Wonk Zone!

Welcome to the Wonk Zone

Thank you for your interest. There's a lot of healthy skepticism in the green market place these days, but Village Green is confident that we're doing things right. Read on to see how.

Why do people buy Renewable Energy Certificates?

Most people who purchase Renewable Energy Certificates (RECs) in the voluntary market do so to "offset" the negative environmental impact caused by their personal or business practices - usually electricity use, automobile emissions, and air travel. Most voluntary purchasers are primarily concerned carbon dioxide (CO2), the greenhouse gas most directly responsible for global warming.

Other reasons for purchasing generally include:

  • Desire to support the fledgling renewable energy industry
  • Interest in promoting "green" image for business marketing
  • Desire to reduce dependence on imported fuels, high energy prices, and other environmental impacts like smog, acid rain, and nuclear waste

Why buy RECs, not other kinds of carbon offsets?

 Carbon offsets are created by projects that reduce overall carbon dioxide levels in the atmosphere - either by pulling CO2 out of the atmosphere (e.g. planting trees) or by reducing emissions. Customers who purchase carbon offsets continue to use coal, oil, natural gas, and nuclear, and then pay for another project to neutralize the carbon emissions. In Village Green's view, these types of projects are a "band-aid" that attempt to address the symptoms of a problem, rather than work towards a solution - namely, ending dependence on fossil fuels.

The problem is that we as a society use a lot of energy, and the way we create that energy produces a lot of carbon dioxide and other pollutants. The solution is to use less energy, and produce the energy we do use with renewable resources. The path to that solution involves energy efficiency projects at home and at work, and the increased development of renewable resources. When a consumer purchases Renewable Energy Certificates, they are forcing more renewable energy into the market, thereby working towards a broad solution, rather than applying a band-aid. In addition, RECs have other benefits beyond simply avoiding carbon dioxide emissions. (See What are some other advantages of RECs over Carbon Offsets?)

Can Renewable Energy Certificates be counted as Carbon Offsets?

Some can, some can't. (Village Green's RECs DO count). It is possible to calculate the amount of carbon dioxide emissions reduced by renewable energy projects as the amount of CO2 emissions displaced from fossil fuel use. The actual amount of CO2 will vary depending on which type of power generation the renewable power is replacing, and how much. The U.S. Environmental Protection Agency has a cool calculator that shows you how clean or dirty your local grid is. However, in order for renewable projects to reduce carbon emissions, the purchase of a REC must pass the "additionality test."

What does the term "additionality" mean?

The additionality test for RECs boils down to the following question: "Did my actions result in more generation of renewable power, or would the same amount be generated even if I had not taken action?" (This same general question must be answered for any carbon offset project). Projects where the sale of RECs or carbon offsets caused new renewable energy capacity into the market or reduced carbon emissions are deemed "additional."

Do Renewable Energy Certificates pass the additionality test?

Not all RECs pass the additionality test. Non-additional RECs are simply extra revenue for energy companies who make their power with renewable technology. In this case, the renewable generator already exists, and your purchase of RECs essentially does nothing. Some would argue that these projects could not have existed without planning for the future revenue from RECs. While in some cases that may be true, it is extremely difficult to prove, and this alone makes a weak case for additionality.

Some RECs do pass the additionality test. Village Green only sources such RECs. There are two main ways for Renewable Energy Certificates to pass the additionality test.

  • One is to source RECs from supply constrained compliance markets, where voluntary purchases of RECs force compliance bound utilities to source additional renewable power capacity to meet their legal minimum requirement.
  • The other is to finance new construction of renewable power with future contracts for RECs.

How can RECs be "non-additional"

RECs are non-additional if your purchase of RECs does not force new renewable energy into the market. The most common examples are the purchase of RECs from facilities that were built without the revenue stream for RECs and that are not within a compliance market. In this case, your purchase of RECs is simply a payment to a generator for installing a system several years ago.

As we will see in the question "What is a compliance market for Renewable Energy Certificates," it is possible to buy additional RECs from generators that have been in operation for several years, but only these RECs are eligible for a compliance market.

Do Green-e certified RECs pass the additionality test?

Green-e is a voluntary certification process for renewable energy certificates, created by the Center for Resource Solutions, an environmental organization based in San Francisco. Green-e monitors to ensure that each REC is sold to only one customer, and that RECs do in fact come from renewable energy generators.

However, many RECs in the market are Green-e certified, but not additional. Green-e certification does not ensure that RECs are additional (although clearly many Green-e RECs are additional). Village Green Energy sells Green-e certified RECs, but we go beyond their requirements by sourcing RECs only from compliance markets, so that we can be confident of their additionality.

What is a compliance market for Renewable Energy Certificates?

A compliance market in this case is a state that has enacted a Renewable Portfolio Standard (RPS). An RPS mandates that the utilities operating within the state must source a minimum amount of their electricity from renewable sources by a certain date. For example, in California, where Village Green sources its RECs, the law requires utilities (PG&E, SoCal Edison, and SDG&E) to be 20% renewable by 2010.

