RPS and RECs – Managing an Increasing Regulatory Burden by CTRM Center

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RPS AND RECS

MANAGING AN INCREASING REGULATORY BURDEN

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RPS and RECs – Managing an Increasing Regulatory Burden

A ComTechAdvisory Whitepaper

INTRODUCTION Renewable energy certificates or ‘RECs’ have become the currency of the renewable power industry, allowing power providers to expand their product offerings and offer ‘green’ power irrespective of whether or not they can physically generate it. RECs also assure consumers who opt to buy renewable power, that that power has either come directly from a renewable generator, or if a renewable generator is not servicing their facility, that it is offset in the market by power from a renewable source, such as wind, solar or hydro, in another geographic area. As described by the US EPA, a “REC represents the property rights to the environmental, social, and other nonpower qualities of renewable electricity generation. A REC, and its associated attributes and benefits, can be sold separately from the underlying physical electricity associated with a renewable-based generation source.”1 1

By separating nonpower qualities from the underlying physical electricity, RECs create value and benefits for both the producer of green power, whose investment is supported by selling RECs, and consumers who wish to enjoy the benefits of green power but who may not have direct access to renewable power.

http://www.epa.gov/greenpower/gpmarket/rec.htm

RPS and RECs – Managing an Increasing Regulatory Burden

A ComTechAdvisory Whitepaper

The driving force behind the development of the REC RE growth over the next decade. Much of the demand and its underlying market has been the development for meeting these renewable portfolio standards will be of state level renewable portfolio standards (RPS). met by the renewable generation resources within the The standards either 1) mandate a certain level of states; however, even within those state boundaries, electricity servicing the markets in that adopting state physical renewable power may not be available on the be from renewable sources, or 2) set voluntary goals grid for a particular marketer or utility due to geographic for electricity sold in the states from Figure 1 – US Renewable Portfolio Standards renewable sources. As of September 2020, 38 states and the District of Columbia had established an RPS or renewable goal, and in 12 of those states (and the District of Colombia), the requirement is for 100% clean electricity by 2050 or earlier. (Figure 1)2. Lawrence Berkeley National Laboratory estimates that under the current mandatory RPS programs, the current RPS demand growth from 2019 through 2030 will require roughly 90 GW of new renewable energy (RE) capacity and will require total U.S. non-hydro RE generation to reach 17% of electricity sales (compared to 12% in 2019)3. Relative to US Energy Information Agency (EIA) projections, this amounts to roughly one-third of projected

2 3

constraints. By utilizing RECs, marketers without direct access to renewable generation can still offer consumer the option of certifiable green energy, or the regulated load serving utility in that state or region can meet their mandated renewable obligations.

http://www.eia.gov/todayinenergy/detail.cfm?id=4850 https://emp.lbl.gov/publications/us-renewables-portfolio-standards-3

RPS and RECs – Managing an Increasing Regulatory Burden

A ComTechAdvisory Whitepaper

HOW DO RECS WORK? Renewable power generators produce two separate products - physical power and RECs. With every 1,000 kwh produced, a new REC is created by that generator, and once created, the generator can bundle the REC with the produced power, essentially certifying that power as a renewable product and receiving the premium that accompanies that designation. Alternatively, power producers can separate the two products, selling their generated power without the certificate and receiving the rates that would be applicable for non-green electricity. They can then sell that REC in the secondary market, allowing generators or marketers without access to physical renewable power to sell a green energy product to their customers. Each REC produced is effectively an accounting of the power generated, and will generally contain the following information: • The type of renewable generator that produced the power • The date the certificate was created (its vintage) • The date the generator was first put into service or its vintage • The physical location of that generation unit Once created, the REC becomes a tradable commodity and can, as previously noted, can be sold with the physical power or separated for sale in the RECs trading markets. Some states allow RECs that were produced in other states to be utilized to meet their RPS programs

requirements, though the eligibility varies greatly and impacts the growth of liquidity in the RECs markets. While there is some exchange-based trading of RECs occurring, primarily on the Intercontinental Exchange (ICE), most RECs are traded bilaterally or over the counter (OTC), and generally on a periodic basis. In fact, most RECs are purchased in bulk, with the regulated load serving utilities purchasing the majority directly from renewable energy generators to meet their RPS requirements. Other RECs are purchased by electric cooperatives - smaller utilities that operate primarily in rural areas. Brokers and aggregators also operate in this market, servicing utilities, industrial consumers and power marketers who purchase the certificates to service their green energy programs.

