Using RECs To Finance Projects | Norton Rose Fulbright

By Samuel R. Kwon, Roy S. Belden and Tamara Stevenson

Renewable energy credits, or RECs, are becoming an additional source of financing for windpower, biomass and other renewable energy projects. However, a proceeding before the Federal Energy Regulatory Commission could award such credits to the utilities that buy the output rather than the generators that own the projects.

RECs and RPS

RECs are credits at the state level for using renewable fuels, like wind, biomass or sunlight, to generate electricity. To date, 13 states have adopted some form of “renewable portfolio standard,” or law requiring utilities in the state to ensure that a certain percentage of their electricity comes from renewable sources. Five other states have adopted voluntary goals to increase the use of renewable fuels. At least another five states are considering adopting RPS-type legislation. (See the table of RPS states below). Once a state adopts an RPS, then utilities in the state that do not meet the requirements of the RPS are assessed penalties.

Currently, there is no separate federal renewable portfolio standard (although Congress is considering whether to adopt one as part of the energy bill), and RPS requirements in the 13 states vary from state to state. For instance, Arizona’s RPS applies to all utilities and rural electric cooperatives.  The Connecticut RPS applies to utilities, but a utility does not count as part of its electricity output electricity that it purchases from wholesale suppliers under a “standard offer.”

The percentages of electricity that must come from renewable sources also vary from state to state and over time. For example, Arizona requires utilities only to generate 1% of electricity from renewable fuels by 2005 and 1.1% by 2007.  Texas requires that there be statewide at least 1,280 megawatts from renewable fuels by 2003, 1,730 megawatts by 2005, 2,280 megawatts by 2007 and 2,880 megawatts by 2009.

What qualifies as a renewable fuel also varies from state to state. In all states, wind and biomass qualify. Most states also accept some form of solar energy. However, only some states allow landfill gas, fuel cells, waste, geothermal energy, wave, hydroelectric and tidal energy.

Issues With RECs

A utility can meet its obligation under a state RPS by generating the electricity itself or by purchasing power from a third party. Alternatively, the utility can simply buy renewable energy credits from a third party.

A utility hoping to satisfy its RPS obligations using purchased RECs faces at least three issues.  The first issue is whether the state’s RPS allows the utility to use RECs in the first place to satisfy its RPS obligations by permitting renewable generators to transfer RECs. Not all states with RPS or similar programs allow the transfer of RECs for such purposes. For example, Connecticut, Massachusetts, Nevada, Texas and Wisconsin currently allow renewable generators to sell their RECs as long as the transaction is reported to the entity administering the RPS. New Jersey and Iowa do not.