what are RECs?

What Are Renewable Energy Certificates (RECs)?

Renewable energy certificates, or RECs, represent the environmental benefits of one megawatt hour (1MWh) of electricity generated from a clean energy source, such as solar or wind.

RECs reduce financial risk for commercial solar, wind and energy storage projects. They can also help projects become eligible for offtaker insurance, as described below.

What Are RECs?

Two types of value are created by commercial solar or wind powered projects:

  1. Electricity: Low cost electricity is generated.
  2. Environmental benefits: Clean energy creates environmental benefits such as reduced pollution, eliminated greenhouse gas emissions, etc.

However, tracking the latter, the environmental benefits, is important because the utility grid cannot distinguish between “dirty” and “clean” electrons.

This is where renewable energy certificates (aka “RECs”, “renewable energy credits” or “green tags”) come in.

RECs help identify and track the environmental benefits of the “clean electrons” generated by renewable energy projects. 

A REC represents one megawatt hour (aka MWh or 1000 kilowatt hours) of clean energy generated and sent to the grid from a renewable energy source.

For each clean MWh of electricity generated, a REC can be certified, packaged up and sold separately to a buyer who wants – or needs – those environmental benefits.

The market of buyers of RECs includes utilities, companies, or individuals who want or need to go green… REC buyers fall into two camps:

  1. Voluntary buyers of RECs: ESG minded companies such as Apple, Starbucks and Facebook purchase renewable energy certificates to offset carbon emissions and/or achieve carbon neutrality. Bitcoin mining facilities increasingly purchase RECs to offset the non-renewable energy composition of their mining and to make bitcoin greener.  Individuals and private organizations and companies also buy RECs to ensure that the electricity they use is from renewable sources.
  2. Compliance buyers of RECs: Utilities purchase renewable energy certificates to comply with renewable portfolio standards (RPS) requirements. RPS requirements mandate that certain states, such as California and New York, produce a certain percentage of their electricity from renewable sources.

This means the buyer of the REC may not be the same as the buyer of the electricity being generated.

However, to the financier, the offtaker (buyer of clean electricity) is as important as the REC buyer. 

If an offtaker’s credit is sub-par, RECs can play a role in helping you close a deal…

RECs dramatically improve the underwriting profile of your renewable energy project, such as a PPA, enabling your project to qualify for offtaker insurance, as described below.

How Renewable Energy Certificates Reduce Project Risk

Solar project developers of power purchase agreement (PPA) projects, sale leasebacks, partnership flips, etc. can use renewable energy certificates to reduce renewable energy project risk in two ways:

  1. Diversify income streams: In addition to the sale of clean energy, renewable energy projects offer financial incentives, such as the investment tax credit (ITC) and MACRS accelerated depreciation. Long-term REC purchase agreements from a utility diversify the income streams beyond the sale of clean energy to an offtaker. This reduces the risk to a lender or investor that revenue forecasts, which can stretch out for decades, may fail to materialize.
  2. Improve financial profile and insurance eligibility: RECs make projects more attractive to financiers in their underwriting and may help with eligibility for offtaker insurance. Offtaker insurance can reduce project cost of capital because it guarantees the payment streams to a lender (or investor such as tax equity) from the offtaker for up to ten years. If you have an offtaker with bad credit, a low-credit rating or no rating, but the project qualifies for RECs to be purchased from a utility, this can help with eligibility for offtaker insurance. 

Benefits of offtaker insurance include:

  • One time payment
  • Eases underwriting process 
  • Makes financing applications more attractive to lenders and investors
  • Increases loan to value (LTV)
  • Reduces debt service coverage ratio (DSCR)
  • Improves project economics
  • Eliminates need for letter of credit, guarantees, excess reserves, etc.

Summary

To summarize, renewable energy certificates make projects more financially viable. 

RECs also increase lender confidence and help with eligibility for offtaker insurance by guaranteeing cash flows from offtakers for up to 10 years.

At this time, long term REC sale agreements in states such as Connecticut, New York, Massachusetts and Maine are quite compelling and competition for deals is greater than ever.

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