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

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RPS and RECs â&#x20AC;&#x201C; Managing an Increasing Regulatory Burden

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Commodity Technology Advisory LLC Houston TX and Prague CZ

www.comtechadvisory.com

RPS and RECs – Managing an Increasing Regulatory Burden

A ComTech Advisory Whitepaper

“While the use of Renewable Energy Certificates, or RECs, is an effective method of allocating the cost of Renewable Portfolio Standards (RPS) across the breadth of the market, the tracking and administration of those certificates places a significant burden on power suppliers, particularly smaller utilities such as municipals and cooperatives. As these standards increase in scope and amount of renewables mandated, the burdens increase proportionally, leaving many of these companies unable to effectively manage their business and regulatory requirements on spreadsheets.”

Introduction Renewable energy certificates or ‘RECs’ have become the currency of the renewable or green power industry, allowing power providers to expand their product offerings and offer ‘green’ power irrespective of whether or not they can physically generate it. Consumers can also be assured that should they choose to buy renewable power, in support of the renewables suppliers servicing the market, that the power they use 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. Essentially, 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 It is the separatability from the underlying physical electricity that actually creates the 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 due to their physical locations. The driving force behind the development of the REC and its underlying market has been the development of state level renewable portfolio standards or RPS. These either 1) mandate a certain level of electricity servicing the markets in that adopting state be from renewable sources, or 2) set voluntary goals for electricity sold in the states

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

RPS and RECs â&#x20AC;&#x201C; Managing an Increasing Regulatory Burden from renewable sources. As

A ComTech Advisory Whitepaper

Figure 1

of early 2012, 30 States and the District of Columbia had either

RPS

mandated

similar

renewable

programs; in addition, a further seven states had established voluntary goals (Figure 1)2. Under the current mandatory RPS programs, itâ&#x20AC;&#x2122;s estimated that

the current market

requirements are for up to 140

MWh

power,

which

renewable by

some

estimates is expected to grow to over 200 MWh within a couple of years. Much of the demand for meeting these renewable portfolio standards will be met by the renewable generation resources within the states; however, even within those state boundaries, physical renewable power may not be available on the gird for a particular marketer or utility due to geographic constraints. By utilizing RECs, that marketer can still offer consumers the option of certifiable green energy, or the regulated load serving utility in that state or region can meet their mandated renewable obligations.

How do RECs work? Renewable power generators produce two separate products - physical power and flows to the grid and RECs. With every 1,000 kwh produced, a new REC is created by that generator, and once created, the generator can bundle transfer the REC with the produced power, essentially certifying that power as a renewable product and receiving the premium that accompanies that designation. Alternatively, they may have chosen to 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:

http://www.eia.gov/todayinenergy/detail.cfm?id=4850

RPS and RECs – Managing an Increasing Regulatory Burden

A ComTech Advisory Whitepaper

The type of renewable generator that produced the power The date it 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, that 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 do allow RECs that were produced in other states to be utilized to meet their RPS programs requirements, though the eligibility will vary greatly and does impact the growth of liquidity in the RECs markets. While there is some exchange-based trading of RECs occurring, primarily on the Intercontinental Exchange, 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 in order 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.

A Look at one State’s Program North Carolina established a mandatory renewable standard in 2008, becoming the first (and still the only) state in the Southeast to adopt a Renewable Energy and Energy Efficiency Portfolio Standard (REPS). Under the new 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. The smaller rural electric cooperatives and municipal electric suppliers are subject to a 10% REPS requirement. In order 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 NC-RETS 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. Ultimately, the NC-RETS will integrate with all other renewable energy certificate tracking systems in the United States to allow for the import and export of RECs to and from North Carolina.

Meeting the Compliance and Tracking Challenge With the new renewables standards, North Carolina power utilities and cooperatives were faced with a significant compliance burden – a burden that the cooperatives were particularly unprepared and understaffed to meet. In response, the board of directors of 23 of the state’s electric cooperatives formed a green services company, GreenCo

RPS and RECs – Managing an Increasing Regulatory Burden

A ComTech Advisory Whitepaper

Solutions, Inc., in April 2008, to help them meet their energy efficiency and renewable energy goals and obligation under the new regulations. Today, GreenCo Solutions helps the electric cooperatives 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 current 22 member cooperatives. Like many of the other electric suppliers operating in states with RPS, GreenCo Solutions is 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 in ensuring each member cooperative can meet their REPS mandates. Unlike the larger utilities operating in the state, GreenCo 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 GreenCo’s membership and then 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 is sufficiently covered and positioned to meet their state obligations. Beyond many large long-term purchases of RECs for GreenCo’s full membership, the firm is also occasionally tasked with purchasing certificates at the request of its individual members, necessitating 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 must be managed as part of the combined portfolio for retirement in the state’s tracking system and in reporting to the Utilities Commission. According to Jay Nemeth, director of business operations for GreenCo Solutions, when the company first began operations, they were utilizing spreadsheet to track the acquisition, accounting and allocation of certificates to the member cooperatives. However, within a couple of years, the company knew it would inevitably outgrow the ability to use those spreadsheets to manage the complex tasks and analysis involved in their business. In order to address the company’s needs, they began a market search for a vendor supplied and supported REC portfolio management solution. After undertaking an extended search for a solution, the company discovered that most of the energy trading and risk management (ETRM) solutions from the largest vendors had little or no ability to address their particularly complex requirements mandated by under the NC-REPS. They did, however, find that Pioneer Solutions, a global ETRM & CTRM solutions and environmental management system (EMIS) software provider, did have the specialized solutions that addressed a majority of their needs and a technical infrastructure that could be customized to address GreenCo’s unique requirements. Copyright 2014, Commodity Technology Advisory LLC

RPS and RECs – Managing an Increasing Regulatory Burden

A ComTech Advisory Whitepaper

Mr. Nemeth described the process of selecting Pioneer 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. Pioneer’s REC Tracker system, once fully implemented, allowed us to not only capture and manage the processes involved in working with 22 member companies, 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 was started in late March 2013, and once live on Sept 1, 2013, “the system did what it needed to do,” according to Mr. Nemeth. “The implementation went well. Pioneer 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 to deploying and implementing the software, the team of GreenCo and Pioneer also worked to develop and implement a programmatic interface from RECTracker to the NC-RETS 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, Mr. Nemeth points 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.

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 finite hydrocarbon fuels for power generation. However, these standards are not without a cost either for the power consumers or the utilities that service those consumers. While the use of Renewable Energy Certificates, or RECs is an effective method of allocating those costs across the breadth of the market, the 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 amount 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 generally require additional capabilities outside of those core systems. Fortunately for these companies, there are a limited number of providers, such as Pioneer Solutions, that have focused on these issues and can deploy a system that will address the unique needs of this market.

RPS and RECs â&#x20AC;&#x201C; Managing an Increasing Regulatory Burden

A ComTech Advisory Whitepaper

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, whoâ&#x20AC;&#x2122;s 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 http://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 http://www.ctrmcenter.com. ______________________________________________________________________________________________________ 19901 Southwest Freeway Sugar Land TX 77479 +1 281 207 5412 Prague, Czech Republic +420 775 718 112 www.ComTechAdvisory.com Email: info@comtechadvisory.com