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Clean Energy Trainwreck: Why Most RECs are Bad, and How to Find the Good Ones

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"Clean Energy Trainwreck: Why Most RECs are Bad, and How to Find the Good Ones"

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We all want to do the right thing. And for many of us, the only way to purchase clean energy is through Renewable Energy Credits (RECs) – a certificate that represents the environmental value of one megawatt-hour of electricity. In buying a REC, you are paying a project owner (or a broker) a little bit of money so that you can claim the clean benefit of the electricity produced. But as we’ve pointed out before (See: “Good RECs Versus Bad RECs”), those “benefits” may be doing nothing to increase investment in renewable energy and lower carbon emissions.

Guest blogger Auden Schendler, a sustainability expert who’s written on RECs for us before, dives back into the subject and makes some recommendations for businesses and consumers considering a purchase. So, are your RECs bringing new generation online?

UPDATE:  Schendler responds to comments.

If you are serious about solving climate change, you need to figure out how to clean up your power supply. That’s because efficiency can only take you so far: we can’t achieve the kinds of emissions reductions required to stabilize climate through efficiency alone. Cutting your demand in a home or business by 30% would be an outrageous victory. But you still have to deal with the remaining 70% of your carbon footprint.

That’s why so many major entities, from Intel to Carnegie Mellon University,  the State of Illinois to the Air Force, are buying vast quantities of Renewable Energy Certificates, or RECs, which are a surrogate for clean power, the only obvious way to purchase carbon free electricity  for your business.

The problem with RECs is that for the most part, they don’t drive change and don’t represent carbon reductions in the atmosphere. This issue has been daylighted in great detail over several years by Ben Elgin at Bloomberg and by me in Harvard Business Review.

The reason RECs typically don’t drive change is that at the prices people are willing to pay, the REC component of a clean energy deal isn’t material to project financing. As offset expert Mark Trexler once told me: “The question of whether a new wind farm gets built is usually a function of natural gas prices, falling technology prices, and federal tax incentives, rather than being a function of REC sales.”

The current price of even Green E certified RECs is often less than one dollar per Megawatt hour, essentially irrelevant to a developer. So even though the RECs are “certified,” they still don’t do anything. Green E is a very low bar—in fact, it’s the only bar. (An “all beef” hot dog is certified, in a manner of speaking, but you still don’t sleep at night after eating one.) Green E also “regulates” a voluntary market, which we’ve proven can’t solve climate change. (Good RECs, described below, do drive positive change. But few are buying the good RECs because they are so expensive and the public can’t tell the difference.)

A secondary problem with RECs is that there is a superabundance of them, and probably always will be. This means that their price will likely always stay low, negating the “market forces” argument that says demand will cause REC price increases, driving clean energy development. That hasn’t happened over the last decade, even with exploding purchases of RECs.

There’s a big problem with this situation for someone like me, and it’s best illustrated by my own recent experience. This year, the corporation I work for, Aspen Skiing Company, was able to cut CO2 emissions by about 5%. It was an absolutely monumental effort that cost us hundreds of thousands of dollars, and actually millions over the last decade. But other ski resorts have won awards based on the claim that they cut CO2 emissions 50%. How did they do it? They bought RECs, for a cost of about one percent of the utility bill. All parties—the ski resort and the award committee—had the best intentions. But they have both been duped in a way that frankly threatens civilization: they are under the illusion that they are solving climate change when they are not. An apt analogy would be wearing a mask to ward off swamp vapors that “cause” malaria. One’s misdiagnosis of the solution to a problem can be deadly. Cheap RECs actually make the climate problem worse, because they distract us from real solutions.

What this boils down to is that RECs are good for marketing. If that’s your goal, a purchase might well serve your needs and provide tremendous bang for the buck. But if you care about solving climate as a business or citizen, you’d far better off spending your REC money elsewhere, even to fund a policy nonprofit.

OK, but let’s assume you’re a business or individual who really wants, or needs, to get some “clean power” to address your carbon footprint. How might you do it?

My first suggestion is to actually develop clean power yourself, because this ensures that the project is making a difference, and is what’s called “additional” in the lexicon. For a home, this is difficult, as most people won’t install solar arrays. Fair enough. But that is rapidly changing.  State and federal tax incentives, increasing utility rates, plus the plummeting cost of solar panels, mean your array now returns at 8% or more. That’s not a bad use of your money given the current economy. For businesses, the opportunity is bigger. Often businesses can develop small hydro, solar, or other clean power sources as income generators and clean power providers. That’s what we’ve done.

