Embrace a Hybrid Approach of Carbon Offsets and Renewable Energy Purchasing
Over the last few years, an increasing number of organizations, agencies, and states have been publicly sharing energy and sustainability goals. These goals can be to reduce greenhouse gas emissions by a certain amount, increase renewable energy consumed, or achieve carbon neutrality. The pursuit of green practices can be driven by compliance needs such as NYC’s LL97 and Boston’s BERDO 2.0, voluntary programs and pledges, or stakeholder pressure (e.g. university students or investors).
Achieving these goals through efficiency measures and on-site renewable energy alone is a difficult task and sometimes an impossible one. This is where renewable energy purchasing in the form of Renewable Energy Certificates (RECs) and emission offsets can come into play. Below we describe how RECs operate, how they can work into institutions’ compliance needs, and their current costs.
Renewable Energy Certificates (RECs)
As we have discussed in the past, Renewable Energy Certificates (RECs) are a product of renewable energy projects and give the owner the right to claim one megawatt-hour (MWh) of renewable energy that is associated with each REC. Institutions can utilize RECs to reduce their scope 2 emissions – emissions that are associated with electricity generation. This can allow an institution to claim the use of renewable energy generation and progress towards emissions compliance.
RECs are either bundled or unbundled, meaning they are purchased along with the electricity from the same generation asset or independently of the associated electricity produced. Bundled RECs are typically associated with new-build energy projects; thus, buyers can demonstrate that they are contributing to the production of new renewable electricity generation. While unbundled RECs do not add any additional projects to the grid, as the credits are pre-existing, they are a valuable tool to help achieve emission compliance and employ renewable energy.
Drivers of REC Prices
RECs differ based on the year they are produced, the location, and the generation technology. Therefore, you may see a REC defined as “2022 Texas Wind” or “2023 Maryland Solar.” Prices of each vary depending on government regulation, demand, and the cost of new renewable energy generation.
Many states require utility companies to source a certain percentage of generated electricity from renewable technologies. The type and amount of renewable electricity vary by state in their respective Renewable Portfolio Standards (RPS) programs (DSIRE). RPS programs constitute a significant driver of REC prices as utility companies are typically compelled to purchase RECs to fulfill their requirements. If a utility fails to meet its requirements outlined in the state’s RPS, it is mandated to pay an Alternative Compliance Payment (ACP). The ACP is a charge per megawatt-hour and can be seen by the utility company as an alternative to purchasing RECs. Therefore, ACPs often set a maximum price for RECs. Overall, 31 states and the District of Columbia have legally binding RPS policies, creating both demand and ‘setting’ a maximum price across these states.
Take New York as an example. For 2021 the state’s RPS policies require 2.04% of a utility’s total load to be sourced from renewable generation. The ACP for this year was set at $23.79 for each megawatt-hour of renewable energy a utility is unable to generate or purchase RECs to meet its RPS requirements. The REC price came in below the ACP at $22.33 per megawatt-hour (MWh).
The voluntary purchase of RECs has increased substantially in recent years. As institutions and individuals aim to reduce their climate impact, many have turned to RECs to reduce their GHG emissions. As of 2020, 1 in 20 retail customers in the US voluntarily purchased RECs, amounting to 192 million MWh or 23% of the renewable energy market. Voluntary purchasers can purchase RECs from around the nation, something that not all compliance buyers can do. This allows an institution based in NY to utilize RECs from other states where the price of RECs may be lower.
Federal tax credits, combined with local or state incentives, can drive the production of renewable electricity generation projects. For example, the Business Energy Investment Tax Credit, a federal tax incentive program, was recently extended in 2020 and allows investment tax credit to be claimed on the development of renewable energy generation projects. With the potential of new legislation coming into effect, such as the Inflation Reduction Act of 2022, we can expect to see more federal incentives for renewable energy production.
The market and development of renewable projects are constantly changing and are not immune to forces affecting other markets, such as supply shortages. Nevertheless, renewable energy development continues to expand, granting more opportunities for institutions to utilize RECs to meet their emission goals.
Cost of RECs versus Offsets
The cost associated with RECs and Offsets can vary greatly based on the specific details. Offset prices tend to range from $1 to $20 per avoided ton of CO2 emissions depending on the approach being deployed. (Compare that to over $1,000 per ton of extracted emissions – CO2 pulled out of the atmosphere.) For RECs, the value ranges from $10 to $200 of avoided emissions. (It’s most common to report avoided warming potential for various greenhouse gasses in units of metric tons of carbon dioxide equivalence, or MTCO2e.)
The market price of these RECs vary (often significantly), and the amount of carbon they replace varies based on the emissions factor of the prevailing grid, but here’s a sample of how RECs rank in terms of cost-effectiveness of avoiding carbon (the lower price, the more effective):
While RECs tend to be more expensive than offsets per ton of CO2 averted, RECs can be seen as an appropriate investment by some institutions. From a stakeholder perspective, RECs are often seen as preventing emissions, whereas offsets can be viewed as attempting to sequester past emissions. Furthermore, RECs are closely regulated by the federal government, which allows assurance that the renewable energy is realized. Again, with the ability to purchase coupled RECs, institutions can drive new renewable energy projects offsite.
RECs for Climate Legislation
RECs also allow building owners to come into compliance with legislation. In New York City, Local Law 97 will be enforced starting in 2024 for buildings over 25,000 square feet. The law allows 100% of building emissions to be offset using RECs if the source of the electricity is “located in, or whose output directly sinks into, the zone J load zone.” Zone J comprises the New York City area. The law also allows 10% of emissions to be offset using greenhouse gas offsets with no geographical limitations. Through audits and planning, institutions can effectively incorporate RECs to negate their scope 2 emissions to comply with Local Law 97.
On the other hand, in Boston, BERDO 2.0 is set to require owners to comply with emissions standards starting in 2026. The law allows for RECs to be used to offset emissions. More details are expected to be released regarding the emission standards and the use of RECs to meet BERDO’s standards.
Environ is prepared to help organizations pursue any of the opportunities described. Email firstname.lastname@example.org or fill out our contact form to get in touch with us. Please do not hesitate to reach out with any questions or concerns.