Solar panels and wind farms are different from the typical natural gas power plant for many reasons, but their ability to sell the same electricity twice is an incredible hidden talent. Unlike the fossil fuel power plant, renewable energy generators do not emit greenhouse gasses or harmful pollutants once operational. The intangible environmental benefit of not doing this is a product, like many others, that can be bought and sold. Renewable Energy Certificates (RECs) are financial instruments that entitle holders to the “social and environmental benefits” of renewable energy, as described by the EPA. They are quite literally certificates: their value is largely intrinsic, dependent completely on social and political priorities. One megawatt-hour of electricity can be used to power homes and businesses, but the equivalent one REC of social benefit only matters if someone cares, or if there’s a law mandating they matter.
The markets that produce and sell electricity are a living tapestry of varying phases of regulation, deregulation, centralization, and decentralization. In general, electricity in America is largely hidden from the public view beyond the local utility company. This is largely due to a period of reform in the 70s and 80s, where dozens of middlemen were introduced to every step of electricity traveling from power plants to homes. The liberalization and deregulation pushes brought a longtime favorite American flavor to a new dish: deregulation for the electricity industry.
Reform passed under the Carter administration opened a slate of new opportunities through tax loopholes and decentralization. This was when renewable energy showed up in the United States. Often the result of unexpected partnerships between aging hippies and eager investment bankers, as Yale anthropologist Gretchen Bakke describes, renewable energy made it onto the grid in sizable numbers for the first time.
The liberalization and deregulation pushes brought a longtime favorite American flavor to a new dish: deregulation for the electricity industry.
The following decade saw yet another shift: environmentalists lobbied successfully for legal commitments to renewable energy, always at the state level. With a realization of climate change’s long-term threat, many states decided that a transition to renewable energy was worthwhile. To this end, they created Renewable Portfolio Standards laws, mandating that certain proportions of statewide electricity must be produced by renewable sources. To track progress and verify compliance, the REC was born. A brief analysis shows that this policy has been tremendously successful: Lawrence Berkeley National Laboratory claims RPS requirements are responsible for 60% of the increase in American renewable generation since 2000. However, every participating state made its rules separately, and often without communicating with each other. As a result, the interstate REC trade was a mess. It remains a mess today. A federal RPS was considered under the Obama administration, but failed for political reasons. As with many similar environmental issues, RPS rules are generally exclusive to liberal states, aside from a few notable exceptions.
A miracle of the unique commodity-instrument REC is that its “environmental benefits” can be separated from the electricity it was produced alongside, hence, a product that can be sold twice. A REC can be sold alone as an “unbundled” product, representing the social benefits of renewable electricity without the electricity it was born alongside. While renewable electricity and its corresponding REC are often marketed and sold as a bundled product, they are often separated. The ability to split electricity from its REC complicates energy transition goals, but does not necessarily run counter to them.
Today, RECs are sold for two purposes, the fulfillment of compliance or voluntary goals. RECs are used to certify compliance with state-level Renewable Portfolio Standards (RPS), mandating that the state’s electricity be generated with a specific proportion of renewable sources. This comes with several exceptions and loopholes, many of which are amplified by the use of RECs as a compliance mechanism. The current REC system arose in the late 90s specifically for RPS compliance. As discussed, the policy landscape for RPS is highly variable, making REC trading “highly fragmented…creating differential values across states and regions,” according to Mack and Gianvecchio. Prices are set by supply and demand, but supply and demand are extremely unpredictable and set by a spider web of state policy and public-private partnerships.
The ability to profit from two distinct markets helps the economics of widespread renewable energy adoption. A gas power plant sells its energy, but a wind farm sells the same amount of energy alongside RECs, making it more profitable on a levelized basis. As a result, unbundled sales create a severe problem in decarbonizing the grid. If a company in the Northeast purchases unbundled RECs from a wind farm in Texas in an amount equal to their energy usage, they are legally entitled to claim 100% renewable electricity. However, electricity is produced and used instantaneously, so the Texan energy flowed directly onto the Texas grid, and the Northeastern company just used power from their Northeastern grid. However, the Northeastern company still claims they used renewable electricity, and the Texan wind farm earned extra revenues from selling those certificates. In this dynamic, renewable energy is not impact-specific – it is difficult to quantify what impact is created.
