See below for the March 2023 edition of the Sol SOURCE. Make sure to sign up to receive future editions as they release.
The Sol SOURCE – March 2023
The Sol SOURCE – March 2023
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After the Inflation Reduction Act: Solar’s New Horizon
After the Inflation Reduction Act: Solar’s New Horizon
This article is part of the March 2023 edition of our publication The Sol SOURCE. Click here to read the full publication.
After the excitement that followed passage of the Inflation Reduction Act (IRA), reality is setting back in as we await implementation guidance from the Biden Administration. However, clean energy isn’t the federal government’s only focus—2021’s Infrastructure Investment and Jobs Act (IIJA) has started to take effect, not to mention the continued war in Ukraine, increasing trade and tensions with China, and a tumultuous U.S. economy made even rockier by the recent collapse of Silicon Valley Bank and ongoing uncertainty about the debt ceiling. Analysts, investors, and state governments are setting new expectations for clean energy deployment as we all dig deeper into the challenges and opportunities ahead.
New Law, New Projections
The IRA’s effect on solar growth projections is unmistakable. The Solar Energy Industries Association (SEIA) projects a 69% increase in solar deployment over the next 10 years, which would lead to five times more solar in the ground. 85 GW of new solar manufacturing capacity have been announced since the IRA was signed—an 870% increase. With annual overall investment in renewables set to increase from $64 billion in 2022 to $116 billion in 2031, the U.S. is now projected to cut its economy-wide emissions by more than 50% by 2030.
The End of the Solar Coaster
The unprecedented scale of these projections is largely driven by the new longevity of federal clean energy tax credits under the IRA. For the first time, the ITC and PTC will persist at full value for 10 years—or longer, if emissions from generation aren’t reduced by at least 75% in that time. The longer horizon is intended to encourage sustained investment in clean energy, instead of the too‑familiar boom-and-bust cycles brought on by periodic one- and two-year extensions. Under the IRA, the credits also transition quickly to technology-neutral clean energy credits, aligning with scientists’ and policymakers’ focus on emissions outcomes rather than technological inputs.
States Step Up
While we await federal guidance for implementing novel portions of the new law, state governments are stepping up to make the most of this moment. Encouraged by the new federal attention on clean energy that we saw in 2022, a number of states have passed or are studying 100% clean electricity commitments. As we highlight in our State Markets section, since the IRA was signed, Minnesota and New Jersey have made fresh commitments to 100% clean electricity, marking the first time that more than half of Americans live in jurisdictions that have made this commitment. States are also looking ahead at how they can leverage a clean electricity supply to decarbonize other sectors, such as transportation and building operations. The IRA and IIJA’s significant investment in these harder-to-decarbonize sectors is largely funded through states, making their role particularly important.
New Challenges
Portions of the IRA’s larger and longer-lasting tax credits rely on further federal guidance for their implementation. Because of the limits of the budget reconciliation process under which the IRA was passed, the law itself could not include the specific instructions needed for implementing its novel credit adders and financing options. Rules and definitions related to domestic content, energy communities, credit transferability, and direct pay are left to the IRS and other federal agencies to develop before the credits can be monetized. For example, the IRA incentivizes building clean energy infrastructure in “energy communities,” defined by their proximity to Superfund sites or recently closed coal facilities, or by lost fossil fuel employment. Each of these criteria requires additional information from the IRS to be actionable—defining census tracts, proximity rules, and so forth.
Another key hurdle to fulfilling the promise of the IRA is a challenge facing many industries in 2023—finding enough workers. According to some estimates, more than 100,000 new clean energy jobs have been created in the six months since the IRA took effect. At the same time, the U.S. construction industry was short 413,000 workers as of December, while 764,000 manufacturing sector jobs remained open, according to the Bureau of Labor Statistics. McKinsey & Company expects a further 550,000 new energy transition jobs by 2030, of which they estimate only up to 10% will be filled by workers leaving the oil and gas industry. Even with the significant support the IRA provides for apprenticeships, this issue remains potentially the most important challenge to achieving the full value of the IRA over the long term.
What Else Is Going on in Solar?
