to sell them until after they have generated the electricity. This takes the risk out of RECs.

The commodities market has grown to include many industries beyond agriculture. Futures contracts have provided the upfront investment that helped mines get dug, wells get drilled, orchards get planted and factories get built. In the 1990s, commodities also expanded into the energy industry, allowing people to buy and sell ownership of the electricity that runs through power lines, even if the electricity was generated by someone else and even if the power lines were in another state.

The non-tangible aspect of commodities makes them incredibly flexible. Almost anything can become a commodity, as long as someone is willing to invest in it. Even something as non-tangible as fresh air.

Commodities are regulated, certified and monitored to keep everything legal, fair and transparent. Regulations prevent people from selling commodities they don’t really own or commodities based on things that really don’t exist. They also prevent people from selling the same commodity multiple times to different people.

To review:

• Your REC is a document that gives you ownership to something you don’t physically possess.
• Your REC is regulated to make sure you get what you pay for.
• Your REC takes money from a willing investor…you…and gives it to someone who needs it now…a green energy generator…who uses it to make something of value…green energy, plus a green energy byproduct.
• Your REC makes you the owner of this green energy byproduct, which is called the “environmental attributes” of the electricity.

So, what are the environmental attributes of green energy?

So far, we know that the environmental attributes of green energy are something you will never physically possess, and that they are non-tangible, meaning you can’t see or touch them. They must be pretty valuable to be worth all this trouble.

Environmental attributes, it turns out, are VERY non-tangible. They are something that DOESN’T happen.

And the fact that it doesn’t happen makes them very valuable indeed.

When people debate the pros and cons of green energy, the argument that trumps all others is that fossil fuels are cheaper. And in markets where green energy goes head to head with fossil fuels, fossil fuels almost always have the lower price.

But what if the market price isn’t telling the whole story?

Fossil fuels, in fact, have a significant extra cost that never shows up in the market price. But we are so accustomed to it that we’ve forgotten to add it in.

Fossil fuels HURT. We drill and slice and scrape and tear to get them out of the ground. We plow through the oceans and cut across the plains to move them from place to place. We crush and split and dissolve and rip to turn them into the fuel we use. Then we burn them, belching and spewing and heaving the gases, smog and soot that’s left over into the sea, the land and the sky. Oil wells blow out; coal mines explode; ocean-going tankers break up; storage tanks burst into flames; oil spills choke coastlines; coal slurries foul rivers.

Yet we have lived with this hurt for so long that we don’t think of it as an “extra” cost of the energy we get from fossil fuels. For the past two hundred years, we have gotten used to gray skies and oiled beaches and stripped hillsides and fouled streams, and have convinced ourselves that these things are unavoidable if we want fast cars, busy factories and warm, well-lit houses.

The failure to recognize the cost of these “environmental attributes” of fossil fuel has been called “the greatest market failure the world has seen.”

RECs fix this failure. With RECs, green energy generators are given a way to take all the environmental damage that doesn’t happen when a megawatt hour of clean, green electricity is generated, package it into a commodity, and sell it. Only clean, renewable energy sources can sell RECs. Every time a wind farm or solar array generates one megawatt hour of electricity, they are also allowed to sell one REC. Product and byproduct. Tangible electricity and non-tangible environmental attributes.

Another way to picture this is to imagine that every time you turn on a light in your house, you have two choices. You can take a breath of air filled with smog, soot and greenhouse gases. Or you can take a breath of clean, emission-free air. Isn’t that breath of clean air worth paying for?

A REC makes you the owner of the clean air that is a byproduct of green energy. You won’t have it in your possession. You will never actually breathe it. But you own it. And if you hadn’t spent the money to buy the REC, that breath of air would have been filled with smog, soot and greenhouse gases.

RECs change our perspective about energy and how it is produced. Before RECs, we didn’t think about the overall consequences of our energy. We didn’t realize that every kilowatt hour of electricity we use comes with a side order of pollution and greenhouse gas.

RECs give you a way to have the same electricity, but with a better side order.

RECs are an example of free market economics: the idea that any issue, even something as complicated as the environment and global warming, can be dealt with in simple economic terms. Free market thinkers believe that issues of right and wrong, which can be debated forever, are best solved by finding creative ways to turn them into issues of dollars and cents. People act most decisively, and most honestly, when they act with their wallets.

Turning clean air into a tradable commodity was a pretty radical idea back in 1992, when RECs were first proposed. But the results speak for themselves: Renewable Energy Certificates now help fund more than 30 million megawatt hours of renewable energy a year.

