Renewable Energy Certificate (REC)

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Renewable Energy Certificates (RECs): What They Are and How They Work

Renewable Energy Certificates (RECs) are tradable instruments that represent proof that one megawatt-hour (MWh) of electricity was generated from a renewable energy source and delivered to the grid. They separate the environmental attributes of renewable generation from the physical electricity, allowing those attributes to be sold independently.

How RECs Function

  • Each REC equals 1 MWh of renewable electricity generated and fed into the grid (roughly a month’s electricity for a typical U.S. household).
  • Because electrons from different sources mix on the grid and are indistinguishable, RECs provide a way to track and claim renewable generation.
  • Owners of renewable systems (utility-scale projects or rooftop solar) can sell RECs to utilities, businesses, or other buyers. The renewable generator retains or transfers the environmental claim tied to that 1 MWh.
  • Important: If you sell a REC associated with electricity your system produced, you forfeit the right to claim that you are using renewable electricity from that generation. To claim on-site renewable usage, you must retain the REC.
  • RECs typically expire at the end of the fifth calendar year after the year they were generated.

Regulatory Context

  • Renewable Portfolio Standards (RPS) in many U.S. states require utilities to source a defined share of electricity from renewables. These mandates create demand for RECs.
  • Some states include solar carve-outs or specific requirements for solar generation; to meet those rules, utilities may purchase RECs or equivalent credits tied specifically to solar.
  • Where utilities fail to comply, alternative compliance payments (penalties) and supply-demand dynamics influence REC market prices.

Market for Buying and Selling RECs

  • Buyers: utilities (for compliance), corporations and institutions (to meet sustainability goals), and other market participants.
  • Sellers: renewable project owners, residential solar owners, brokers and marketplace operators.
  • Transactions can occur via direct bilateral sales, brokers, or third‑party marketplaces that track and retire RECs on behalf of buyers.
  • Newer initiatives aim to increase certificate specificity. For example, industry partnerships are developing “granular” certificates that include time and location data on generation, enabling buyers to match energy usage more precisely to renewable production and improving signals for where new projects are needed.

Solar RECs (SRECs)

  • SRECs are RECs specifically for solar-generated electricity. Some jurisdictions maintain separate markets or requirements for solar to accelerate solar deployment.
  • Examples of states and jurisdictions that have used SRECs or solar carve-outs include Connecticut, Delaware, Illinois, Maryland, New Jersey, Ohio, Pennsylvania, and Washington, D.C. (programs vary by jurisdiction and over time).

REC Arbitrage and Trading Opportunities

  • REC arbitrage (or REC swaps) involves buying RECs where they are cheaper and selling or using them where REC prices are higher due to stronger RPS requirements or tighter supply.
  • Price disparities arise from differing state policies, carve-outs, supply, and demand. Brokers and cross-market trading mechanisms facilitate these transactions.
  • While each REC represents the same quantity (1 MWh), location and regulatory acceptance can affect its market value.

Benefits and Criticisms

Benefits
* Provide a revenue stream that improves the economics of renewable projects.
* Allow organizations to meet regulatory requirements and voluntary renewable goals.
* Create a flexible market mechanism that channels financial support to renewable generation.

Criticisms
* Critics argue some REC programs may not always spur new renewable capacity and can enable companies to claim “support” for renewables without changing on-site operations.
* Studies and evaluations differ on the extent to which RECs drive additional renewable investment versus serving as compliance or accounting instruments.

Practical Facts

  • One REC = 1 MWh of renewable electricity.
  • RECs expire five years after the generation year.
  • Selling a REC transfers the environmental claim away from the seller; retaining it is required to claim that your on-site electricity is renewable.

Conclusion

RECs are a central market tool for recognizing and monetizing the environmental attributes of renewable electricity. They help utilities and organizations comply with regulatory mandates and pursue voluntary sustainability goals while providing financial support to renewable energy producers. Ongoing developments in certificate granularity and market transparency aim to improve alignment between renewable generation and end‑user demand, potentially increasing the effectiveness of REC markets in driving new clean energy deployment.

Select Sources

U.S. Environmental Protection Agency; National Renewable Energy Laboratory; Center for Resource Solutions; LevelTen Energy; market research on REC and RPS policies.