Setting aside the IRA, familiar policy topics remain in focus for the industry. International trade issues are still an important concern, including tariff policy and complications from our ever-evolving relationship with the People’s Republic of China. In the near term, we expect a final determination on the AD/CVD investigation by May 1, 2023, which will establish tariff rates for a substantial portion of solar panel imports. President Biden (D) stayed the effect of this decision through June 2024, although Congress is now considering overturning that critical near-term tariff relief and imposing retroactive tariffs, which would debilitate the industry. Purchasing decisions already stretch past the end of the tariff relief, and we look forward to better pricing certainty as we onshore manufacturing capacity. As we write this, solar panel imports have begun to unstick from the logjam that followed the Uyghur Forced Labor Prevention Act. Trina Solar, for example, noted that more than 900 MW of panels have cleared customs recently with less than one percent detained. This is a significant improvement from the effective freeze we saw after the law took effect last year.
Domestic challenges also remain. At the forefront are ever-worsening interconnection processes, which are hampering many regions’ efforts to connect new renewable generation. In PJM, which serves 14 jurisdictions from Pennsylvania to North Carolina to Illinois, grid operators worry that interconnection uncertainties may threaten future reliability. In the near term, the ongoing threats of federal default and bank insolvencies hang over investors and developers alike as the U.S. approaches the federal debt limit, currently estimated to be reached as soon as June. At the local level, an Astroturf campaign threatens to impose overly restrictive siting requirements for solar—if not outright bans—in many counties. Meanwhile, the State of Illinois recently passed a national model for streamlining siting requirements across geographies and technologies.
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Exploring Agrivoltaics: Solar Design and Lettuce Yield in Fresno, California
Exploring Agrivoltaics: Solar Design and Lettuce Yield in Fresno, California
This article is part of the March 2023 edition of our publication The Sol SOURCE. Click here to read the full publication.
The agricultural and solar industries sometimes compete for land use, but they have recently found ways to work together. Agrivoltaics is the use of land below solar panels for crop fields, allowing a site to produce both food and energy. To better understand how these dual uses interact, we researched how yields for lettuce, a cash crop that can produce in shaded conditions, might benefit from changes to solar panel configuration at a projected growing site near Fresno, California. We found that some configurations are well suited to both agricultural productivity and project returns.
Research Methods
Our team evaluated four system configurations:
- a fixed ground-mounted system with one-meter ground clearance;
- a fixed elevated system with 3.75-meter ground clearance;
- a single-axis tracking ground-mounted system with one-meter ground clearance; and
- a single-axis tracking elevated system with 3.75-meter ground clearance.
We measured the effect on lettuce yield of adjustments to ground-clearance height, array height, axis selection, tilt, tracking rotation limit, and backtracking.
Row spacing was set to approximately four meters between panels, allowing lettuce positioning between rows to conform to standard 14-inch spacing, including 14 inches from the system’s standard 20-inch-diameter support piling. The yield was measured under normal and drought conditions to monitor crop response to variable moisture retention. Reduced moisture retention in drought conditions results in greater production when panels are positioned over the lettuce, enhancing yield for ground-mounted panels and elevated arrays.
Using all input parameters, we created 25 plots of subarrays containing 20 rows per subarray and 16 modules per row, occupying a total of seven acres of land. Differences in assumed yield were calculated based on average photosynthesis. System costs were adjusted to reflect increased labor and materials costs of elevating panels on stilts and installing trackers.
Results and Conclusion
Total lettuce output for each system parameter demonstrated that elevating panels is key to increasing lettuce yield. Tracking also increases yield, although to a lesser extent.
The cost-adjusted financial results for each array design showed that the fixed elevated system generated the highest net present value, while the ground-mounted tracking system generated the highest internal rate of return (IRR).The elevated tracking system maximized lettuce yield, generated the highest total income, and generated a greater IRR than both fixed systems. The single-axis tracking array with 3.75-meter ground clearance resulted in the smallest reduction in lettuce yield compared to full-irradiance growing conditions. Importantly, an elevated system design would allow tractors averaging three meters in height to pass under the array, allowing farmers to use typical harvesting techniques. Unelevated ground-mounted systems would require harvesting by hand, necessitating special protective equipment for workers operating near the panels.
