Green trading: Why the chase is on for US RECs

With an increasing number of states and municipalities introducing renewable portfolio standards, and a large number of high-profile companies looking to improve their image and reduce their environmental impact, the market for green tags in the US has never been stronger. Elisa Wood reports on this emerging financial industry.

It wasn’t easy for Brent Haddad to explain green tags, even to energy insiders, when he helped conceive the notion back in the mid-1990s. So Haddad, then a college student, decided to create a visual aid. He designed a fake currency on his computer that looked like a dollar bill, but was denominated in megawatt hours.

He would hand out the ‘dollars’ at meetings; afterward, he’d collect them.

One night, a tag was returned to him with a note scribbled on the back: ‘This is a stupid idea!’

Today, the stupid idea accounts for hundreds of millions of dollars in trades by generators, utilities, wholesale suppliers and retail marketers. Even hedge funds and financial institutions have gotten into the act, applying to green tags a range of trading and pricing innovations that were learned in larger energy markets.

Also known commonly as renewable energy credits, or RECs, green tags are clearly no longer the poor cousins of the energy world, but are barter chips with backing. The National Renewable Energy Laboratory expects US REC sales to reach as much as US$900 million by 2010, up from less than $200 million in 2004. The growth comes as buyers chase them down to meet state requirements, or simply to do good by the environment.


‘There is a huge amount of market activity out there when it comes to greening up competitive retail supply’, said Andrew Kolchins, Director of Environmental Markets at Evolution Markets, a global broker on the vanguard of developing REC markets. ‘I used to talk about how these markets were growing year to year. Now I tend to talk about the quarterly change – they are developing so fast’.

The tags represent the positive attributes, or brownie points, earned for generating renewable energy. One megawatt hour of renewable energy produces one REC. Utilities and competitive suppliers use these credits to meet renewable portfolio standards (RPS). Now in 23 states and the District of Columbia, RPS rules mandate that a specified amount of power sold to consumers come from green sources. Buyers also pursue so-called ‘voluntary’ credits, those purchased not to meet a state mandate, but to fund a renewable project as an act of goodwill.

A marriage of markets and mandates

The green tag notion has its roots in California’s wind industry. Nancy Rader, executive director of the California Wind Energy Association, formulated the idea of an RPS and trading credits, along with Haddad, now an environmental studies professor at the University of California, Santa Cruz. Others credited with playing a key role are Richard Rosen, executive vice president at the Boston-based Tellus Institute and Donald Aitken, a senior scientist at the Union of Concerned Scientist.

At the time, California was all about competitive electric markets. Rader, then with the American Wind Energy Association, realized it would be necessary to use a market-based approach, if she were to win support of a law that would mandate the purchase of renewable energy.

She explained: ‘When I proposed the RPS in 1993/94, people thought I was a total radical. They said, ‘You are talking about guaranteed market share? Hello?’ And, I said, ‘Yes, but it will be tradable and competitive’. It meets social goals in a competitive way – that’s what made it fly. We were able to talk about a mandate in the context of deregulation’.

Rader assigned Haddad the task of working out the mechanics, and the doctoral student turned to the New Jersey housing industry for inspiration. The state supreme court had ordered townships to ensure that a percentage of their housing be affordable. Townships could transfer the obligation to others. This allowed developers to meet the standard by packaging expensive housing developments in a suburb with redevelopment of inner-city slums elsewhere in the state. The system provided the vast majority of New Jersey’s new low-income housing in the 1980s and 1990s.

‘What I drew from this example was the concept of a transferable obligation based on a percentage of overall activity. In New Jersey’s case, it was a transferable obligation among housing developers to provide inclusive housing; in renewable energy’s case, it was a transferable obligation among retail power providers to purchase renewable-resource power’, he said. For the actual trading mechanism, he studied other trading-rights models developed for air pollution, fisheries, and water.

Out of the group’s work came the first detailed RPS proposal, which was formally submitted to the California Public Utilities Commission by AWEA, the California Biomass Energy Alliance, the Geothermal Energy Association, and the Solar Thermal Electric Alliance.

Unfortunately, the birthplace of the REC, California, did not run with the idea. Instead, the portfolio standard crashed with the state’s historic deregulation train wreck and notorious Enron trading scandal. Critics were not sad to see the concept lose force, saying the credits were nothing more than worthless paper, much like some of the wholesale power trades done by Enron. The problem was compounded by the fact that the REC concept is not easy to understand, since a credit is a non-physical product. No electricity comes with purchase of a credit. The REC is simply a revenue stream that reflects the social or environmental value the green energy source provides. Thus, a utility can buy RECs from a wind farm to meet a portfolio standard, while someone else might buy the actual electricity generated by the facility.

Trading in 10 states

But no matter how confounding, the idea would not go away. Soon policymakers in Texas and the Northeast became intrigued by its possibilities. And today those areas have thriving green tag markets, while a humbled California once again resurrects the idea and attempts to get a market off the ground. In all, there are 10 states with tradable REC markets: Connecticut, Delaware, District of Columbia, Maine, Maryland, Massachusetts, New Jersey, Pennsylvania, Rhode Island and Texas, with more likely to emerge, according to Kolchins. Trading is most active in Connecticut, Massachusetts, New Jersey and Texas.

