Renewable Energy Certificates (Credits)
A renewable energy certificate (RECs) is a type of instrument that is traded on the open market. A renewable energy certificate is equal to one megawatt-hour or 1,000 kilowatt-hours of power that is generated from a renewable energy source. According to the U.S. Energy Information Administration, renewable energy is energy from sources that are naturally replenishing but flow limited. The most common forms of renewable energy sources are biofuels, wind power, solar power, and hydropower. These sources are considered environmentally friendly as they significantly reduce the amount of carbon dioxide that is released into the atmosphere.
A generation company or energy supplier can earn renewable energy certificates for every megawatt-hour that is generated from a renewable energy source. RECs are a great way to keep track of how much renewable energy is generated and transmitted to the power grid. The power grid is a system or network of wires that deliver energy from all sources, including fossil fuels, from producer to consumer.
Renewable Portfolio Standards
States nationwide are implementing what is known as renewable portfolio standards (RPS). RPS are policies or regulations designed to increase the supply of renewable energy resources. These policies require energy generation companies to have a set percentage of total power generated or sold to consumers come from a renewable energy source. The idea is to encourage new companies to enter the space as now the state has created an artificial demand for renewable energy sources. Nearly half of the growth associated with renewable energy sources is a direct result of renewable portfolio standards.
Some states including California, New York, Maine, and Washington are pushing for 100% renewable energy by 2050. Like most states, the required percentage of generation by renewable energy sources set by the state’s RPS is set to increase every few years. This is likely to put added pressure on retail energy suppliers to generate enough power from renewable energy sources to meet these standards.
Renewable Energy Certificates can satisfy Renewable Portfolio Standards
As mentioned earlier, renewable energy certificates can be traded on the open market. This means for an energy supplier to meet the requirements set by the state’s RPS program, the supplier doesn’t necessarily have to generate power from renewable energy sources themselves. The energy supplier can simply purchase renewable energy certificates to meet the requirements.
Most energy suppliers that advertise themselves as green energy only generate a small percentage of power from renewable energy sources. The majority of renewable power that enters the power grid most likely came from a third-party green energy producer such as a solar or wind farm. These third-party producers will earn a renewable energy certificate for every megawatt-hour of green energy produced. They then can sell the RECs to energy suppliers or other entities on the open market.