Further research into the potential of agrivoltaics is essential to improving land use in the clean-energy economy. More detailed data and citation information are available upon request.
Endnotes
1. Barron-Gafford, Pavao-Zuckerman, Minor, Sutter, Barnett-Moreno, Blackett, Thompson, Dimond, Gerlak, Nabhan, and Macknick (2019), Agrivoltatics provide mutual benefits across the food-energy-water nexus in drylands, Nature Sustainability.
2. Tani, Suguru, Nakashima, and Hayashi (2014), Improvement in lettuce growth by light diffusion under solar panels, Journal of Agricultural Meteorology.
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Infrastructure + Impact Spotlight: Welcome Our New Impact Partners!
Infrastructure + Impact Spotlight: Welcome Our New Impact Partners!
This article is part of the March 2023 edition of our publication The Sol SOURCE. Click here to read the full publication.
In 2020, we announced our first power purchase and community investment agreement. The agreement was a milestone in our “Infrastructure + Impact” mission, representing a groundbreaking strategy to leverage clean power generation to invest in under-resourced communities and communities disproportionately harmed by climate change. Under that agreement, Sol Systems is charged to craft community-focused clean energy solutions and support local workforce development by partnering with local organizations that are working to address challenges in their communities.
Today, our initiative has grown from five organizations based in Philadelphia, Baltimore, and Washington, D.C. to 10 organizations serving a variety of rural and urban communities. Like their predecessors in the program, our newest partners are focused on renewable energy, environmental justice, and job creation and training. These partnerships also bring new support to our “Pathway to Solarization” objective, which recognizes the importance of home repairs and energy efficiency upgrades to expanding access to solar, as well as educating and growing the clean energy workforce. Below are a few of the organizations that we have worked with closely over the last year and will continue to work with in the year to come.
Based in Boone, North Carolina, Appalachian Voices envisions an Appalachia with healthy ecosystems and resilient local economies that allow communities to thrive. They work to increase energy efficiency and end harmful fossil-fuel practices (such as mountaintop-removal coal mining), and strive to shift to clean energy sources, including solar and wind power. Sol Systems’ partnership will establish a solar readiness fund. This fund will expand the work of Appalachian Voices’ established solar finance fund, which provides catalytic support to unlock solar investments in coal communities. Specifically, the solar readiness fund targets facilities whose key barrier to solar is poor roof conditions.
Based in Christiansburg, Virginia, Community Housing Partners was founded to perform home repairs for low-income families living in unsafe or unhealthy conditions. As the complexity of home repairs grew, the organization incorporated, received a not-for-profit 501(c)(3) designation and became Virginia’s first provider of federal Weatherization Assistance Program services. Sol Systems’ partnership will support energy efficiency and safety upgrades, improving residents’ quality of life and reducing the energy burden in a low-income apartment community in Pembroke, Virginia.
Based in Washington, D.C., Rebuilding Together DC Alexandria is part of a national network of affiliates working to preserve affordable homeownership, revitalize neighborhoods, and provide critical home-repair services that eliminate health and safety hazards free of charge to those in need. Sol Systems’ partnership will be used to make energy-efficient upgrades to two facilities: an affordable housing facility for homeless veterans and a housing unit for low-income households owned by So Others Might Eat (SOME). SOME is a Washington, D.C. organization and existing partner of Sol Systems working to help break the cycle of poverty and homelessness in the city. SOME is the current beneficiary of a 915 kW community solar installation recently completed for FedEx at a facility in Washington, D.C. FedEx is allotting part of the electricity bill credits generated by the solar installation to offset the yearly electricity costs of two SOME facilities.
Based in Baltimore, Maryland, Climate Access Fund is a green bank whose mission is to reduce the energy burden and carbon footprint of Maryland’s low- and moderate-income (LMI) households by facilitating access to clean community solar projects. Sol Systems’ partnership will support the financing and implementation of a community solar project at the Henderson Hopkins School in East Baltimore, which will reserve 100% of the solar power generated for LMI households in the community. Other community benefits will include solar workforce training and an after-school club for middle school students.
