RECs and Renewable Energy

June 6, 2018

Confusion abounds about renewable energy credits, known as RECs and to what extent Vermont’s renewable energy development is being helped or hindered by the REC market.

 

RECs

            Renewable energy portfolio standards (RPS) were created to quantify and promote renewable energy. Utilities in states with an RPS are required to have a certain percentage of renewable energy in their portfolio. The way utilities prove they have the required amount is to hold Renewable Energy Credits (RECs) which are a financial construct (certificates) representing the renewable attributes of generation. Every New England state has an RPS; although, requirements vary from state to state. RECs are traded on the New England energy market, and utilities that don’t meet their RPS requirements buy RECs to make up the difference. Together RECs and RPS facilitate the development of renewable energy throughout New England.

 

RECs and RPS and 2017 changes

            Confusion around RECs and renewable energy has arisen on two fronts. First, some people have confused RECs with the actual energy produced by renewable energy projects. They are not the same thing. Second, there has been confusion when comparing Vermont’s renewable energy development prior to 2017 with the new Renewable Portfolio Standard (RPS) that became effective that year. All Vermont utilities are required to have at least 55% renewable energy. This percentage increases gradually to 75% in 2032. Currently Green Mountain Power has 60% renewable energy and 90% is carbon free. Two smaller Vermont utilities are at 100% renewable. Note that Hydro Quebec makes up about 25% of most Vermont utilities power supply, and utilities are entitled to claim the renewable energy attributes toward their RPS.

 

            Prior to 2017 there was no RPS and no requirement for utilities to retire RECs; so, Vermont utilities sold RECs to other New England states. Those sales helped lower rates for all electric ratepayers as renewable energy projects were built here in Vermont.

 

            Large solar and wind developments such as Kingdom Wind provide electricity to Vermonters, but they do not count towards Vermont’s RPS if the REC’s are sold. However as RPS requirements are ramped up, a higher and higher percentage of RECs must be retired each year. That will assure that Vermont moves towards our overall renewable energy goals. While energy advocates believe Vermont is moving too slowly, Vermont’s RPS requirements are among the highest in the US.

 

RECs and Electrons

            Regarding RECs and the actual energy (electrons) that move along the grid, remember that RECs and electrons should not be equated with one another. While Vermont imports a substantial about of the electricity we consume, and nearly 25% of that is a non-renewable mix from the New England grid, it is not true that when RECs are sold out of state, Vermont is importing dirty energy as a substitute. Kingdom Wind and huge solar developments that came on line prior to 2017 do not support Vermont’s renewable energy goals. However those developments do reduce fossil fuel generation elsewhere in New England, reducing overall greenhouse gas production. In truth Vermont only produces a small proportion of our own energy. Currently approximately 1/3 of our electricity comes from Hydro Quebec and the beyond that, the bulk is purchased from the greater NE grid which is largely fueled with natural gas.

 

            Regarding renewable energy production that is fed directly onto the regional grid, electrons follow the laws of physics, not the peculiarities of the REC market. Electron flow to the end user is much like how water flows through a hose. We feed energy onto the grid (the big hose), and it is used by consumers along the way through lines to individual homes and businesses (in smaller hoses). Thus while RECs move around New England according to the market price and can be moving along multiple market paths at once, it is not possible for water to flow through a hose in two directions simultaneously. The same goes for electrons. Within Vermont’s local or regional grid, electrons are consumed reasonably closely to where they introduced. Thus, most of the energy from renewable sources is used in state even when RECs are sold, and as RECs are retired going forward that will help us move towards our long term renewable energy goals.

 

            Beyond this juncture, opinions of renewable advocates and Vermont’s utilities diverge, particularly regarding financing net metered generation.

 

Net-metering

            Net-metering is a program whereby qualifying renewable energy from solar arrays is fed onto the grid at the point of generation. Participating customers are paid an above market price for the energy that flows out to the grid, while receiving the market rate for the electricity consumed when their system is not generating as much as they use. Where opinions differ whether is whether increasing amounts of net-metering are beneficial to Vermont’s energy development or not. Above market subsidies make renewable energy more affordable for participants, enabling some homeowners to install solar energy systems they otherwise could not afford. But those subsidies represent a hidden cost to non-participating customers. According to GMP, net-metering subsidies result in millions of dollars of cost shifts born by other customers. In 2018, the added cost spread over all GMP customers will total $2.5 million. Over the time net-metering has been in place, GMP says their cost has been about10 times that.

 

            As a matter of policy, I am a strong supporter of our net-metering program. Prior to 2017 Vermont’s first net-metering program (known as SPEED) promoted solar development that would likely not have occurred. It worked. The program enabled Vermonters to install renewable energy systems while providing a remarkable stimulus to home grown solar energy developers. However, under SPEED, RECs were sold out of state, and those systems did not count towards our RPS goals. Nonetheless, in total Vermont has developed approximately 300 Megawatts of solar energy since these efforts began.

 

Another Perspective and a Controversy

            The legislation that led to the 2017 RPS also directed the PUC to recalibrate the above market premiums paid to net-metered customers. The move was requested by the utilities because, as noted above, utilities argued that subsidies were causing Vermont electric rates to be higher than necessary. The result was a reduction of about 3 cents/kW for systems installed after January 1, 2017. Bear in mind, part of the PUC’s responsibility is to assure that utility rates are reasonable, competitive and support the Vermont economy. According to GMP, net-metering systems that are 15kW or less (rooftop solar for instance) represent 92% of all applications but only 28% of all net-metered capacity. These systems are almost exclusively true net-metering, i.e. providing electricity directly to a home or business. However, projects between 15kW and 500kW represent about 8% of applications but represent 72% of capacity. These systems predominantly feed power directly onto the grid and are essentially merchant generators.

 

            As a matter of sound public policy, the legislature created net-metering subsidies in order to promote renewable energy and to make it more affordable to small scale developers. The subsidies were expanded/included projects of up to 500 kW to further renewable development. The recent reduction in subsidies caused a slow-down in net-metered solar development and was particularly disconcerting to renewable energy advocates.

 

            Advocates for renewable energy and opponents of pipeline infrastructure expansion alike have been disappointed with PUC decisions. However, the PUC operates as a quasi-judicial body rendering its decisions according to the rules and laws it must follow, and it is the legislature that writes the statutes that direct the  PUC. To the extent that a different outcome is desired, the initiative starts with the legislature if different guidance is to be provided to the PUC. That will require all the parties involved work cooperatively together toward a common outcome.

 

Fiscal Year 2016 Preliminary Sources, before sale of Renewable Energy Credits

 

 

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