Aggregated energy renewable cons renewable energy credits

Published: 22 April 2024
Contributor: Alexandra Jonker

Renewable energy certificates (RECs) are an energy procurement option that certify the bearer owns one megawatt-hour (MWh) of zero-carbon electricity that has been generated by renewable energy sources and delivered to the power grid.

RECs are generated from power plants that produce renewable power or “green energy” from renewable energy resources like wind, solar, geothermal, hydropower and biomass. The production of renewable energy generates two products that can be sold on the market: the energy itself and the non-power attributes of renewable electricity generation such as the environmental and social benefits (that is, RECs).

RECs are also commonly referred to as “green tags” or “renewable energy credits.” There are also RECs called solar renewable energy certificates (SRECs) that exist specifically for solar energy, or electricity produced by solar panels. Additionally, similar energy attribute certificates in the EU are called Guarantees of Origin (GOs) as well as international renewable energy certificates (I-RECs), which are used in more than 50 countries.

Organizations use RECs—along with other types of energy attribute certificates such as zero-emissions credits (ZECs)—to support clean energy goals associated with the fight against climate change and comply with carbon emissions regulations.

RECs represent electricity that could have otherwise been generated by fossil fuels such as oil, coal and natural gas. In this way, RECs can help reduce an organization’s Scope 2 emissions tied to electricity purchasing. However, RECs do not ensure an organization’s energy consumption is entirety renewable nor do they create emissions savings in the same way as carbon offsets.

A carbon offset represents the avoidance, destruction, reduction or sequestering of a metric ton of CO2 emissions in one place to offset a metric ton of emissions elsewhere. Carbon offsets typically represent direct emission reductions or sequestration from carbon offset initiatives such as reforestation or waste management. Organizations can use carbon offsets to reduce or offset their carbon footprint from Scope 1, 2 and 3 emissions.

In contrast, RECs are typically applied only to Scope 2 emissions calculations and shouldn’t be used to reduce Scope 1 or Scope 3 emissions. That’s because RECs do not directly reduce emissions. Instead, a REC represents the positive environmental attributes of renewable energy generation. The purchase of RECs supports the renewable energy market and renewable energy generation, which allows them to be used as market-based instruments or tools used to address emissions associated with the purchase of electricity.

RECs that are purchased with their associated electricity are considered “bundled.” RECs purchased separately from electricity are considered “unbundled.”

While unbundled RECs don’t directly provide renewable electricity to an organization, they do send a market signal to support renewable energy development. Organizations may choose to purchase unbundled RECs to advance sustainability goals and support renewable energy projects because they lack renewable energy providers or policy support in their area, or are unable to generate their own onsite renewable energy.

RECs have drawn criticism due to their association with “greenwashing.” This is because companies can buy RECs and claim their operations as renewable while continuing to use fossil fuels and emitting the same amount of emissions. For example, a company that consumes 100 MWh of electricity annually from a fossil fuel–powered electric grid can purchase 100 RECs from a solar project and be considered 100% solar power–driven for one year. And thus, the company can claim zero emissions for the 100 MWh of electricity consumed. 1

However, the purchasing of RECs does generate revenue for renewable energy projects through power purchase agreements (PPAs). PPAs are long-term contracts between renewable energy suppliers (such as wind farm developers) and renewable energy buyers (such as organizations). In PPAs, developers get a fixed price for every MWh of renewable energy they generate. In exchange, the buyer receives the associated RECs.

So, while one organization’s REC purchases may not move the needle on overall grid emissions, many organizations purchasing RECs is a market signal to increase overall demand. Over time, this may provide environmental benefits such as helping to reduce greenhouse gas emissions.

RECs purchases are categorized into two market and buyer types: voluntary and compliance.

Many regions, states and countries have renewable portfolio standards (RPS), also called renewable electricity standards (RES), for renewable energy use. These are regulatory policies that require utility companies to supply a certain portion of their energy from renewable sources.

Compliance REC buyers are the energy producers or electric utility companies required to comply with RPS. They often do not generate a high enough percentage of renewable electricity themselves—and therefore must purchase RECs to make up for it. When REC purchasing such as this occurs in locations with these policies, it is called a compliance market. Compliance market RECs are often more expensive and required to meet certain criteria outlined in the standards. 2

A voluntary REC market is fueled by buyers’ desire to purchase renewable electricity to meet sustainability, emissions or environmental goals. Voluntary REC buyers choose to purchase RECs regardless of any regulatory policies. They are often environmentally conscious organizations with commitments to reducing their greenhouse gas emissions but can also be individuals, such as homeowners. Voluntary markets usually have lower prices than compliance markets.

The voluntary REC market has little regulatory oversight. For this reason, the US Environmental Protection Agency (EPA) recommends that consumers buy third-party certified and verified RECs.

According to the EPA, certification answers the question: "Does this product meet acceptable standards for quality?” Verification answers: “How do I know I'm getting what I pay for?” Currently, in the US, only one organization certifies RECs: the Center for Resource Solutions' Green-e Energy program. 3

In addition to third-party certification and verification, in the US energy market, there are two accepted approaches for tracking renewable electricity ownership: certificate-based tracking systems and the contract-path tracking method.

Certificate-based tracking systems issue RECs to the generator. Each REC issued includes unique renewable energy data attributes such as the renewable fuel type or the renewable facility location as well as a unique identification number. This ID number ensures RECs are held by only one organization at a time. These systems are typically electronic databases that allow holders to transfer RECs like people transfer money in online banking systems. 4

The contract-path tracking method is the oldest method in the market. It’s used to verify, track and trace REC ownership from generator to consumer. It includes a third-party audit supported by several proof-of-generation and transfer-of-ownership documents (such as sworn statements and contract receipts). 5