Based in Petersburg, Virginia, Virginia Environmental Justice Collaborative was created when four organizations (the Southeast CARE Coalition, Appalachian Voices, the Federal Policy Office of WE ACT for Environmental Justice, and New Virginia Majority) saw the need for statewide coordination to support Virginia organizations addressing environmental justice issues. Sol Systems’ partnership will support the organization’s efforts to establish a solar-plus-storage resilience hub and launch workforce development initiatives in Petersburg, a historically under-resourced community in Virginia.
In the year ahead, we will continue to foster relationships with our current community partners while expanding our impact with new ones. Our continuing partnerships deepen the impact we have in D.C., Baltimore, and Philadelphia, while our new partners will allow us to expand our work into new geographical areas, specifically rural Appalachia in Virginia and North Carolina.
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Clean Fuel Update – California LCFS Price Trends November 2022
Clean Fuel Update – California LCFS Price Trends November 2022
LCFS credit prices in California continue to plummet as supply outpaces demand. Current spot prices for immediate delivery are in the low to mid $60s, a ~30 percent drop from prices last quarter.
Similar to past quarters when the California Air Resources Board (“CARB”) held stakeholder convenings, the market did see a slight uptick on pricing following CARB’s November 9, 2022 meeting when pricing was around the $63-69 range. However, the uptick was short lived.
CARB’s Q2 2022 data posted on October 31, 2022 shows an all-time high of credits outpacing deficits with a surplus of 1.35 million metric tons of credits generated in Q2. The credit bank now sits at 11.3 million metric ton credits.
The downward spiral of LCFS pricing over the past year has impacted many stakeholders’ infrastructure development plans as well as LCFS credit monetization strategies. With regards to project buildout, developers and investors have been taking a more cautious approach, either delaying or halting projects altogether. For LCFS monetization, many market participants, particularly those in the electricity pathway, are re-thinking the cost-benefit analysis of utilizing renewable energy credits (“RECs”) to lower carbon intensity (“CI”) scores. In the past, there has been no question of whether purchasing RECs was worth it as the delta between REC purchase costs and LCFS revenue was large enough to make the REC investment pay for itself in multiples (i.e. despite the added REC procurement costs, market participants would generate enough additional LCFS credits from the purchase to come out ahead). As the delta shrinks, purchasing RECs may no longer be worth it. Where that threshold is will differ from participant to participant based on the vehicle type utilized, the energy economy ratio, and other factors. Sol Systems can work with clients to answer any REC related questions and determine what the optimal REC procurement strategy may be. This market dynamic may also put a downward pressure on REC pricing in CA.
This analysis was featured in the November 2022 edition of the Sol Standard, a quarterly newsletter that provides up-to-date pricing data, market analysis, and policy trends to keep clients up to speed on the country’s growing low carbon and clean fuels programs. To subscribe and access past editions of the The Sol Standard, fill out our subscribe form here.
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Reimagining REC Markets: Integrating Additionality and Emissionality into a New Carbon-Free Paradigm
Reimagining REC Markets: Integrating Additionality and Emissionality into a New Carbon-Free Paradigm
With the recent passage of the Inflation Reduction Act, the federal government has taken a bold step towards a carbon-free future for America. There remain critical obstacles; including rising interest rates, supply-chain issues, tariffs, and module costs. But we have embarked.
States looking to follow the federal government’s lead on climate -a refreshing change- have a powerful framework to leverage and replicate: renewable portfolio standards (RPS) and corresponding renewable energy certificate (REC) markets. Corporations looking to offset their carbon footprint, specifically Scope 2 but indirectly also 3 emissions that represent the Scope 2 emissions of their supply chain, can (and should) engage in updating these markets to ensure the markets are designed to achieve their carbon-free goals.
This article takes a fresh look at RECs, why they are important, how they can drive additionality and emissionality, and how RECs can be an integral part of customers’ carbon-free goals.
PART I: What Is a REC?
