What are Renewable Energy Certificates (REC)?
Renewable Energy Certificates (RECs) are a market-based instrument that certifies the bearer owns one megawatt-hour (MWh) of electricity generated from a renewable energy resource. Once the power provider has fed the energy into the grid, the REC received can then be sold on the open market as an energy commodity. RECs earned may be sold, for example, to other entities that are polluting as a carbon credit to offset their emissions.
- RECs provide proof that the owner of an energy market instrument owns one MWh of renewable energy; they account for the amount of renewable energy that flows through the power grid.
- RECs can eventually be sold for profit to those looking to offset their carbon emissions or speculators betting on the value of energy credits.
- REC swaps consist of trading RECs to profit from the disparity between the buy and sell price; because many states have varying RPS standards, this increases opportunities to swap.
How Renewable Energy Certificates Work
A Renewable Energy Certificate (REC) acts as an accounting or tracking mechanism for solar, wind, and other green energies as they flow into the power grid. Since electricity generated from renewable energy sources is indistinguishable from that produced by any other source, some form of tracking is required.
This accounting and returning energy to the grid is necessary because electricity is difficult and expensive to store in batteries. So, most renewable-generated power, which is unused by the creator, is fed back into the power grid for use by other customers. The provider of renewable electricity, such as a homeowner with rooftop solar panels, will then receive a REC. Energy Certificates can be sold, but are typically used as a credit against their own power usage.