In an earlier blog I talked about Renewable Energy Certificates (RECs). They are of course they are a tradable contract instrument that represents the generation of 1 megawatt hour (or 1000 Kilowatt-hours) of electricity, as long as that generation is from a renewable source. RECs are interesting from the point of view of the additional administrative burden placed on the organizations that engage in handling these types of instruments. There are a number of important questions for many companies that enter in the RECs business. They need to ask if my Energy Trading and Risk Management (ETRM) system can handle RECs and if so, what functionality does my system have? Additionally, they need to determine how much functionality around RECs does my organization really need?
RECs are a tradable contract instrument so that means that most, if not all, of the ETRM vendors out there will be able to say that they can in fact handle RECs. This is probably a true statement because they all should have the ability to create an instrument called RECs, ensure the instrument has field to enter in the quantity of REC’s required, identify the price, define a location/state, and date or date range. The real questions though is what additional data needs to be captured and how does my organization use all this data through the RECs lifecycle.
Trade capture is typically the easiest part of the equation, the tougher pieces related to RECs are things like how to value the RECs for risk purposes, is credit risk a concern with the counterparties we are trading RECs with, how do we reconcile and retire the traded RECs against the actual amount of renewable power that was generated, and how do we handle any imbalances or inventories in the system of record? When companies start looking at all these other aspects of RECs that is where a significant portion of the ETRM systems on the market today will not hit the mark.
Any company that enters into or plans to enter into the REC space will need to do its due diligence during the evaluation of its existing or proposed ETRM system. If a company doesn’t do this then they will likely find themselves conducting some or all of the REC administration work outside of the ETRM system. As RECs become more and more prevalent in the market the approach of figuring it out later, or utilizing a work around becomes more problematic. As this happens it is likely to result in higher administrative costs over the long run.
- On May 11, 2015