A REC is an intangible certificate that represents the environmental benefits associated with a specific amount of electricity produced by a renewable energy resource, generally one megawatt-hour (MWh)[1].When renewable electricity is produced, it enters a shared electricity grid and becomes indistinguishable from electricity generated by other sources – similar to water flowing into a network of pipes. Although individual electrons cannot be tracked on the grid, RECs enable renewable energy to be independently measured, tracked, and traded like other commodities. REC markets also ensure integrity because the environmental benefit of a REC can only be counted once when a customer “retires” the REC to claim it.
Each REC can be tagged with information about the project that produced it, the project’s location, technology type, and the time period when the electricity associated with the REC was generated. The electricity production is first recorded by a project’s electric meter and is then communicated electronically to third-party environmental registries or regional transmission organizations (RTOs) who validate and award the REC.[2]
There are generally two types of RECs in the United States: compliance RECs and voluntary RECs.
Compliance RECs were first introduced in the 1980s as part of an incredibly successful state market-based mechanism, the Renewable Portfolio Standard (RPS), for driving the expansion of renewable generation. In these RPS compliance markets,[3] retail electricity suppliers and utilities are mandated to purchase a defined (usually increasing) percentage of their electricity supply from renewable sources. These buyers are generally referred to as “compliance buyers,” and they are required to either produce renewable electricity themselves, where allowed, or buy RECs in order to satisfy their RPS requirements. If these buyers do not meet the RPS requirement, they are required to pay an Alternative Compliance Payment (ACP), a non-compliance fee that acts as the price ceiling for RECs within a given compliance year.
Demand within a compliance market is set by the RPS and generally increases year over year. If demand is high and supply (renewable energy projects producing RECs) is low, REC prices will rise towards the ACP. As more renewable energy gets built within the market, REC supply will increase, and REC prices will decline.
Renewable energy projects that do not sell RECs into compliance markets can still sell RECs to businesses, homeowners, governments, and non-profits who are interested in purchasing these RECs on a voluntary basis. These voluntary customers may purchase voluntary RECs to meet their renewable procurement goals, or to combine these RECs with “brown” electricity from coal and other fossil fuels and “green” their energy supply. If a family purchases green energy through their utility or retail energy supplier, this supplier is likely combining their preexisting brown electricity with voluntary RECs to offer renewable energy to customers.
Voluntary market pricing has been increasing over the past couple of years, largely driven by corporate appetite for RECs to meet Environmental, Social, and Governance (ESG) goals. Unlike the compliance markets, the pricing in a voluntary market is not tied to an ACP. It functions more similarly to a traditional market; as demand for renewable electricity goes up (relative to supply), prices follow until supply begins to meet that demand. Conversely, as demand for RECs goes down, so do prices. Increased corporate demand has helped incentivize the development of renewable energy projects in non-compliance markets, providing another revenue source for these projects.
The owner of a renewable energy project can either sell the electricity and the RECs produced by the project together (called a “bundled” product) or sell the electricity and RECs separately. The value of a REC can vary depending on the type of renewable project that produced it, the duration of the contract to purchase it, whether the RECs are being sold into a compliance market or a voluntary market, and what the ACP – essentially the price ceiling in compliance markets – is set to.
For example, solar RECs are generally sold at a premium; longer duration contracts are usually signed at lower prices; and RECs generally trade at higher prices in compliance markets than in voluntary markets. Prices in compliance markets range from $3 per REC for some types of technologies to hundreds of dollars for solar RECs in some compliance markets. Compliance RECs compose anywhere from 25-80 percent of a project’s revenue depending on the market. Voluntary RECs typically compose 10-20 percent of a project’s revenue.
The additional revenue earned by renewable generators through REC sales is essential for enabling renewable projects to compete with heavily subsidized fossil-fuel generators. The REC markets in the United States are some of the most sophisticated environmental markets in the world.[4] They are particularly important because of their integrity and their “traceability”—their ability to trace the production of renewable energy across multiple states, a variety of technologies, and across multiple jurisdictions, and millions of owners.