Prices are set by supply and demand, but supply and demand are extremely unpredictable and set by a spider web of state policy and public-private partnerships.
The example above develops the idea that different areas of the grid have different climate change impacts. For example, the Midwest uses more fossil fuels to produce the same amount of electricity relative to California, so we say that electricity here is more carbon intensive. Using renewable energy has the highest impact when it is produced in the most carbon intensive regions of the grid. This consideration is referred to as emissionality, the idea that any purchase of renewable energy should prioritize displacing the most fossil fuel-generated emissions as possible. The massive problem with RECs, and the markets that trade them, is that this is not considered at all.
REC markets do not reflect emissionality. More importantly, it is near impossible to find a single list of every REC ‘Market.’ There is no New York Stock Exchange for RECs, nor a coordinated system of wholesale markets like there is for electricity. There are exchanges, yes, but they overlap and are often limited by political boundaries. For example, Massachusetts law establishes three separate classes of REC based on the age and resource type of renewable generation. In addition, some of these RECs can be produced and purchased from out-of-state, while others must come from within its borders. With three separate markets that each have three separate sets of requirements, and three vastly different sets of buyers, it is easy to tell why the REC market is so complicated.
Interestingly, Connecticut defines its Class I RECs in the same way, enabling cross-state trade. However, this compatibility is rare. More often, REC requiring states have varying requirements. For this reason, an informal network of agreements and contracts takes the place of a single – or even many– centralized exchanges.
This description leaves out another essential piece of complexity: compliance markets operate as described, while voluntary markets do not have to comply with specific statutory requirements. Here, RECs are often bought at the lowest price possible: cost-efficient sustainability.
While they include information on interconnection and emissions rate of the renewable resource, they do not consider the emissions displaced. This displacement comes from two places. Firstly, in the grid region. If a REC comes from generation that prioritizes additionality, it has more impact than if bought from existing generation. Secondly, in terms of marginal emissions. If a REC comes from generation that for a specific time of day, is replacing a gas peaker plant that could be online, this has more impact than if it is replacing cleaner fossil fuels or other renewables.
In short, RECs allow everyone to take the easy way out of decarbonization. Utilities choose between supplying RECs or paying a non-compliance fee, which sets a price ceiling on how a REC can cost. Sustainability has a price tag, and it’s one that jumps around unpredictably. Corporate and voluntary buyers buy at the lowest price possible, often ignoring the actual climate impact of their actions. This system arguably benefits no one, but it works. Utilities never supported expensive renewable energy commitments, environmentalists argue this system ignores the true impact of emissions, and grid operators lament the additional responsibility of operating REC tracking systems.
Prioritizing decarbonization means incorporating emissions and emissionality information into Renewable Energy Certificates. By doing so, it would be possible to have markets and regulatory mechanisms that properly value progress made towards a lower-emission electric sector. Additional policy is needed, but this first step is a prerequisite. Regulators must create policy mandating this information is available and included in RECs. The authority to do so is ambiguous, which is why the Federal Energy Regulatory Commission, FERC, must take action.
In the slim chance we meet these climate targets, it will be done through selling massive amounts of certificates, not through careful validation of emissions data.
This proposal is threatened by a series of legal challenges in the federal court system. In 2007, the Second Court of Appeals declined to hear a case, arguing that due to interstate differences in how RECs are defined, they can be considered “an invention of state property law.” Subsequent challenges have resulted in repeat deferrals to state-level legal systems, meaning that any attempt by federal regulators to redefine or mandate changes to the loosely-assembled REC ecosystem could suffer from challenges.
Current policy aims to push the United States towards a 100% renewable-powered electricity sector by 2035, as a first step to wider reaching climate goals down the line. At the state level, unless they are repealed and replaced, Renewable Portfolio Standards will reach their maximum limits around the same time. The next decade or so will see the exponential growth of utility-scale renewables grow even further. All of these projects will begin selling their RECs as the incremental statutory requirements increase, meaning that the near future will have both a lot more RECs and demand for them will stay high. In the slim chance we meet these climate targets, it will be done through selling massive amounts of certificates, not through careful validation of emissions data. We deserve accountability and some semblance of accuracy. The current system is a mess, but without further action, the influential labyrinth of REC rules and transactions will only get further tangled.
Harrison Goodman Cohn ‘26 studies in the College of Arts & Sciences. He can be reached at gharrison@wustl.edu.