Massachusetts has one of the country’s more pricey REC markets. Demand is strong, pushing credit prices as high as the mid-$50/MWh range, as of early 2007. In comparison, RECs go for less than $1/MWh in nearby Maine. One reason for the wide disparity is that Maine counts existing renewables toward RPS compliance, creating a big pool of credits. In Massachusetts, however, only newly built projects can create credits, so supply is low.

In many areas, the majority of renewable energy credits are derived from wind power seawest

Evolution Markets has conducted several REC auctions in Massachusetts on behalf of a quasi-public state agency, the Massachusetts Technology Collaborative, which is working to develop the credit market. The auctions have attracted a range of bidders – utilities, suppliers, hedge funds and other financial players – and winning prices have been consistently high. In early 2007, Evolution Markets took the next step and offered Massachusetts credits in a forward market auction. Even though a forward market typically produces cautious pricing because of future uncertainty, prices were again high, with winning bids of $54.50/MWh.

The Massachusetts REC shortage is brought on, in part, by a strong not-in-my-backyard (NIMBY) predisposition among the state’s citizenry. This sentiment makes it hard to site large-scale wind farms, which could be an ample source of credits. In fact, one of the most notorious NIMBY cases in the country is in Massachusetts. The 420 MW Cape Wind, an offshore project, has been fighting to win approval for six years. Cape Wind will be the largest renewable project in the state – should it ever be built. So the project could be good news for Massachusetts utilities and retail suppliers who must provide 3% of their power from renewables, a mandate that will rise to 4% by 2009. The problem for these buyers is that if they cannot find enough credits to meet the standard, they must make an alternative compliance payment to the state, a penalty charge of $57.12/MWh for 2007. Massachusetts ran short by 368,000 RECs in 2005 (data are not yet available for 2006.) As a result, of the 20 companies that must meet the RPS, only three were able to secure enough credits; the remainder made the high-cost compliance payments.

Massachusetts used proceeds from compliance payments – $19.6 million – for commercial development of more renewables. And that is helping the state ease the REC crunch. In a February 2007 report, the state Division of Energy Resources predicts a better balance of supply and demand this year as more biomass and some wind projects come on line. So the idea behind the state RPS and REC market – to encourage development of new projects – appears to be working, despite the state’s NIMBY reputation. Further, the price signal from Massachusetts is being heard beyond its borders, with projects being built in other New England states, New York and the Canadian Maritimes, with an eye toward selling into the lucrative Massachusetts REC market.

Now that RECs are no longer a fledgling idea, industry players are beginning to use the credits in more sophisticated ways, engaging in forward markets and longer-term trades. Constellation NewEnergy, one of the nation’s largest competitive retail power suppliers, is advancing the notion of ‘double commodity’ sales – a customer might secure green power for a hypothetical 10 cents/kWh to power its facility, and then sell off the accompanying RECs for 5 cents/kWh, cutting its costs by half.

State governments also are exploring more advanced strategies for credit trading. For example, an idea has been floated in Connecticut of letting customers use the credits as a hedge against utility rates. Residential customers who sign up for utility green pricing programmes would see their rates rise or fall depending on how renewable energy prices compare to fossil fuel prices at any given point in time.

Nationally, future growth is all but certain for the mandatory REC market, given that most states require that an increasing percentage of retail sales come from renewables each year. In addition, more states – beyond the current 22 – are contemplating passage of renewable portfolio standards. And finally, talk continues in Congress of a possible national RPS, although its pros and cons are heavily debated in the industry. Critics of a national plan fear it will disrupt markets in states that carefully crafted portfolio standards to meet their unique needs. Others, however, say a national standard would not only significantly boost renewable development, but also would create much-needed uniform trading rules between states and regions.

The US state of Massachusetts has the highest REC prices in the US, caused, in part, by local planning objections to the development of renewable energy sxc photo library

While the mandatory market – buying and selling to meet state rules – remains the largest arena for green tags, the so-called voluntary market also is expanding. In this case, companies, schools, hospitals, resorts, government agencies and others buy RECs, not because they must, but because they want to support renewable energy growth. Prices for voluntary credits tend to be lower than the costs of green power sold by utilities, according to NREL, because the credits can come from anywhere in the country.

The Center for Resource Solutions, a San Francisco company that certifies voluntary credits, reported in December last year that voluntary sales increased 43% the previous year, for a total of 5.2 million MWh. The products were sold in 48 out of 50 states. Among the big buyers are well-known names, such as Whole Foods, Starbucks, and the University of California. It has also become increasingly common to buy green tags for popular events. Thus, this year’s NFL Superbowl was able to advertise that it was powered by green energy, as did the Academy Awards.

Sincerest form of flattery

With the success of the green tag market, imitators are emerging, some considered natural partners to renewable energy; others eyed with some suspicion by green energy advocates.