The REC markets also enable governments, businesses, and the public to directly participate in valuing renewable energy and assigning long-term value to renewable energy assets – driving the energy transition. While large organizations often negotiate complex virtual power purchase agreements (PPAs) to procure large volumes of renewable electricity and RECs bundled together, unbundled REC markets enable individuals and smaller organizations, like churches and schools, to also participate in the renewable energy market and purchase their electricity from clean sources even if they cannot procure electricity directly from onsite or offsite generation. Only if a customer owns and retires a REC can a renewable energy usage claim be made.
PART II. REC Markets and Additionality
How REC Markets Drive Additionality
The economic concept of additionality is a bit like the “but for” test in tort law: but for a specific action or intervention, a certain outcome would not take place. In the renewable energy industry, additionality generally means that but for a specific agreement to buy energy from a specific facility, that facility would not be built.[5] Many customers look to buy electricity from new renewable energy projects to create additionality.[6] Some have raised concerns that current REC markets do not effectively drive additionality or the development of new renewable generation. We disagree.
RECs and REC markets play a key role in driving new renewable energy deployment and projects by guaranteeing an income stream for new projects. Project owners earn a significant portion of their revenue by selling their project’s RECs, either to its electricity off-taker in a bundled sale or independently to third parties. In either case, revenues from REC sales often provide the critical cash flows that enable a project to move forward.
Large corporate and institutional customers drive around 25 percent of all large-scale solar build in the United States. Most of these customers procure their electricity through a financial instrument called a “virtual PPA.” Under a virtual PPA, a customer commits to purchase electricity from a specific project at a fixed price, and instead of delivering electricity directly to the customer, the project delivers its electricity onto the grid at a floating market price. The customer then pays to or receives from the project owner the difference between the fixed and floating prices, guaranteeing a fixed revenue stream for the project,[7] making it financeable and hence enabling the project to be built.
Even when these customers buy a bundled product (the purchase of both RECs and electricity) through a virtual PPA, they are still purchasing RECs. When the renewable project delivers electricity onto the grid, that electricity is sold through the RTO or to the local utility, and the corporate customer (buyer) is really transacting on a financial swap. The project then keeps the green attributes associated with generation in the form of the RECs and those RECs are sold to the customer for retirement.
Corporate buyers can (and should) still claim additionality (if that is their critical metric) if the virtual PPA enables new generation. However, these buyers should recognize that this approach is really a combination of a financial instrument plus a REC procurement; and should also recognize that other financial instruments may enable new renewable energy projects just as meaningfully. For example, if a customer’s goal is to provide a financeable income-stream for a project to drive new renewable energy capacity (additionality), they could alternatively purchase RECs from the project over a long period of time or finance the project with critical tax equity – or both.
Consider the following example: A project in the Southwest Power Pool (SPP) may have the opportunity to sell its RECs unbundled from the associated electricity. A project owner in the SPP might find that the voluntary REC market provides a better premium for its renewable energy than the utility - which drives healthy competition in regulated territories. A corporate customer hoping to procure renewable energy and drive new capacity could contract to purchase 10–15 years of RECs from the project, providing a financeable revenue stream and creating additionality similarly to a PPA. Further, enabling projects in SPP through such a REC strip may have a more profound impact on reducing carbon emissions than transacting on a virtual PPA in the California Independent System Operator (CAISO) given the higher carbon intensity of the SPP grid. More on that in a moment.
In short, by purchasing RECs, customers can provide critical cash flows to projects that would not have been financially viable otherwise. Over the last decade, Sol Systems has worked with over 20,000 customers to provide long-term REC financing, and by doing so has facilitated the development of tens of thousands of new projects – that is additionality.
RECs are Critical Regardless of Additionality
Of course, RECs can also be purchased from preexisting renewable energy projects. Although revenue generated by REC sales can be critical to an existing project’s continued operation, these purchases do not drive new construction and therefore generally are not associated with additionality. While we understand (and support) the preference for new build, preexisting RECs are also critical to the industry for a couple of reasons.
First, RECs enable project owners and customers to track and transact renewable energy in a market in which electrons are liquid and impossible to track. Second, investors rely upon merchant unbundled RECs (sometimes from the beginning and sometimes after a PPA term) in their underwriting to finance renewable energy projects just as they rely upon merchant electricity. The opportunity to eventually sell these “merchant” RECs is an essential basis for an owner’s initial investment in a new project. Although the decision today to purchase RECs from an operational renewable energy facility does not lead to new build (because the project has already been built) the current market for unbundled RECs was a core part of the initial underwriting and financing of the project when it was developed years ago.