The utilities in these states must purchase both renewable electricity AND the renewable energy property rights, which are often called Renewable Energy Certificates. If a utility buys the power from a generator but not these certificates, it cannot count the electricity towards its renewable goal.

When voluntary market participants like individuals or business owners purchase RECs from a compliance market, they are competing with the utilities for the rights to renewable power. Since there is a finite amount of renewable power that can be generated over a given period of time, this competition creates scarcity in the market which must be met with new renewable generation. Thus, voluntary purchases of renewable energy from compliance markets force new capacity into the market, and can therefore be considered additional.

Why is it important that the compliance market be supply constrained?

To answer this question, let's look at three cases, using three specific states as examples. In each case, we will assess the supply conditions in the compliance market, and draw conclusions about what happens when the voluntary market begins to compete for renewable power within that state.

First, let's consider a market that is oversupplied, such as the compliance market in Texas. The Texas RPS calls for 5,880 MW of renewable power by 2015. As of June 2007, there are 4,598 MW1 of wind power alone operating or under construction. Texas is way ahead of schedule due to favorable siting conditions, transmission policy, and high wind energy potential, making wind cost competitive with other forms of power generation even without extra revenue from Renewable Energy Certificates. Therefore, prices for RECs are low, and voluntary purchases are not likely to motivate utilities to accelerate their procurement activities. In other words, if you buy a REC from a wind farm in Texas, you are not creating any market forces that will lead to an increase in the total amount of renewable power that is generated.

Second, let's consider a market in which the sources of renewable power supply are very flexible. The Colorado RPS calls for 20% renewable power by 2020. In Colorado, though, the utilities are able to meet this requirement by purchasing RECs that were generated anywhere in the nation2. In this case, a REC purchased from a renewable source in Colorado is equivalent to purchasing a REC from anywhere. As in the first example, your purchase does not create any market forces that act effectively on utilities or generators to increase the total amount of renewable power that is generated.

Finally, let's consider the California compliance market. As previously mentioned, the California RPS mandates 20% renewable power by 2010 and 33% by 2020. Renewable power supply can only come from in-state facilities, or facilities that deliver power to California from a neighboring state with an RPS. The California compliance market is under-supplied. The major utilities in California are behind in their renewable power procurement schedules3, and are willing to consider any source of renewable power for a power purchase agreement, no matter how small. For example, PG&E has entered into a power purchase agreement with Eden Vale Diary Project, a biogas generator with only 150 kW in capacity4. Clearly, PG&E is close to exhausting its resources for renewable power supply when it is willing to contract power from such a small source.

In this market, it is apparent that voluntary competition can force more renewable power into the market. For example, Village Green Energy has contracted to buy RECs from the Sunnyvale Power Generation Facility, a 1.6 MW biogas generator. While PG&E must still transmit the power from this facility through the grid, it cannot count that power towards its RPS because it doesn't own the RECs - our customers do. Since PG&E can't count the power from the Sunnyvale Power Generation Facility towards its RPS, it must source additional power from elsewhere, effectively increasing the minimum amount of renewable power from 20% to 20% plus the 1.6 MW from Sunnyvale, and any other renewable facility that has been removed from RPS eligibility by the voluntary market, but still transmits its power over the grid.

This holds true as long as the state of California doesn't grant the utilities a "pardon" on meeting their requirements. So far, there has been no evidence that such action is pending. Lawmakers have acknowledged that additional market tools will likely be needed to make it possible for the utilities to meet their RPS requirements. The likely solutions will be to allow utilities in California to purchase un-bundled RECs and count them towards their RPS requirement.

Are RECs "additional" if they are purchased through future contracts as part of the financing of a new renewable power facility?

Using future contracts for RECs in order to finance a new renewable facility is another strong case for additionality. In this example, a company raises the money they need to build new renewables by selling the future RECs that will be generated from this new facility to the voluntary marketplace. The argument here is that these future contracts enable the facility to be built. As previously mentioned, the argument that revenue from REC sales enabled a given project to exist is difficult to make without the use of future contracts. After all, if no future contracts existed prior to the facility's operation, then the project happened without any help from RECs.

There remain some concerns with this approach as well. The main one is that it is often difficult to determine whether the sales of RECs actually made a project happen that wouldn't have otherwise. For example, one financial perspective is that extra revenue upfront from REC sales reduces the payback time on a new generator. But it is difficult to say that if RECs reduce the payback time on a new generator from 10 years to 8 years (as a hypothetical example) the unit is now "economic." Some investors would still build it with a 10 year payback period, while others still wouldn't build it at 8 years. These situations must often be reviewed on a case-by-case basis.

What are some other advantages of RECs over other types of Carbon Offsets?

In contrast to Carbon Offsets, Renewable Energy Certificates address more than just one part of the problem. In addition to preventing carbon dioxide from entering the atmosphere, RECs represent:

  • Avoided emissions of SOx (acid rain), NOx (smog), mercury (birth defects), particulate matter (asthma and other respiratory illness) and nuclear waste associated with conventional energy generation
  • Increased overall grid efficiency via distributed generation from small plants like the Sunnyvale Power Generation Facility
  • Decreased reliance on foreign sources of fossil fuels for electricity generation, such as natural gas

Back to top