RECs also change our perspective about the role each of us plays in the health of the environment. When you buy RECs, you are acknowledging your individual contribution to making the world cleaner…or not. You are recognizing that pollution and global warming are the combined effect of billions of people using fossil fuels, each contributing one small measure to the world’s total emission. And you are saying, with your wallet, that you want to do better.

Part of this is your carbon footprint. If you put together all the ways you use fossil fuels…the electricity that you use, all the miles you drive in your car or fly in a plane, all the energy used to heat your home and your business, and all the fuel burned to bring the items you buy from their point of origin to the stores where you bought them…that is your individual contribution to greenhouse gas emissions. You can reduce your footprint by finding ways to use less energy. You can also buy RECs to reduce the impact of your electric use.

And if everyone demands RECs to reduce their footprint, suddenly this small individual act becomes a large combined one. We would need a lot more green energy to meet the demand. Without the flexibility offered by RECs, it would be impossible to put green energy together with the people who want to support it. You may not have the power to clean up the air directly around you, but you can help make it cleaner somewhere. And if enough people follow suit, eventually it will be cleaner everywhere.

At this point, you are probably thinking that RECS are a very complicated way to fund green energy. We agree. They are. But they are the only way that works right now. Let’s look at the reasons why.

Why don’t I just buy green energy directly?

Because you can’t, even if you want to. There are two reasons for this.

• Green energy provides less than 8% of America’s electricity, meaning it is not directly available in most places.
• Even if you do have direct access to it, it is impossible to know who actually generated the power that flows into your home.

Electricity makes its way from power plant to wall socket through a complex infrastructure or wires and cables called a grid. Your local utility operates this grid, balancing the output from all the power plants that feed it against the demand of millions of customers. Managing an electric power grid isn’t rocket science: rocket science is much easier.

Electric grids are “blind” systems, which means that once electricity is fed into them there is no way to track it back to its source. The power in your house might have come from one plant, or five plants, or hundreds of them. So there is no way to directly pay a green energy generator for their electricity. You pay the utility, or an independent provider, and they pay the power plants. You send in your bill and from there, who knows where your money goes.

For someone who is committed to going green, who wants to know their money is going directly to green energy, and who doesn’t have the space in their back yard to put up a commercial wind turbine, RECs are the answer.

Unlike your electric bill, RECs send money directly to green energy producers. Depending on the REC you buy, it could be one specific generator or a group of generators who have pooled their output. But only certified renewable energy sources are allowed to sell RECs. The RECs sold by the Eco-Vision Sustainable Learning Center support wind farms throughout the United States.

This is why you are buying “proof” when you buy a REC. It is impossible to track the electricity you use. And the environmental attributes are something that doesn’t happen. But the certified document guarantees that the electricity was generated, that it was green and that you are the only owner of the benefits.

Trust is vital. Anyone can sell you a certificate and claim it represents clean, green energy. That is why The Eco-Vision Sustainable Learning Center only sells RECs that have been certified by Green-e® Energy, the most respected oversight agency for RECs in America. Green-e® Energy certifies almost 70% of voluntary REC purchases in this country. They verify that all of our RECs come from approved sources, and that the money you spend helps to actively promote green energy.

Your utility might offer you a “green choice” plan at a slightly higher rate. This is another way you can support green energy directly. But guess what…the utility takes your premium and uses it to buy RECs! They might be RECs generated by green energy generators that feed your grid, or they might be RECs from somewhere else. RECs are the only way to know for sure that green energy was generated.

RECs are an example of how free market thinking can solve problems…sometimes multiple problems at the same time…through innovation. RECs take something that is valuable, but which cannot be physically owned, and give it a hard dollar value. They give green energy providers a way to profit from all of the value that their produce. And by separating the product (the electricity), from the byproduct (the environmental benefit), they give green energy providers access the widest possible market. A wind farm may be physically tied to one grid, but its owners can sell their RECs to anyone, anywhere.

A REC allows you to buy the best thing about green energy…the fact that it doesn’t hurt the environment…and still buy your electricity from whoever offers you the best plan. They allow you to buy something you want, but which isn’t directly available to you. They allow you, the green energy supporter, to actively invest in a greener energy future for all of America. And they let you choose exactly where your green investment goes, because you can buy your RECs from anyone, anywhere.

Why don’t we charge fossil fuels extra for the damage they do?