Of course, not everyone can develop power projects—they’re messy and expensive. So my second suggestion is to dodge the power purchase option and instead create the right conditions for clean power development. Instead of buying “green tags” as RECs are often called, you could buy “policy tags.” In other words, you contribute two dollars (or more)  for every megawatt hour of energy you use, to an entity working to put in place the right policy to solve climate change, groups like CERES, Protect Our Winters, NRDC, our own Climate Progress or Grist on the journalism and education side, or state leagues of conservation voters. This will be vastly more meaningful and effective than your REC purchase.

Now, I realize the above point is a dodge and a cop out, so let me try to answer the question straight and realistically.

One approach is to work with your utility to secure a contract for clean energy, either through a community solar project or through a green pricing program. This contract will require that a utility have clean generation as part of its portfolio, and your participation will cause that utility, at some point, to purchase more to meet demand from others. Our utility, Holy Cross Energy, was one of the first to create a green pricing program. They locked into an early wind farm contract at what ended up being a very high price—a premium of $25 per megawatt hour. They then sold that power in blocks of 100 kWh for $2.50 to customers. Because the contract was long term and high priced, it was a material part of the developer’s financial model.

By showing leadership Holy Cross spurred other utilities to follow suit. And as other customers bought power, they were forced to expand their program. In short, by working with your utility, you can get towards more tangible power that is real and additional.  (There is still the risk that your utility will buy RECs to meet their demand for clean power. Ask them.)

If you are hell bent on buying RECs, you need to buy meaningful RECs that actually incentivize clean energy development, and by definition that means an expensive ($5 to $20) REC subject to a long term contract. (And this means that while you do the right thing and buy expensive RECs that really drive change, your competitor is buying the cheap ones and getting exactly the same PR boost and community accolades because the press and the public don’t know the difference. Too bad. Civilization is at stake. Nobody said this would be easy. You need to put your head down and do the right thing.)

To find the best RECs, you need to do extensive due diligence. That should lead you to what’s called a forward REC from a high integrity business like Native Energy or Community Energy, where people like George Hoguet and Erik Blank have long been asking, and answering, the tough questions posed in this blog.  Note that even these vendors can sell you higher or lower quality RECs, and these two, at least, will be straight up with you about the choices. Here are the questions you need to ask of a REC vendor:

  1. When I buy a REC, does it do anything to change the world? Does it do anything to reduce carbon dioxide emissions? (The technical way to ask this question is, “Are the RECs additional?”) If the REC in question is $1-$2, you already know the answer—$2/MWH isn’t enough money, it’s a meaningless addition to the project—so this question tests the integrity of the REC vendor. Some vendors will say that even these small premiums “incentivize the producer.” Baloney.
  2. Do you sell “forward RECS” (RECs that are part of the economic model of a project before construction and are therefore required to make the project happen, economically) and if so, what might those cost?
  3. Where are your RECs coming from, and explain to me the finances of how that project works and the role the REC played in this. Actually, send me the pro forma for the development, so I can see how those RECs made the project possible. Can I visit the project the RECs are coming from? Can I talk to the project developer? I have spoken to vendors who wouldn’t, or couldn’t, tell me where my RECs would come from. That is a red flag.
  4. If I am not buying a long term contract, how can the REC have any value to the developer? Is there a strategy to address that problem?

Hey…this is messy, isn’t it?

It’s in part because of the vast complexity of the climate problem—and the difficulty of doing the right thing—that solving climate change is often described in moral terms. We have entered a time where we have to do the right thing, not what’s expected, or what everyone else is doing, because the stakes are so high. In this case, that means we must either forgo a meaningless clean power purchase, or buy the really expensive RECs that do something, even when all our competitors are buying the cheap ones.

Take solace. The above act is the very definition of integrity: doing the right thing, even if nobody is watching.

Auden Schendler, vice president of sustainability at Aspen Skiing Company

[Joe Romm:  RECs are like the voluntary carbon offset market in many respects --  and I have called that voluntary market "rip-offsets," though others say that, like RECs, there are good offsets and bad offsets.  The bottom line is:  Caveat Emptor!]

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