Customers that purchase and retire RECs from preexisting renewable energy assets can still claim renewable energy use by offsetting their non-renewable or brown electricity consumption with merchant RECs. They should just be clear about what type of RECs they have purchased,[8] and about the fact that the REC purchase did not drive new or additional solar projects. Moving forward customers should also begin to disclose the carbon “benefit” of these RECs and compare that to the carbon footprint of their current electricity needs. A concept often referred to as emissionality or locational marginal emissions.
Part III: REC Markets and Emissionality
One criticism of REC markets is that they were designed to drive renewable energy, and have succeeded, but they are not calibrated to necessarily incentivize the outcome we are all trying to achieve – a net zero economy. This is a fair criticism, and one that becomes more cogent and important as we build more renewable energy. We should not be incentivizing new renewable energy build in a market that is already saturated with renewable energy the same way we incentivize renewable energy build in a market that relies upon coal. REC markets have been critical to supporting and catalyzing new renewable energy capacity. Moving forward, they must better capture, reflect and value the carbon emissions that this new renewable energy capacity is displacing – also referred to as “avoided emissions”.
The implicit environmental value of renewable electricity corresponds to the carbon and other pollutants associated with the non-renewable electricity it displaces, usually measured in CO2e.[9] The carbon intensity of a grid changes throughout the day and is a function of the fuel sources (coal, natural gas, bunker fuel) used by generation facilities on the grid at a specific time. Each fuel source has a CO2e impact, and the carbon footprint of each utility territory or RTO at a given moment is an amalgamation of these different generation facilities that are producing. Companies like Watt-Time are endeavoring to measure this impact in real-time.
REC markets are critical tools for this endeavor. These markets could (and should) tag each REC with the corresponding carbon intensity of the grid at the time and location of their production to provide customers with both the traditional MWh displaced metric, and also a CO2e metric measured in tons.[10] This is exactly the information customers need to measure, trace, and ultimately price the specific environmental impact of RECs with an aim to fully displace carbon on the grid. This approach to valuing renewable energy based on actual displaced emissions is often referred to as “emissionality,” and several large corporations are working to develop better methods of accounting for this metric.
While these changes would add complexity to existing REC markets, the benefits would be substantial.
First, utilities, retail energy suppliers, corporations and other consumers could better understand the actual carbon reduction associated with each REC and value RECs based on the corresponding CO2e value. This would incentivize renewable energy development in utility and RTO geographies with a higher carbon footprint, accelerating the transition to carbon-free electricity. This would also enable states to transition RPS programs into carbon-free programs by linking the language and metrics of carbon (tons offset) with the language and metrics of RPS markets (MWh produced and offset).
Second, the changes would help large corporations, academics, and the SEC who are struggling with how to integrate RECs into Scope 2 requirements because RECs measure MWhs of renewable energy produced, and Scope 2 requirements focus on carbon displaced. Customers can currently offset the electricity they consume with RECs without an understanding of the carbon intensity of the grid in which they operate, or the emissionality of the RECs that they procure. They may be procuring too many RECs or procuring too few.[11]
Tagging RECs with a carbon intensity (in tons of CO2e) would enable these customers to precisely match their REC procurement and carbon credit procurement under one framework to achieve verifiable carbon neutrality. Creating a 7-year transition period for customers and markets to integrate RECs based on their emissionality into their Scope 2 plans would enable both the market to evolve, and customers to better measure and plan for their carbon-free future.
Our Conclusion: A New Architecture for the Future
Over the past 14 years Sol Systems has helped develop or finance tens of thousands of renewable energy projects throughout the United States. In our experience, REC markets provide a proven and effective framework for valuing, incentivizing, and transacting with renewable energy resources. It is critical for customers, utilities, policymakers and other stakeholders to understand the significant potential of these markets and also possible areas of improvement. We urge academics and policymakers, especially those who may not actually be actively involved in the renewable energy industry, to listen to and engaging with the practitioners and participants currently building this industry.