In a perfect world, that’s what we would do. America is a great country. We’re just not perfect yet.

In America, nothing happens until a majority of voters demand it. With 300 million people, 50 different states, and a multitude of cultures, backgrounds, educations, outlooks and opinions, it is hard to bring a majority of voters together on anything. Consider health care: everyone agrees that the current system doesn’t work, yet it has remained unchanged for almost fifty years, and the one reform that passed is now in danger or being repealed.

American voters are a tough audience.

Green energy and global climate change are a particularly tough sell. Greenhouse gases are invisible. Pollution has been around for longer than most of us have been alive, so we’re used to it. The consequences of global climate change happen slowly and unpredictably, so it’s easy to ignore or deny them. And low energy prices mean that everyone has more money to spend on the things they like.

Green energy hasn’t overcome the challenge of convincing a majority of Americans to voluntarily spend more of their money, or demand legislation from their government, to fix a problem they can’t see.

Green energy and global climate change are issues where America lags behind the rest of the world. There is, in fact, a system in place internationally to make fossil fuels pay for greenhouse gas emissions. It’s called a “cap and trade” system, and it has been in place for more than a decade.

America actually set up a cap and trade system back in the 1990s to deal with a different environmental problem: acid rain. Acid rain causes damage that is plain to see and very scary, so it was easy to convince voters and Congress to support the legislation. We haven’t shown the same resolve when it comes to greenhouse gases. Last year, the federal government debated it, but the shakeup that took place after the 2010 elections makes it unlikely that this will become law any time soon. If you would like to learn more about cap and trade, click this link.

Progress is gradually being made. Most Americans now believe that green energy is a good idea, and that it will eventually play a major role in generating power in America. More Americans are expressing concern about global climate change, although the holdouts are clinging hard to their denial of the problem and the science. Legislators, mostly at the state level, are taking the first steps to pass laws to help green energy. One of these laws created RECs.

A REC allows you to show the government, through your voluntary purchase, that Americans are willing to pay more for green electricity. It is a powerful statement when you act through your wallet. Until more voters demand a change, green energy must survive and grow in a free market that is stacked against it. Part of the idea behind RECs is that people can use the freedom of the marketplace to lead the way where government lacks the resolve to act. Without RECs, green energy wouldn’t stand a chance.

An obvious question is why green energy isn’t cheaper than fossil fuels, since the sun and the wind are free. Unfortunately, the economics of energy production involve more than just the cost of the fuel. You have to consider the cost of construction, together with the total cost of day-to-day operations, and measure it against the rate at which revenue is returned.

This is where you run into the one major disadvantage of green energy: it’s pokey.

For all their faults, fossil fuels generate huge amounts of energy when you burn them. Feed the furnices, and the power lines crackle 24 hours a day. Meanwhile, wind turbines slowly spin in the breeze and solar panels patiently soak up the sun. When the wind dies or the sun sets, green energy shuts down. Compared to coal, oil and gas, green energy produces electricity at a trickle.

And somebody, somewhere, invested the money to put up these wind turbines and solar panels. Investors expect to recoup their investment and start turning a profit as quickly as possible. Coal-fired and gas-fired power plants generate huge returns, even at very low prices, and recoup their costs in a few years. Green energy generates at much lower volume and a much slower pace, so it takes decades instead of years to produce the same return. This means green energy has to charge a higher price, or it will never reach the break-even point. It’s the classic lose-lose scenario in a free market.

REC sales give green energy investors the extra income, and the extra incentive, to put their money into wind turbines and solar panels. Without the added income from RECs, they would invest their money somewhere else.

REC regulations: the fine print

The energy sources which are allowed to sell RECs are:

• 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, 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 to the public. Our RECs are brokered by Community Green Energy: click here to visit their website. Brokers may break RECs into blocks as small as 100 kilowatt hours, and sell these REC blocks at prices that people like you can afford. The Eco-Vision Sustainable Learning Center sells RECs in blocks that are appropriate for individuals, families and businesses.

When you purchase a block of RECs, you can claim that a certain amount of the electricity you use has minimal impact on the environment, and does not result in the emission of greenhouse gases into the atmosphere. You may purchase RECs up to 100% of the electricity you use in a year. The best way to know how much electricity you use is to track your electric bills throughout the year. Your can also check your utility’s website; they probably have an online tool you can use to estimate you use.

