Renewable energy. What do you think of? Wind turbines? Solar panels? Niagara Falls? All reasonable answers but when it comes to Massachusetts the answer is entirely different. In Massachusetts, the person or entity (a utility for instance) that purchases and retires the Renewable Energy Certificate (REC) associated with the megawatt hour (MWh) produced by an eligible renewable energy generator can claim that they have used a MWh of renewable energy. Is there any sense to this ridiculously complicated statement or is this typical government bureacratese? Actually there is a lot of sense to it and let’s see why.
Massachusetts has given a special priority to encouraging the construction of new renewable energy projects: principally wind, solar, and small hydro projects. They do this by allowing new renewable energy projects to produce RECs (Renewable Energy Certificates) at the same time they produce one MWh (MWh = 1000 kWh) of electricity. In fact they can print one REC for each MWh produced for the first 10 years that they produce energy. The wind turbine or small hydro project can sell the electricity they produce just as any fossil fuel or nuclear plant does but additionally they can also print and sell one Renewable Energy Certificate (REC) for each MWh of electricity they sell. But who would want to buy a REC?
The answer is that utilities in Massachusetts want to buy RECs. In fact they have to. The government has required the Investor Owned Utilities (IOU’s) to buy an increasing number of RECs each year. The number of REC’s the Massachusetts utilities have to buy each year is called the Renewable Portfolio Standard (RPS). There are different classes of energy associated with the RPS but the Class 1 energy requirements are the most important. These are the new renewable energy projects mentioned above. RECs purchased by utilities to meet the RPS standard are called compliance RECs.
How is the price of RECs determined? There are various factors involved. First if the utility doesn’t purchase a sufficient number of RECs in a given year the government requires the utility to pay an Alternative Compliance Payment (ACP) which essentially puts a ceiling on the price of a REC. The other main factor is simple supply and demand. More RECs printed by energy generators drive down the price of REC’s and more RECs that have to be purchased by utilities to meet their RPS drives up the price.
Not all RECs are created equal. The state has placed a special priority to increase solar generation and so has created a solar carve-out in the state RPS which requires utilities to purchase an yearly increasing number of a special category of RECs called solar RECs or SRECs. Because the alternative compliance payment for SRECs is higher and because they are in higher demand the price of SRECs is considerably higher than the price of a regular REC.
There is a market for RECs and SRECs much like a stock or bond market where they can bought, sold, and traded. Utilities try to buy them at the lowest price and generators try to sell them at the highest price. But at some point the IOU’s have to “retire” the REC to get credit with the state for “owning” the right to call the MWh of energy associated with the REC renewable and to meet the requirements of the RPS. When the REC is retired it is registered in a special database and can no longer be traded.
You might ask why is the system so complicated. The answer is that there is a competitive energy market that underlies the entire power system. Every hour there are auctions where generators of electricity sell MWh of their electricity and utilities buy them. In these auctions coal generators, natural gas generators, nuclear generators, and wind generators all have to bid against each other as equals. Of course society might value clean wind more than dirty coal energy but in the hourly auctions where they bid against each other there is no easy to make a distinction about where the energy comes from.
There are two solutions to this problem. You might make the dirty fossil fuel generators pay extra for their “dirtiness” or you might allow the clean generators an extra payment for their “greenness.” In fact, both solutions are used. The first solution is the Regional Greenhouse Gas Initiative (RGGI). Because of RGGI fossil fuel generators have to pay a certain amount for each ton of carbon dioxide they produce. The second solution is the RPS/REC system. Clean generators get an extra payment (the REC) for each MWh of electricity they produce.
After the clean generators get paid extra for their “greenness” (the REC) or the dirty generators pay extra for their “dirtiness” the energy is no longer considered “green” or “dirty” and they compete as simply “null energy” in the competitive energy market. Energy from a wind or solar generator without the REC or SREC is not considered “renewable” or “green.” It is the REC or SREC that gives the energy its “greenness,” not the energy itself.
What kind of energy qualifies for RECs? That is a political decision. In Massachusetts these are mostly new (post 1997) solar, wind, and small hydro projects. Energy from Niagara Falls doesn’t qualify. This is because it has been around for a long time and the project is paid for. The RPS/REC system is designed to encourage the construction of new renewable energy projects. It is sort of like the patent drug system. Additional money is given for a fixed length of time to help pay for capital intensive projects. Once a renewable energy project is paid for the cost of running it is generally small and it can pay for itself. Getting them built however requires a large initial capital investment and the RPS/REC system supports that.
The RPS for 2015 is 10%. That means an IOU must buy RECs from new renewable energy generators to cover 10% of their total energy sales. The RPS increases by 1% yearly until it is 15% in 2020. Note that it is only new renewable energy generators that can qualify to print class 1 RECs. This is because the state wants to encourage the construction of new renewable energy sources. Again buying energy from Niagara Falls is good in that it doesn’t pollute but it doesn’t stimulate the construction of new sources of renewable energy and so the owners of the Niagara Falls power project cannot print RECs (also only small hydro projects meet the criteria of the state RPS requirements).
There is an additional market for RECs. These are entities that simply want to support the production of renewable energy. A lot of these entities are individuals. Individuals can buy RECs as part of programs run by organizations such as Moms Out Front or Mass Energy or Belmont Light’s Green Choice. Businesses may also want to buy RECs as may municipal utilities like Belmont Light—which are not part of the state RPS and are not required to buy RECs. In these cases the individuals, businesses, and municipal utilities buy RECs not driven by state requirements but driven by their own conscience and values instead.
So does Belmont Light buy RECs and SRECs. No. Why not? Because we, the owner/regulator of our utility choose not to. Why not? Perhaps that is a discussion we should be having.
To summarize a qualifying renewable energy generator (for example a wind turbine owner or solar panel host) may print a REC at the same time it produces one MWh of electricity and both may be sold; however only the purchaser of the REC may claim they are using renewable energy. Energy from a wind turbine or solar host that is purchased or used without the accompanying REC is not considered renewable. It is the REC that confers the renewable or clean attribute to the energy. This is explained in more detail by the Environmental Protection Agency statement on Renewable Energy Certificates here.
Let’s take a look at how this plays out by examining the wind turbines constructed by the town of Hull. The town of Hull has 2 wind turbines that produce electricity for their municipal light department and which is sold to residents in Hull to meet their electricity needs. The town also prints a REC for each MWh of electricity produced and sells the REC to whomever wants to buy it—most likely NSTAR or National Grid or another utility which is required by state regulations to purchase a certain amount of renewable electricity to meet its Renewable Portfolio Standard. In this case the electricity used by Hull residents that comes from the wind turbine is not considered renewable. The right to call the energy renewable goes to the utility or other entity that purchases and retires the REC. It is this system of energy plus REC that allows renewable energy projects like wind turbines and solar panel arrays to be financially worthwhile for their owners.
It is interesting to note this renewable energy system requires two things for it to be successful. It requires a public that is willing to require its utilities to pay subsidies for renewable energy—ultimately leading to higher electricity prices for ratepayers—and entrepreneurs willing to take advantage of the both the subsidies as well as the ability to sell electricity to build renewable energy generation facilities.
In short RECs are production subsidies for renewable energy paid for by utilities because the state requires them to or by individuals, businesses, and municipal utilities because they feel it is the right thing to do.