Sterling Planet, a clean energy retail supplier in Atlanta, Georgia, has taken a lead in pushing ‘white tags,’ certificates that represent efficiency savings, a concept borrowed from the United Kingdom, France and Italy. Similar to a green tag, a white tag is equal to 1 MWh, but it represents energy saved, through conservation or combined heat and power, rather than energy produced through renewable generation.

‘White tags are the logical next step,’ said Patricia Stanton, Vice President and Director of the Clean Energy Markets Division at Conservation Services Group, a national, non-profit energy services firm that provides a range of credit trading services. ‘Renewables are important, but energy efficiency – not having to generate electricity at all, not having to burn the natural gas at all – is extremely important.’ A virtue of white tags is that efficiency faces none of the NIMBY problems, associated with siting wind projects. Thus, ‘the white tag concept of figuring out how to send a good strong market signal to the efficiency investors is likely to become even more prevalent,’ Stanton said.

Connecticut paved the way in creating a mandatory white tag market beginning January 1, 2007. The state requires that 1% of the retail power sold by a utility or marketer come from either energy efficiency or certain combined heat and power plants. Nevada and Pennsylvania also have passed white tag mandates.

The concept of ‘Green tags’ is now being expanded to include other areas, for example energy efficient appliances, so-called ‘white tags’ sxc photo library

‘The market for these energy efficiency credits rewards companies and others that have taken real steps to conserve energy, such as installing an energy management system, updating a chiller or just adjusting the thermostat,’ said Mel Jones, Sterling Planet’s President and Chief Executive Officer.

While the white tag is being greeted favourably by environmentalists, a portfolio standard that would require a percentage of power to come from waste coal or clean coal technologies has less support. Dubbed ‘dirty’ tags by some, the requirement first won approval in Pennsylvania and is under debate this year in Illinois and Massachusetts. Pennsylvania includes new and existing waste coal and ICCG in its Tier II resources, as well as distributed generation, demand-side management, large-scale hydro, municipal solid waste, pulping process and wood-manufacturing byproducts. The state law requires that 4.2% of utility power come from these sources in 2007-2008.

Markets grow more complex

Whatever the colour of the tag, it’s clear that REC markets are providing the basis for increasingly intricate resource obligations and trading mechanisms. Reiner Musier, Chief Marketing Officer for California-based APX, has a birds-eye view of the market changes, since APX information management technology creates, verifies and manages the bulk of US credits.

Musier envisions states increasingly using the REC concept for other environmental commodities – as evidenced by the push for white tags and growing talk of carbon restrictions. The technology already is in place to track such trades, so it will not be difficult for the REC market to transition into a broader ‘environmental market’, he said.

Further, he sees trading borders, or ‘jurisdictional complexity’, disappearing between states and regions, as national players push for uniform rules. ‘Market forces – brokers, generators, and load-serving entities – will be looking to increase their flexibility in the management of environmental commodities, and this means that they will be encouraging policymakers to iron out some of the differences with their neighbours on environmental policy. Some of the barriers to be cleared are made of paperwork,’ he said in a recent white paper: ‘US Mandatory REC Markets – An Established Environmental Infrastructure’.

Indeed, the American Council On Renewable Energy (ACORE) took a major step toward removing such borders earlier this year by publishing a standard national contract for both mandatory and voluntary REC trades. The contract was created by ACORE, the American Bar Association and the Environmental Markets Association.

Another key issue is how RECs will be treated as carbon market design emerges in the United States. For example, should carbon caps be based on expected emissions reductions produced from renewable portfolio standards? Some argue that this is tricky business since it is possible that states will not meet their goals. And in the voluntary market, how should the industry explain green tags to customers who buy them to reduce their carbon footprint? These buyers neither understand nor care about the complex debate among policymakers over whether RECs should be counted inside or outside a carbon cap. They see their purchase as a ‘bundle of environmental attributes’ and want to know how much carbon emissions their purchase avoided and how much it lowered US dependence on foreign oil, Musier said. ‘The fact that policymakers have differing and strong opinions on the relationship between RECs and carbon-not-emitted does not keep the university buyer from asking the question, and marketers/brokers from having to look for the answer’. As a result, ‘trust and integrity’ in environmental reporting will be vital, with the verification work of organizations such as Environmental Resources Trust and Center for Resource Solutions becoming increasingly important, he said.

What will all of this change mean for the market? Musier predicts double or triple digit growth for environmental commodities. And he doesn’t make the prediction lightly. In fact, Musier says he’ll put his money where his mouth is, or rather, ‘I’ll bet you a REC’. This could well be a sure bet, as the US expands its clean power sector and the green tag, that ‘stupid idea’, increasingly becomes an established currency, a solid way to define and trade on what’s good about renewable energy.

Elisa Wood is US-based writer on energy issues.



  1. Holt, E.A. and L. Bird, 20051 Emerging Markets for Renewable Energy Certificates: Opportunities and Challenges. NREL/TP-620-37388. Golden, CO: National Renewable Energy Laboratory.
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