RPS and RECs – Managing an Increasing Regulatory Burden

A ComTechAdvisory Whitepaper

A LOOK AT ONE STATE’S PROGRAM North Carolina established a mandatory renewable standard in 2008, becoming the first state in the Southeast to adopt a Renewable Energy and Energy Efficiency Portfolio Standard (REPS). Under this law, investor-owned, load serving utilities in North Carolina are required to meet up to 12.5% of their energy needs through renewable energy resources or energy efficiency measures. Smaller rural electric cooperatives and municipal electric suppliers are subject to a 10% REPS requirement. To ensure compliance and proper management of the REPS, the North Carolina Utility Commission established the Renewable Energy Certificate Tracking System or NC-RETS in 2010. The NC-RETS function is to issue and track renewable energy certificates and energy efficiency certificates (EECs) created within the state. Registered renewable energy producers use NCRETS to create RECs (in digital form) that meet the

requirements of North Carolina’s portfolio standard, and the state’s electric utilities use the system track their activities related to, and demonstrate compliance with, the renewable energy portfolio standard. The NCRETS is currently working to integrate with all other renewable energy certificate tracking systems in the U.S. to allow for the import and export of RECs to and from North Carolina.

MEETING THE COMPLIANCE AND TRACKING CHALLENGE With the renewables standards, power utilities and cooperatives in states with mandatory standards are faced with a significant compliance burden – a burden that cooperatives may particularly unprepared and understaffed to meet. In some cases, these electric cooperatives have joined forces to form “green services” companies as leverage improved economies of scale to help them meet their energy efficiency and renewable energy goals and obligation under the new regulations. One such green services company in North Carolina was founded to help the electric cooperatives in the state develop energy efficiency programs, evaluate

renewable energy projects, and meet regulatory and compliance obligation and milestones, including the purchasing and management of RECs for each of its

RPS and RECs – Managing an Increasing Regulatory Burden

almost two dozen member cooperatives. Like many of the other electric suppliers operating in states with RPS, this firm was faced with managing a complex array of tasks and issues, from helping the electric cooperatives develop energy efficiency programs to evaluating renewable energy projects and meeting regulatory and compliance milestones, including the purchasing and management of the RECs that are vital to ensuring each member cooperative can meet their REPS mandates. Compared to larger utilities operating in North Carolina, this new green services firm faced some unique challenges in managing their business. The largest of these was the requirement to manage their operations at two separate levels: 1. the purchase of RECs for the whole of their membership and the management, tracking and valuation of that inventory on an aggregated basis, and 2. the need to disaggregate and allocate that portfolio of RECs to each member based on their needs, ensuring that each individual member can meet their state obligations. In addition to executing many large long-term purchases of RECs for their members, the firm is also occasionally tasked with purchasing certificates at the request of its individual members. These requests necessitate the tracking of those individual purchases, including the specific assignment of the RECs to member companies within their respective aggregated portfolios. Further, once allocated to those members, the certificates

