What's a Green Tag?
Green tags/Tradable Renewable Energy Certificates
Buying tradable renewable energy
certificates (RECs) is not unlike buying green power. The difference lies in
the fact that RECs were previously never identified as such, because buyers of
green power always assumed that the environmental benefits of green power
accompanied the electricity itself.
But as we know, green power is not actually
delivered to the purchaser's meter. Instead, it flows into the local or
regional electricity grid. The sale of RECs simply acknowledges as much, making
it possible to buy virtual green power anywhere--even if our electricity
supplier doesn't offer it.
What is a tradable renewable energy
certificate?
Imagine that each megawatt-hour produced has
a conceptual label, or "tag," attached to it. The tag describes the
attributes of the electricity: its selected environmental impacts, and the
resources that generated it. But renewable energy sources typically have fewer
environmental impacts. Therefore, a so-called "green"
tag--representing the benefits of using renewable energy in terms of the
pollutants avoided--is more desirable than a "dirty" tag, assuming
consumers can discern the difference.
Here referred to as a tradable renewable
energy certificate, each green tag represents the premium value of one
megawatt-hour of certified renewable power generation. For example, each
megawatt-hour of electricity produced by a wind plant displaces the energy and
associated pollution from the marginal generator, usually a fossil fuel plant.
The premium value of RECs compensates for
the extra costs associated with generating green electricity, leveling the
playing field for green energy to compete with generic energy. RECs also create
revenue for green providers, and, most importantly, an incentive for cleaner
energy production.
Who's using RECs?
Companies, municipal utilities and
non-governmental organizations as diverse as PG&E's National Energy Group,
Pacificorp, Sterling Planet, Waverly Power & Light, and the Bonneville
Environmental Foundation have already begun to sell and promote RECs. On the
demand side of the market are buyers that vary from the U.S. General Services
Administration to Kinko's.
RECs are used in
How old is the market for RECs?
The market is still in its infancy. While
the concept of separating electricity from its benefits is relatively new, we
nonetheless have experience in trading environmental benefits through sulfur
dioxide emission allowances or nitrogen oxide emission reductions credits.
Congress established this practice with the 1990 Amendments to the Clean Air
Act, in an attempt to reduce air pollution.
What does "unbundling" mean?
The first step in strengthening the market
for RECs is to recognize that, in some instances, the actual electricity has
been separated from its environmental benefits. The act of separation is know
as "unbundling."
A consumer can buy RECs and electricity from
two different sources: the RECs from a renewable generator, the electricity
from an energy service provider. An energy service provider that buys wholesale
generic power, meanwhile, can make environmental claims about what it sells by
purchasing unbundled RECs and re-bundling them with the commodity of generic
electricity to create a bundled green power product.
What is meant by
"disaggregation"?
Taking the concept one step further, imagine
that we can disaggregate a certificate into its component attributes, and trade
those attributes separately. For example, a wind generator might sell part of a
certificate representing carbon dioxide reduction to one party, and another
part of the certificate representing nitrogen oxide reduction to another party.
The question remains, however, as to whether the remaining attributes--wind
power and sulfur dioxide reduction, for example--can be sold as a REC in a
green power market. Because certificate trading is still evolving, the National
Wind Coordinating Committee has developed REC principles and guidelines, and
the Center for Resource Solutions is formulating certification standards for
tradable RECs (they call them "T-RECs").
What are the risks of accepting RECs as a
tradable resource?
One risk is the potential for fraud without
a certificate registry or REC tracking system.
Consumer advocates and market participants
have also warned of potential liabilities stemming from misleading claims about
what type of electricity each REC really represents, or even suppliers making
multiple claims on the same REC. In addition, companies must comply with
truth-in-advertising laws. The National Association of Attorneys General has
already issued guidelines for marketing green electricity.
To avoid these problems, REC providers such
as National Energy Group and the Bonneville Environmental Foundation have
adopted a full disclosure policy, telling consumers up front that they are
selling the RECs or benefits of green electricity and not the electricity
itself. Providers thus aim to protect their own credibility by clarifying that
the RECs have been unbundled from the electricity; and by stating where, when
and what energy source produced it.
Market analysts who have tried to anticipate
potential risks have pointed out that explaining the REC concept to the average
consumer might cause confusion, undermining the credibility of the market. In
fact, some research shows that consumer confidence in the veracity of the label
information declines when tradable certificates are explained to them. (1) They
had a harder time understanding the verification method for tradable certificates
than for contract tracking. Some observers believe that consumers don't want to
know the details about how RECs trading and tracking work. Various stakeholders
need to know and support the concept, but it is information overload for the
average consumer.
The balance between full disclosure and not
overloading consumers with unwanted information may be in this: If selling RECS
only, a marketer should be clear and upfront about it, erring on the side of
full disclosure. If selling commodity electricity bundled with RECs, as in a
delivered green power product, a marketer should explain that consumers don't
get green kWh delivered to their meters but instead cause green power to be
delivered to the grid. This is essentially the same explanation given to consumers
for traditional bundled green power products. This skips the details, which can
be made available on websites.
A Broader View of Certificates
Although RECs focus on trading renewable
energy certificates only, it is important to remember that identifying the
attributes of each kilowatt-hour (tags or certificates of any stripe or color)
supports information disclosure requirements as well. This has the advantage of
placing accurate information about power sources in front of consumers,
educating many in this passive way.
If every kWh requires a tag identifying its
generation type, location and emissions characteristics, verification for
product labeling purposes is made easy. The
Geographic scope of trading
One of the great advantages of RECs is that
they can be bought and sold over great distances because there is no physical
constraint of reliance on transmission grids. Hence
But is this really a great advantage? Will
consumers care where their certificates are created? Some consumers concerned
about climate change may recognize that avoided greenhouse gases provide global
benefits, and hence the location of the emission-free generation doesn't
matter. On the other hand, there are many consumers who are motivated by a
desire for cleaner air (a local benefit) or for regional renewable energy
development.
One option is to accept RECs generated in
other regions (or countries for that matter) if it is accompanied by the
delivery of electricity into the regional grid where the RECs are ultimately
used. This would ensure the displacement of some regionally produced
electricity, and the regional environmental benefits of that displacement. Such
a restriction, however, limits the flexibility of RECs trading, and the
liquidity of RECs markets.
Relating to this regional deliverability
question is the recent issuance of several FERC orders that require the
formation of larger regional transmission organizations. Larger regional
markets would make it easier to deliver commodity electricity to the region
where the RECs are sold, but might also dilute the credibility of local
environmental benefit.
One solution is simply to require disclosure
of where the energy is generated, both as a general rule for electricity
labeling and specifically for RECs, and let consumers decide if it matters to
them.
International experience
In
To address this problem, there is an effort
underway to create a common platform for certificate trading at the continental
level. The generation information system being developed in New England may
fulfill a similar function for the six New England states, but it is not at all
clear that different regional systems that may be created in the
In addition, states or region in the
More information
www.nationalwind.org
www.resource-solutions.org/TRCs.htm
www.purewind.net
www.sterlingplanet.com
www.waverlyia.com (Waverly Light &
Power/Iowa Energy Tags)
1. Herman, M. and B. Roe, Consumer Research
on Tracking Approaches and Product Versus Supplier Labeling. The National
Council on Competition and the Electric Industry, October 1998.
Please click on
the following for additional information.
Greenhouse Gas Reductions
Voluntary Reporting of Greenhouse Gases Program
Turn Your Power Green - We Can Do It!
What's Green Power?
EPA's Green Power Partnership
Tennessee Power Company
Phone: (423) 624-0852
Fax: (423) 624-4906
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