A Renewable Portfolio Standard (RPS) is a market-based mechanism, established by government policy, to encourage the generation of electricity from renewable energy sources. An RPS program requires that a certain percentage of electricity sold in a region be generated by renewable energy sources. Electricity providers must demonstrate that they have complied with the standard, or face significant fines. To comply, electricity providers must either generate clean (from renewables) electricity themselves or buy it from those that do. Or, they can buy just the renewable attributes from a renewable energy generator that is connected to the grid. The renewable energy attributes of electricity are packaged and sold as Renewable Energy Credits (RECs).
A Renewable Energy Credit (REC) is a certificate documenting that 1,000 kWh (1 MWh) of electricity has been generated using a renewable energy source connected to the grid. (RECs are also called "green tags" or alternative energy credits (AECs) and sometimes the "c" is for "certificate" rather than "credit." In all cases they are the same thing. What can I say? It's all new and we live in exciting times!)
It works like this, say you have a 5 kW solar electric system installed on your roof in Pennsylvania, and it's tied to the electrical grid. Your system generates about 6,000 kWH per year. You use whatever you need (instead of getting it from the grid) and send any extra back to the grid. (This process is called "net metering.")
Once the electricity is on the grid, it's all the same electricity (your electrons don't look or act any differently than those from a nuclear plant, wind farm or coal-powered plant). But, in our society, your electricity is special—it's from a renewable energy source. And, the "clean energy-ness" of your electricity has monetary value.
Now, let's be an electricity provider who is selling electricity to customers throughout your region. A local RPS program requires that some percentage, say 15%, of the electricity it sells must come from renewable energy sources. Depending on local regulations, the electricity provider may be generating its own electricity and/or buying it from others to resell to you. In some cases, one option to comply with the RPS program is for the electricity provider to make or buy its own renewable energy electricity.
But, there's another option—you are sitting out there, making clean electricity that you are using instead of getting it off the grid. Can the electricity provider make a deal with you so that your clean electricity helps it meet the RPS standards? Sure, it can! The electricity provider buys the "clean energy-ness" of your electricity from you. This is not the electricity itself, but the renewable energy attributes of the electricity. Then the electricity provider can report back to the RPS program that the company, in effect, paid you to generate electricity using renewable energy. The way this is done is through Renewable Energy Credits.
Your system generates 6,000 kWh per year (6 MWh), so you earn six RECs per year. You can sell these RECs to an electricity provider, and the electricity provider can use them to help prove that it is meeting the RPS requirement for clean electricity.
How much does the electricity provider pay you for the RECs? They pay the market price, based on supply and demand. Supply is the number of RECs available in the market and this is determined by the amount of electricity being generated using renewable energy at facilities with owners who choose to sell their RECs. Demand for RECs is determined by the RPS and the amount of electricity sold, a percentage of which must come from clean energy sources (per the RPS).
This process and market applies to renewable energy generators of all sizes and many different sources, such as wind, hydro, and biomass. A local hospital is installing a 250 kW system on its roof and is working now to reach a longterm agreement to sell its RECs at a fixed price. The system will earn about 300 RECs per year. Last year (2016), in PA the average price for a REC was $62.06 [3]. For the hospital, that's $18,618 per year. For the 5-kW homeowner, that will earn about 6 RECs per year, REC income would be $372 per year. And remember, a solar electric system has a life of 25 years or longer. The point is that REC income can be an important part of the financial analysis needed to secure financing and cost-justify renewable-energy generation projects of any scale. The opportunity to sell some or all of the RECs can make renewable energy projects cost justifiable that otherwise would not be.
When RECs are bought and sold to meet RPS standards, that is called the compliance market. Sometimes, however, people or organizations may choose to buy RECs simply because they want to use clean energy and can't buy it directly. They may do this for many reasons, including marketing value, image, principles of the group or its mission. I was personally affiliated with a large, annual, 3-day Renewable Energy Festival with hundreds of vendors and about 10,000 attendees. We generated and used clean electricity on-site as possible, but also bought electricity off the grid. Each year, we bought enough RECs to cover our electricity consumption—supporting a generator somewhere that is putting clean electricity on the grid. When a person or organization does this because they choose to (not because they are required to) it is called the voluntary market.
In Pennsylvania, renewable energy credits are called Alternative Energy Credits (AECs). The state RPS program is called the PA AEPS program. To see an example of how an RPS programs works...
Visit the PA AEPS program website [4].
Links
[1] http://www.epa.gov/greenpower/gpmarket/rec_longdescription.htm
[2] http://www.epa.gov/greenpower/gpmarket/rec.htm
[3] http://www.pennaeps.com/reports/
[4] http://www.pennaeps.com/aboutaeps/
[5] https://www.e-education.psu.edu/egee401/sites/www.e-education.psu.edu.egee401/files/Copy%20of%20AEPS-Requirements-by-Reporting-Year.xlsx