How Blockchain Adds Value to REC Market?

The UN Climate Change Conference, COP26, is well underway at the moment in Glasgow, Scotland. The call for meaningful action to tackle the rapidly worsening climate change is now coming from all sectors. Never before has such an emphasis been put “to act” and ratchet up the efforts to ensure we still have a safe and green world. At this time, I am considering starting a newsletter around sustainability and (you guessed it right…. perhaps) Blockchain. The first article will focus on Renewable Energy Certificates (RECs) and how Blockchain can be leveraged here.

What Is a Renewable Energy Certificate or REC?

In the 1990s and early 2000s, “green power programs” sprung into existence in the US when a handful of utilities began allowing their customers to buy electricity generated from renewable sources by voluntarily paying a little extra cost. In the latter half of the 2000s, these programs evolved into a more streamlined Renewable Energy Certificates (RECs) and used by utilities to comply with state mandated renewable portfolio standards (RPS).

But what is a Renewable Energy Certificate? Renewable Energy Certificates or RECs facilitate measuring and tracking of the amount of renewable energy generated and traded. One REC is created for every megawatt hour (MWh) of electricity produced from a renewable energy source such as solar or wind. Each REC has a unique number and generally carries information about the type of source, its location, the age of the plant, the time when generated, and carbon emitted in the process. The global renewable energy credit market was at $9.3 billion in 2020, and projected to reach $103.2 billion by 2030.

Who Issues Renewable Energy Certificates?

The Renewable Energy Certificate System (RECS) was a voluntary system to facilitate international trade in RECs. In Europe, the Association of Issuing Bodies (AIB) oversaw the RECS market. Now, several EU directives have replaced the voluntary RECS certificates.

In the US, there are ten regional Renewable Energy Tracking Systems (RETS). They generate a uniquely numbered certificate each time an MWh electricity is generated by facilities registered in the tracking system. They track the RECs – who owns them, when did they change hands, when were they retired, etc. – through bilateral contracts. Green-e, a non-profit founded by the Center for Resource Solutions, certifies the RECs to ensure that they are correctly accounted for.

RETS in the US. Image Source: Center for Resource Solutions

Who Buys RECs?

There are generally two main markets for renewable energy certificates – compliance markets and voluntary markets.

Compliance markets are created by governmental directives that mandate establishments to produce, supply or use a certain amount of electricity by renewable means. In the US, the policy, named Renewable Portfolio Standard (RPS), exists in 38 states and the District of Columbia.

Voluntary markets, as the name indicates, are driven by an individual or businesses’ own impetus to adopt a clean energy strategy. Renewable energy generators in states that don’t have compliance requirements or where there is a surplus left after meeting RPS requirements sell the RECs in the voluntary marketplaces. The prices here are relatively lesser than in compliance markets.

Where Does Blockchain Add Value to REC?

There are several means by which Blockchain technology can benefit the Renewable Energy Certificate ecosystem. 

A Global Marketplace for Buyers

First, it could create a global marketplace for the RECs. Today, the renewables market is more mature in some parts of the world than in others. And there is also more supply than demand in these parts of the world, resulting in tanking of the prices. A marketplace built on Blockchain, where RECs can be sold as NFTs, establishes a trustworthy provenance and tracking system for the energy credits. For instance, if a business in Dubai wants to compensate for the fossil fuel powered electricity they use by buying RECs from a solar farm in California, they can do so with more confidence, now that they know for sure where their offset has come from. This initiative will balance the supply and demand, thereby creating competitive pricing for the RECs.

A Global Marketplace for Sellers

Meanwhile, close to 759 million people in the world, a majority of them in sub-Saharan regions, still lack access to electricity. They depend on unreliable and expensive diesel generators to power their houses and businesses. They don’t have economic means or incentives to go the renewables route. Buyers are also wary about purchasing credits from renewable energy coming from these developing markets. On the contrary, with Blockchain and IoT, it becomes easier to prove the authenticity of a renewable energy project and track the electricity and energy credits created. Buyers would get reliable and verifiable information about the project that persuades them to procure RECs from such emerging markets. As a result, there is an inflow of capital to support more such initiatives. Besides enabling more people to access electricity, RECs coming out of such measures ensure “additionality,” as it introduces new renewable energy onto the electricity grid.

Prevent Double Counting

In many countries, including the US, there is no single registry where all RECs are recorded. Furthermore, since the electricity is separated from its “green” attributes, and the “greenness” is sold as RECs to fossil fuel users, critics claim RECs allow double counting – both by the producers of clean energy and those who purchase these credits. Blockchain facilitates tracking both the roots of electricity and the RECs coming out of it. It is also helpful in recording the REC trades accurately, as and when they change hands or are retired. Blockchain gives that single source of truth for buyers and sellers to ascertain the ownership of the RECs.

Bolster the Current Tracking Systems 

Buyers need to ensure that the RECs they procure have added new clean energy projects that otherwise would not have gotten built – as a result, made a positive difference to the environment. At the same time, it is vital to ascertain that these power plants have not endangered biodiversity or caused any harm to the environment. Capturing the additionality, vintage, environment impact information for a REC and representing it as an NFT on Blockchain ensures that the trustworthy information is immutably recorded and available for all stakeholders to verify, thereby bolstering the current tracking systems.

It has become crucial that greenwashing – making misleading claims of sustainability and environment-friendliness – is no longer tolerable. It is now more pronounced than ever that every clean energy project should assert its value-add to preserving the environment. It is where the Renewable Energy Certificates market could benefit from Blockchain.

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