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must be managed as part of the combined portfolio for retirement in the state’s tracking system and in reporting to the state’s utilities commission. As is often the case, when the company first started operations, they were utilizing spreadsheet to track the acquisition, accounting, and allocation of certificates to the member cooperatives. However, the company knew the complex tasks and analysis involved in their business would soon outgrow the capabilities of those spreadsheets. To address the company’s evolving needs, they began a market search for a vendor supplied and supported REC portfolio management solution. After an extended search for a solution, the company discovered that most of the energy trading and risk management (ETRM) solutions from the other vendors had little or no ability to address their complex requirements mandated by the NC-REPS. However, one options, RECTracker from Hitachi Energy (previously known as Pioneer Solutions), a global ETRM & CTRM solutions provider, had the specialized solutions that addressed a majority of their needs and a technical infrastructure that could be customized to address their unique requirements. Their representative described the process of selecting Hitachi Energy’s RECTracker as follows, “They demonstrated a system that allowed customization to capture the deal and the intent….it allowed us to take the aggregated deal apart for allocation to our member companies and then re-aggregate the RECs for reporting and retirement purposes. The system, once fully implemented, allowed us to not only capture

RPS and RECs – Managing an Increasing Regulatory Burden

and manage the processes involved in working with our member companies, but it also allowed us to optimize our portfolio and ensure we were best able to meet our obligations to those members.” The implementation of REC Tracker required only about 5 months to complete and, “the system did what it needed to do,” according to the company. “The implementation went well. They developed the detailed specs prior to building out new capabilities or trying to populate data. The company consistently provided quick responses to issues or questions that arose, ensuring the project stayed on plan.” In addition

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to deploying and implementing the software, the combined team also worked to develop and implement a programmatic interface from RECTracker to the NCRETS system, the first such interface to that system that allowed the automated sending and receiving of REC data to an external solution. In highlighting additional advantages they found in using the RECTracker system, the company pointed to the ability for users to produce ad hoc reports, giving those users and the company’s leadership deep access to the data and information contained within the system.

RPS and RECs – Managing an Increasing Regulatory Burden

A ComTechAdvisory Whitepaper

SUMMARY State level Renewable Portfolio Standards do serve a positive social function, helping to support the growth of renewable energy and reducing the US’s dependency on fossil fuels for power generation. However, these standards come at a cost to power utilities and the customers they serve. While the use of RECs is an effective method of allocating those costs across the breadth of the market, tracking and administration of those certificates places a significant burden on power suppliers, particularly the smaller utilities such as municipals and cooperatives. As these standards increase in scope and volume of renewables mandated, the burdens increase proportionally, leaving many of these companies unable to effectively manage their business and their regulatory

requirements on spreadsheets. Even for those with an effective and modern ETRM solution, the unique nature of emissions programs and renewables standards are extremely difficult to model and often require additional capabilities outside of those core systems. Fortunately for these companies, there are a limited number of providers, such as Hitachi Energy, that have focused on these issues and can deploy a system that will address the unique needs of this market.

ABOUT HITACHI ENERGY Hitachi Energy is a global technology leader that is advancing a sustainable energy future for all. We serve customers in the utility, industry and infrastructure sectors with innovative solutions and services across the value chain. Together with customers and partners, we pioneer technologies and enable the digital transformation required to accelerate the energy transition towards a carbon-neutral future. We are advancing the world’s energy system to become more sustainable, flexible and secure whilst balancing social, environmental and economic value. Hitachi Energy has a proven track record and unparalleled installed base in more than 140 countries. Headquartered in Switzerland, we employ around 38,000 people in 90 countries and generate business volumes of approximately $10 billion USD.

The Energy Planning and Trading portfolio comprises the following integrated offerings for its customers: • Energy Trading and Risk Management solutions • Energy Market Analysis Software • Market Intelligence Data • Energy Market Outlook • Strategic Advisory Services www.hitachienergy.com

ABOUT Commodity Technology Advisory LLC Commodity Technology Advisory is the leading analyst organization covering the ETRM and CTRM markets. We provide the invaluable insights into the issues and trends affecting the users and providers of the technologies that are crucial for success in the constantly evolving global commodities markets. Patrick Reames and Gary Vasey head our team, whose combined 60-plus years in the energy and commodities markets, provides depth of understanding of the market and its issues that is unmatched and unrivaled by any analyst group. For more information, please visit:

www.comtechadvisory.com ComTech Advisory also hosts the CTRMCenter, your online portal with news and views about commodity markets and technology as well as a comprehensive online directory of software and services providers. Please visit the CTRMCenter at:

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