By Taylor Leyden, Fall 2016 Fellow
Pt. 1: The Context
The electrical grid is like an ocean where electrons flow in from all generating sources, and once they’re in, they’re indistinguishable from one another, whether they were generated by an old, coal-fired power plant or a distributed solar project. The nature of electricity makes it very difficult to stake ownership over “clean energy” or reliably claim that one’s operations are powered by renewables. For this reason, there are contractual mechanisms that define and govern who may claim the “environmental attribute” of renewable generation: renewable energy credits (RECs). A REC represents 1 Megawatt-hour of renewable generation. There are compliance REC markets that fulfill state Renewable Portfolio Standards, where RECs are bought and retired by load-serving entities (LSEs) to uphold their obligations to provide renewable energy. Generally, the RECs in these markets are tracked by generation attribute tracking systems (like GATS and NEPOOL). There are also voluntary REC markets, where RECs can be certified by third parties to avoid double counting of the environmental attributes.
Pt. 2: The Conundrum
When it comes to building new renewable generation, the high upfront capital expenditure often leads to the need for third-party financing. In order to value a project, investors look at contracted and uncontracted cash flows, tax benefits, and the operating expenses that arise from system maintenance. For a typical distributed generation solar project, the main cash flows come from the contracted power purchase agreement (PPA), as well as the SRECs in applicable markets. If you take the Maryland market for example, given the present state of the SREC market, about 90% of the cash flows are coming from the PPA. As governed by REC guidelines, however, the entity that ultimately buys and owns the SRECs from the system gets to claim all the environmental attributes. This seems unfair, when the entity contracting for the long-term purchase of energy is essentially financing the system, but does not get to claim the benefit.
This brings up two conundrums:
- For the electricity offtaker: Oftentimes, a company will contract through a power purchase agreement in order to reach certain renewable or environmental goals. If said company allows the RECs to be monetized in order to make the deal work economically, they can no longer make these environmental claims.
- In general: Why is it that the entity providing the least economic value in many cases (i.e. the party buying the RECs) gets to claim the credit for the entire system?
Pt. 3: The Status Quo
In the past several years, the largest purchasers of renewable energy in the United States, aside from utilities, have been large private companies with energy-intensive data center operations, like Google, Amazon, and Apple. Many of these companies have committed to purchasing 100% of their energy from renewables, and to achieve that goal, they must own the environmental attributes to support their claim. When a project’s associated SRECs provide significant economic upside to a project, most of these companies deal with the issue in the same way: REC arbitrage. In practice, this means that many financiers include provisions in PPAs to provide replacement RECs, which are RECs of a lower value, typically from large wind farms, but which still carry the “environmental attribute.” This allows companies to enter into a PPA and buy electricity from a system, while still retaining the ability to claim the environmental attribute, even if the credits that allow them to do so come from a different project than the one they buy power from.
Pt. 4: The Argument for Shared Claims
This form of arbitrage makes sense practically so that companies can make appropriate claims. However, certain PPA offtakers dislike the practice, as it doesn’t seem intellectually honest; they would prefer to purchase the electricity and retain the environmental attribute from their own project. Why not devise a system of shared claims, then? If multiple cash flows contribute to make a project financeable and economically viable, why can’t they share the responsibility and take the environmental credit for the project? RECs are typically certified by third parties to avoid double counting. In the same sort of third-party certification process, RECs from a certain system could be earmarked and split according to the percentage contribution of each party to the project’s cash flows. This methodology avoids double-counting and gives [renewable energy] credit[s] where credit is due.
Taylor Leyden is an Associate, Customer Energy Services with Sol Systems and a Fellow with the Clean Energy Leadership Institute.