Generating a Project Revenue Stream
Understanding Renewable Energy Certificates (“RECs”)
Renewable energy certificates (“RECs”) are tradeable financial certificates and are equal to one megawatt of electricity, or an energy equivalent, that is generated by an eligible renewable energy resource. A REC represents the renewable energy attribute of the renewable energy produced by an eligible renewable energy facility. The REC can be sold in conjunction with or separately from the renewable energy creating what is known respectively as a “bundled” or “unbundled” REC.
The emergence of renewable energy compliance markets, which are based on the retirement of RECs for compliance, has created a market for RECs that in some cases did not previously exist. Electric service providers with an obligation under North Carolina’s REPS achieve compliance by retiring RECs that they either generate or purchase. For this reason, RECs have a quantifiable value and are increasingly contributing to a project’s revenue stream. As with any financial instrument, the value of a REC is based on the supply and demand for certain technology types resulting in a range of REC values that vary amongst technologies.
The attractiveness to utilities of purchasing bundled or unbundled RECs for compliance with North Carolina’s REPS is linked to the utility’s avoided cost rates. The relationship of RECs to North Carolina’s REPS cost caps is summarized by the following equation:
Bundled Renewable Energy Price (Energy + REC) – Utility’s Approved Avoided Cost Rate =
Incremental REPS Compliance Cost
Unbundled REC = Incremental REPS Compliance Cost
If the bundled renewable energy price is less than the utility’s approved avoided cost rate, then there is no impact on the utility’s incremental compliance cost and thus its REPS cost cap. Therefore as avoided cost rates increase, reasonably priced non-utility renewable energy projects become more attractive to utilities provided that the project cost do not increase in concert with the avoided costs.
For more information on the development of avoided cost rates, please see NCSEA's summary of the avoided cost process in North Carolina.
To be clear, RECs do not have to be retired for compliance with a renewable portfolio standard; they can also be voluntarily retired by the generator or purchaser. NCGreenPower is an example of a green power purchasing program that retires RECs outside of a compliance market.
Selling Renewable Energy and RECs in North Carolina
At this time, there are three primary options for selling renewable energy and/or RECs in North Carolina – power purchase agreements, net metering, and REC-only contracts.
Power Purchase Agreements
A power purchase agreement (“PPA”) is a contract entered into by an independent power producer and an electric utility for the sale and purchase of electricity. In North Carolina, the most common form of PPAs between renewable energy facilities and electric service providers are in the form of buy-all/sell-all contracts. In other words, the electric utility agrees to purchase all of the energy output and associated RECs from a renewable energy facility.
Another option for renewable energy generation owners that wish to use a portion of their renewable energy output to power their on-site facilities is to enter into a net metering agreement. Under a net metering agreement, facility owners receive a billing credit for any energy that the facility produces. North Carolina’s regulated utilities are required to offer a net metering rider to customer-generators. Over the years, this rider has been significantly improved primarily in part to NCSEA’s efforts.
Progress Energy Revised Net Metering Rider, May 1, 2009
Some of North Carolina’s electric membership corporations and municipal electric service providers also offer net metering agreements. Others providers are in the process of developing an agreement. The provisions of these the existing agreements may vary significantly from the net metering agreements offered by the regulated utilities. Customer-generators interested in participating in a net metering agreement may need to be willing to work with the provider to get an agreement in place.
At this time, NCSEA is aware of at least four EMCs offering a net metering agreement or renewable energy rate rider:
An additional option available for renewable energy generation owners is to sell unbundled RECs. Some of the utilities in North Carolina have put standard REC-only purchase offers in place.
If the generator is not interested in selling their RECs for compliance with the REPS, then another option that the generator can pursue is an arrangement such as with NC GreenPower.
NC GreenPower is a green power purchase program that purchases unbundled RECs from renewable energy generators. These RECs are not eligible for REPS compliance. Customer-generators that are accepted into the program generally enter into power purchase agreements with their electric service provider to sell the energy produced by their system and then sell the RECs to NC GreenPower.
Other Options: Leasing
An increasingly popular option for individuals and businesses to participate in renewable energy generation in North Carolina is a leasing agreement. This type of arrangement is likely to be attractive to those interested parties for whom owning a renewable energy generating facility is not an option. Generally, a renewable energy developer uses an individual or business’s property to install a renewable energy system at no cost to the property owner.
Of course, as with all of the options discussed in this section, there are a variety of leasing arrangements. In some arrangements, the property owner receives the direct benefits of the renewable energy system, such as using the system to offset the property’s energy use. Under other arrangements the property owner receives a standard payment for use of the property.
In North Carolina, Duke Energy has recently instituted a solar distributed generation program that is essentially a leasing arrangement.
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