For those of you working in the U.S. Energy sector, you already know that not everyone agrees about climate change and what is or is not causing it. It is not my intention to weigh into the controversy about climate change, but one of the important outcomes from this debate has to do with the creation of renewable energy certificates (REC) instruments in the United States. RECs provides us with a mechanism to quantify and exchange electricity that is generated from renewable sources.
What is important to note here is that a significant number of states have adopted renewable portfolio standards. These standards are state level policies that require that a minimum quantity (often defined in a percentage) of power created by each electricity generation organization be sourced from renewable methods or processes. RECs have, in some jurisdictions, become a tool for tracking and trading electricity that is generated from the renewable methods or processes.
For those of you who are not familiar with RECs, they are a tradable contract instrument that represents the generation of 1 megawatt hour of electricity, as long as that generation is from a renewable source. The interesting thing about the RECs is that they can be separated out and sold to someone other than the purchaser of the electricity. So that means the owner of a wind farm can sell his electricity to one party and sell some of his RECs to another party.
The ability to strip out the RECs provides a mechanism for the owner of power plant that uses coal as its fuel source, to stay compliant with renewable portfolio standards of the state they are based in. Instead of building additional electric capacity from renewable sources, the owner of the coal-fueled power plant can buy RECs from an organization that produces electricity from solar power or wind power. Of course once an organization starts buying and or selling RECs they have to start capturing the trades and settling them based on the quantity of renewable power that was in fact actually produced.
This then begs the question of “what becomes your system of record for these REC trades and does your current energy trading and risk management system (if you even have one) handle this type of activity?” Furthermore what happens if the quantity of RECs you purchased is greater than the electricity that was actually produced? (ie. the sun did not shine or the wind didn’t blow during the period in question) Will your ETRM system track and manage this?
What may have started as a well-intentioned mechanism to slow down global warming ultimately results in new business processes and administration for existing companies to manage.
- On April 27, 2015