You may purchase RECs to cover the electricity used by as many other people as you want. While you own the REC, you may give it as a gift, but you may not resell it…only licensed brokers can do that.

Green-e® Energy, as part of their oversight of the REC market, also specifies that we state a few things RECs don’t do:

• They don’t change your electric bill or affect your electric service.
• They don’t guarantee that green energy will continue to grown, or that a particular green power project will be built.
• They don’t reduce your “carbon footprint” beyond the part caused by your electric use.
• They don’t stop greenhouse gases from being emitted. They are proof that someone, somewhere, added electricity to the overall mix without emitting any greenhouse gas.

Your purchase is entirely voluntary. You buy RECs because you want to, not because you have to.

Most people associate RECs with global warming, so RECs are often described in terms of a “carbon equivalence.” This is an estimate of the amount of greenhouse gas that wasn’t emitted when the electricity the REC represents was generated. This estimate is based on an average emission for all the power plants, either for the state where the REC was generated or for the United States as a whole. RECs generated in states with higher percentages of fossil fuel plants have a higher carbon equivalence than the national average; RECs generated in states with higher percentages of green energy have a lower carbon equivalence.

At the Eco-Vision Sustainable Learning Center, we use the national average to estimate the carbon equivalence for the RECs we sell. You can learn more about greenhouse gases by clicking this link. It is important to remember that this is an estimate.

And that’s what the HEC a REC is.

How RECs help green energy grow

When green energy increases its market share, fossil fuel plants have to cut back production. This is known as displacement. When new green power is built specifically to add new RECs to the market, this is known as additionality. Displacement and additionality are the two ways that RECs help green power grow.

Right now, RECs provide the market incentive that keeps investment dollars flowing into green energy. The RECs that Community Green Energy sells have been verified by Green-e Energy as providing additionality. In other words, they come from new projects which wouldn’t have been built were it not for the extra income they provide to investors.

There is also a scenario…one which hasn’t happened yet, but which might in the future…that could take this support one step further. Because not all REC purchases are voluntary, as yours is. Some are mandated by law.

Electricity in the United States is managed by utilities, also known as your local power company. Utilities are a unique hybrid of for-profit business and government agency: while they generate profits, sell stock and pay dividends, almost everything they do is regulated by the state and local government.

You remember that earlier, we said that state governments have taken steps to support green energy? They do this through their oversight of the utilities. The most important legislative tool for doing this is called a Renewable Portfolio Standard, or RPS.

Renewable Portfolio Standards were another result of the concern over acid rain in the 1990s. While the cap and trade system worked to lower emissions from coal-fired plants, RPS legislation looked to fight the emissions problem from the other direction: by encouraging greater use of non-polluting green energy. Believe it or not, America had been a leader in solar and wind power technology back in the 1970s, but interest and funding had faded during the Reagan years. Renewable Portfolio Standards looked to put green energy back in the mix by requiring utilities to use a certain percentage of electricity that was generated by green energy.

There is only one way to prove that electricity has been fed into a “blind” grid system: certify every megawatt hour of green energy as it is sold, and require the utility to buy this certificate along with the electricity. That’s right: RECs weren’t created to fight greenhouse gases. They were created to fight acid rain.

Every year, utilities in states with RPS legislation must buy enough RECs to show they have met their mandated percentage goals. This part of the REC market is known as the Compliance Market for RECs. Currently, thirty states, as well as the District of Columbia, have RPS legislation on their books. Most require the utilities to buy RECs from within their own grid or their own state.

The Voluntary REC Market is a more recent development. It is made up of people like you who buy RECs voluntarily because they believe in green energy, as well as businesses that buy RECs so they can legitimately market themselves as “green.” The Voluntary Market is still a fairly small part of the overall REC market, since utilities have to buy huge numbers of RECs to be in compliance.

Now you know why RECs are so complicated: not only were they created to help utilities track electricity, which is an untraceable commodity, but they were also created to meet a government regulation. Anything that meets both these requirements is bound to be complicated!

The Voluntary REC Market is growing. If it grows large enough, and buys up enough of the RECs which are on the market, it could theoretically create a situation where there would not be enough RECs left for the utilities to meet their mandated goals.

At that point, the utilities would be forced to either increase the market share of their existing green energy generators…displacement…or actively build new green energy sources…additionality. This would be an example of free markets and governments working together to solve problems that governments cannot solve by themselves. We don’t know if the Voluntary REC Market will ever grow large enough to make this happen. But every voluntary purchase brings it a little bit closer.