Role of Renewable Energy Certificates in Developing New Renewable Energy Projects

Abstract

NOTICEThis report was prepared as an account of work sponsored by an agency of the United States government. Neither the United States government nor any agency thereof, nor any of their employees, makes any warranty, express or implied, or assumes any legal liability or responsibility for the accuracy, completeness, or usefulness of any information, apparatus, product, or process disclosed, or represents that its use would not infringe privately owned rights. Reference herein to any specific commercial product, process, or service by trade name, trademark, manufacturer, or otherwise does not necessarily constitute or imply its endorsement, recommendation, or favoring by the United States government or any agency thereof. The views and opinions of authors expressed herein do not necessarily state or reflect those of the United States government or any agency thereof. Executive SummaryFor more than a decade, renewable energy certificates (RECs) have grown in use, becoming a common way to track ownership of the renewable and environmental attributes of renewable electricity generation. RECs are used widely, and are often required, to verify utility compliance with state renewable portfolio standards (RPS) and to substantiate claims made by voluntary purchasers of green power.In recent years, however, questions have risen about the role RECs play in the decision to build new renewable energy projects. Critics point to the uncertain demand for and, in some cases, low prices of RECs as evidence that RECs do not make a meaningful contribution in favor of building a new project. Others counter that any revenue source, large or small, contributes to making new projects profitable and also attracts investment to the broader industry. . Although compliance demand is subject to policy changes, it is nevertheless relatively certain, whereas voluntary demand is less certain because it is not backed by force of law-in fact, it is subject to willingness to pay extra for the renewable and environmental attributes.Information from a variety of market participants suggests that the importance of RECs in building new projects varies depending on a number of factors, including electricity market prices, the costcompetitiveness of the project, the presence or absence of public policies supportive of new projects, contract duration, and the perspective of different market participants. Electricity market prices vary over time, frequently dependent on the price of natural gas. If the expected wholesale electricity price is low, RECs are more critical to make projects economically attractive; if electricity prices are high, the additional REC revenue may be less critical.The economic feasibility of projects also depends on the quality of the renewable resource and the cost of the project. If the project is very cost-competitive, the importance of REC revenue may be diminished in the build versus no-build decision, but if the project is small, lacking economies of scale, or relies on more expensive technologies or faces other cost chal...

Additionality of wind energy investments in the U.S. voluntary green power market

“…5 Figure 2 shows the distribution of unadjusted capacity factors compared with the distribution developed from an expert elicitation of U.S. wind power industry professionals. Specifically, the capacity factor for each project in the sample was adjusted upwards by 4 percentage points.…”

“…Yet, we have evidence that investors do not hold these expectations. Project investors are rarely able to obtain a contract for the sale of voluntary RECs for more than three years, leading to significant risk exposure [5]. Because of this reality, investors have reported that when making investment decisions they typically discount to zero the expected value of any RECs for which they are unable to obtain a firm contract at the time the project investment decision is made [5,22].…”

“…Project investors are rarely able to obtain a contract for the sale of voluntary RECs for more than three years, leading to significant risk exposure [5]. Because of this reality, investors have reported that when making investment decisions they typically discount to zero the expected value of any RECs for which they are unable to obtain a firm contract at the time the project investment decision is made [5,22]. Correcting Figures 3, 4, and 5 to account the present value of only three years of contractually confirmed REC revenue would depict an imperceptible effect from voluntary REC markets, and therefore is not shown.…”

“…The marketing promises and claims are debated, but it has not been well-established through quantitative analysis whether this voluntary environmental market leads to additional investment in renewable energy generation [3][4][5][6]. Once built, wind energy facilities can be operated with very low variable costs, and so any influence the voluntary green power market has on the amount of electricity produced from wind (as well as solar) must be in the form of additional generation capacity from either new construction or repowering of existing facilities.…”

“…More recently, Holt, Sumner et al [5] at NREL asked the question "do RECs play a direct role in new project development?" Their report addressed both the compliance and voluntary REC markets and was written in response to Gillenwater [3,12,13], Trexler [14], and other critics of the claims made within the green power marketing industry.…”