We recommend three primary adaptations for our industry:
- Redefine & Broaden the Concept of Additionality: Additionality is a core principle for many large corporations seeking to catalyze the development of new renewable energy capacity. Additionality is not the same as emissionality, but it does drive the displacement of carbon-intensive fuel sources on the grid. We urge corporations to rethink how they define additionality with respect to renewable energy procurement and adopt a more flexible and broader approach that could incorporate long-term REC procurement and/or tax equity financing, which can represent 30-40 percent of a project’s financing needs. From our perspective, additionality should mean providing critical additional financial certainty for a project that enables that project to move forward; and can be achieved through multiple strategies.
- Integrate Emissionality into REC Markets: RTOs should move quickly to integrate emissionality into REC tagging and tracking so that market participants can better integrate carbon intensity and emissionality into their REC procurement. These RTOs should meet to discuss an appropriate and uniform application of the concept. Market participants, including NGOs and interested corporations, can help fund these efforts if needed. This effort should begin in the United States, but should be leveraged and replicated in other countries, beginning with those that are most critical to decarbonization. Emissionality gives us the tools and the language to talk constructively about renewable electricity production, RECs and carbon intensity interchangeably.
- Integrate REC Emissionality Into Scope 2 Requirements: We urge academics and policymakers to leverage and adapt preexisting REC markets to architect and achieve the carbon-free future we are all focused on creating. Current REC markets are efficient and transparent platforms to transact both RECs and related CO2e reduction. Rather than carving out REC procurements from Scope 2 compliance, as some have suggested, REC markets should be a key tool and instrument for implementation. Corporations currently offset their electricity and related carbon footprint with REC procurement. We recommend a 7-year ramp towards a framework where corporations reach their Scope 2 requirements through the CO2e of their REC procurement, a more precise methodology that bridges RECs (measured in MWh) and carbon (measured in CO2e). This enables the appropriate development of this market architecture.
[1] For scale, the average U.S. home uses around 7-10 MWh of electricity annually depending on size, location and consumption
[2] For example, PJM-GATS uses Energy Attribute Certificates to track the regional production of electricity by all generation types in 14 jurisdictions from Illinois to North Carolina
[3] 30 states and the District of Columbia currently have compliance legislation in place. Several other states have enacted voluntary programs
[4] The combined market for compliance and voluntary RECs in the United States is valued at $5 - $10 billion annually
[5] Additionality is a determination of whether an intervention has an effect when compared to a baseline. Interventions can take a variety of forms but often include economic incentives. The concept was initially used in carbon offset markets.
[6] Actually measuring the environmental impact of displacing this electricity in a certain location and at a certain time is a bit more complicated, and new “additional” build in an electricity market that has no carbon footprint does not provide environmental benefits
[7] There are situations where this can be reversed
[8] For example, “We have offset all of our electricity for this facility with renewable energy from an operating wind farms located in our utility territory.”
[9] Currently the environmental impact of electricity production and other human activities is measured in CO2e. This measures the impact of a given activity on global warming (the global warming potential) over a century and compares it to the same impact of one ton of carbon dioxide over the same period of time. This is an attempt to standardize and measure the impact of human activities on climate. Environmental markets must improve tracking and valuation of other pollutants, e.g., mercury, nitrogen oxides, and particulate matter. CO2e is a good start.
[10] Carbon intensity of the grid could be measured at the RTO level, at the utility level, or at the actual nodal level. The greater the specificity, the more precise the market can be in incentivizing localized environmental benefits, but the more complex the market tracking and systems need to be. We would suggest utilizing a RTO average as a start.
[11] Offsetting electricity consumption with RECs is a critical first step but does not entirely reflect the carbon intensity displaced by renewable energy or the carbon intensity of the electricity consumed. Customers could be over-purchasing RECs because the grid they are operating in is has a low carbon intensity compared to where they are purchasing RECs from; or under-purchasing RECs because the grid that they are purchasing RECs from has a low carbon intensity compared to where they are operating.