An examination of the market for renewable energy credits

Concerns over increasing energy prices and global climate have led to the proliferation of Renewable Portfolio Standards (RPS). An RPS is a form of regulation that is passed by a state and requires electric utilities to generate a minimum amount of electricity from renewable technologies by a specified future date.  In order to prove compliance with the RPS regulation established by the state legislature, an electric utility must produce Renewable Energy Credits (RECs) to a state regulatory commission. One REC represents one megawatt hour of electricity generated from renewable technologies. As the market for tradable RECs develops, it becomes increasingly important to examine the scope and effects credit trading may have on energy production and prices. Markets for RECs are complex and designed by the intricacies of RPS mandates. RECs serve as an additional source of revenue for renewable generators. The price of renewable energy is equal to the price of the unit of energy generated plus the premium from the sale of the REC. Thus RECs serve as an incentive to invest in renewable technologies. Equilibrium prices of RECs will vary across states. This is due to differences across RPS, including ultimate goals, eligible technologies, specific carve-outs, resource endowments, in-state generation requirements and the intermittency of renewables.  As credit trading has had minimal experience to date in the United States, this paper serves to present a detailed description of the emerging market for RECs, and discuss possible implications it may have on policy implementation, investment in renewable energy production, and prices to the consumer.  The paper examines the New Jersey Solar Renewable Energy Credit (SREC) market, in particular.