POWER October 2014 - 20

Unbundled Renewable
Energy Credits and the
Benefits of Standardization
Lisa Koperski
U
nbundled renewable energy credits and certificates (RECs)
separate the renewable, or green, component of energy
from the actual megawatt-hours of generation. RECs are
traded on nine different regional markets, or " registries, " in the
United States and Canada. Each market employs its own policies
and procedures for tracking RECs. Some regions allow exchanges
of RECs between markets; others do not.
A registry houses the REC until purchased. Certain registries
have been created by individual states, such as Michigan, while
other registries are amalgamations of states such as the Western
Renewable Energy Generation Information System. Each registry
functions and operates independently, and the registries are not
currently set up to communicate with one another. The standalone
process of REC registries frustrates inter-registry transfers
of RECs, engendering economic inefficiencies and facilitating
fraud. National standardization of the tracking of and accounting
for RECs would provide great benefits.
States Create RECs
RECs track the source of green energy through financial transactions.
Thus, RECs serve an important function for renewable
energy in two ways. First, RECs provide a vital tool for utilities
to meet state renewable portfolio standards (RPSs), which
mandate that utilities obtain a certain portion of the electricity
that they sell to retail customers from " RPS-eligible " sources. By
stripping the renewable attribute from the physical energy, RECs
allow utilities to purchase renewable attributes at lower prices,
decreasing the costs of being RPS-compliant. Second, RECs allow
corporations to meet their self-imposed green goals, which enable
them to promote their entities and products as environmentally
friendly, thus boosting consumer demand.
RECs constitute property rights, as they transfer property between
parties. RECs also constitute contracts in the respect that
they manifest the willingness of buyers and sellers to transact for
the sale of property. Property and contract rights are generally
governed by state law. However, the Federal Energy Regulatory
Commission (FERC) could arguably have exercised jurisdiction
over RECs as part of its overall regulation of the wholesale sale of
electricity. FERC regulation would have provided some degree of
national uniformity, but-reasoning that its jurisdiction is limited
to just the physical attributes of electricity-FERC decided in
2012 that transactions involving RECs are subject to state law.
An Absence of Uniformity
REC purchasers must currently rely on attestations by sellers that
they are transferring bona-fide RECs. A market system dependent
on such self-attestations inherently increases the risk of fraud.
For example, the biodiesel market similarly relied on sellers' selfattestations
regarding the value and integrity of the biodiesel-
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and that market experienced cognizable levels of fraud.
The potential for fraud in the REC market is further heightened
by the absence of any formal exchange disclosing REC prices (by
contrast, for example, the New York Stock Exchange sets prices
for paper certificates through shares). In the REC market, brokers
with " insider " knowledge of prices for REC sales serve as the de
facto mechanism for setting prices in REC transactions.
Nonetheless, both utilities and corporations compete to purchase
RECs listed on the registries. State regulations typically require utilities
to procure RECs from suppliers listed in the regional registry.
From an economic perspective, this artificial constraint on supply
causes the demand for RECs in some markets to be higher than the
limited supply of RECs in a registry. Economics teaches that any imbalance
between supply and demand that exists independent of the
workings of competitive markets triggers inefficiency.
As the nation continues to advocate for green technology and
energy independence, the voluntary purchases of RECs and the
number of states imposing RPS purchase requirements are anticipated
to grow. The current system of siloed regional REC registries
is sub-optimal and should be fixed, especially because the
REC market is projected to increase substantially over the next
few years.
Interconnected REC Registries
To be sure, RECs theoretically allocate resources more effectively
and efficiently than requiring all retail sellers and users to generate
or procure physical renewable energy. However, as set forth
above, the splintered market in the United States relegates the
benefits RECs provide to sub-optimal levels.
RECs could better achieve their full potential if consistent
definitions for them existed across state lines, if RECs could be
uniformly transferred across registries, and if transparent prices
became publicly available for willing buyers and sellers. A simple
technical fix exists in making the REC registries interconnected.
Interconnectedness would enable each regional registry and prospective
REC purchaser and seller to see in real time the active
and purchasable RECs on the other registries.
This visibility should mitigate fraud risk because there would
be transparency among the registries. The increased transparency
should also decrease prices, as lower-priced RECs available
in certain registries could be sold in higher-priced REC registry
markets, thus creating a beneficial price impact. Once RECs have
been harmonized and the registries have been networked together,
hopefully the current system of fragmented and disjointed
inter-registry transfers will become a thing of the past as regional
registries see benefits from interconnectedness, including
efficiency gains and the potential to mitigate fraud. ■
-Lisa Koperski (lisakoperski@dwt.com) is an associate in Davis
Wright Tremaine's Seattle office.
www.powermag.com
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POWER October 2014

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