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REC markets reveal diverse trends, volatility

April 24, 2012 - Current prices for renewable energy certificates in the 17 markets assessed by Platts underline how dramatically REC values vary across the United States and the extent to which big differences in the way states design their renewable portfolio standards determine supply and demand, sometimes in combination with unanticipated market dynamics. (See related map: Voluntary and mandatory renewable portfolio standards in US states)

This initial REC market analysis is based on interviews with a range of market participants, including brokers, traders, aggregators, utilities and renewable generators.

REC prices at market close on Thursday, April 12 ranged from a low of less than $2 for the California tradable REC, known as a TREC -- with the low price of TRECs a byproduct of action by California lawmakers -- to more than $500 for a solar REC in Massachusetts, where supply has yet to catch up with demand from a new solar carve-out. (See related chart: Renewable Energy Certificate markets, April 12)

An REC represents the environmental attributes associated with a single megawatt-hour of renewable power. RECs are a tradable commodity used by load-serving entities to comply with a state's renewable portfolio standard.

Analysis continues below...

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California REC market

Given its size, California's RPS has attracted considerable attention from developers and brokers. The 33%-by-2020 requirement, which applies to all load-serving entities, represents a major source of demand for RECs.

What is less clear, because of the highly complex design of the state's RPS, is the type of REC market that will develop. Unlike most states, California requires load-serving entities to buy renewable power and RECs bundled together in order to meet most of the RPS requirements. Unbundled RECs -- so-called tradable RECs, or TRECs -- are allowed to satisfy only 25% of a load-server's requirement, and that amount will decline to 10% by 2017.

Bundled RECs in California are grouped into two categories, called buckets. The two bundled categories and TRECs are the three REC products that the market has started trading. Although it is too early to say for sure which categories will be oversupplied or undersupplied, current REC prices provide some indication.

TRECs are easily the least expensive REC product on the market. The REC-only category is worth less than $2 per REC, a small fraction of the price for the two bundled categories.

This makes sense considering that while demand is capped, available supply seems vast. Eligible renewable facilities located anywhere in the Western Electricity Coordinating Council footprint can offer the TRECs they generate for sale.

Even though TRECs are the least expensive, trading volume has been low given the statutory restrictions placed on their usage. It is possible liquidity will pick up as the first compliance period (2011-13) comes to a close, but until then, load-serving entities seem focused on buying bundled RECs.

At least half of RPS transactions procured after June 1, 2010, must come from the Bucket 1 category: RECs bundled with the associated renewable energy from facilities interconnected to a California balancing authority or otherwise meeting certain deliverability requirements.

A combination of steep demand and tough eligibility conditions has made Bucket 1 RECs the most valuable. The bid-offer range for Bucket 1 RECs at market close Thursday was $35-$40.

A big question surrounding Bucket 1 RECs concerns the eligibility of renewable facilities located beyond a California balancing authority. The RPS statute requires that such generators deliver electricity to a California balancing authority without the use of "firming and shaping" to be credited as a Bucket 1 transaction.

A widespread sentiment among market participants is that Bucket 1 supply will be met mostly through in-state renewable facilities.

Even if an out-of-state supplier is able to provide the necessary documentation, load-serving entities may be reluctant to enter into a transaction over concerns that the California Public Utilities Commission could invalidate the deal later.

That risk is pushing down the price for Bucket 1 transactions involving out-of-state generators closer to the low end of the bid-offer range. A slight premium is therefore implied for in-state generators, for whom eligibility concerns are negligible.

Bucket 2 RECs come from renewable facilities not directly connected to a California balancing authority and delivering power using firming and shaping. Out-of-state generators represent the biggest suppliers of Bucket 2 RECs. Load-serving entities can use Bucket 2 RECs to satisfy only up to one-half of RPS obligations, an amount that shrinks to 25% by 2017.

The cap on use of these RECs is lowering demand, while supply is plentiful because firming and shaping is allowed. Prices are thus lower than for Bucket 1. The market value of a Bucket 2 REC at market close Thursday was about $25.

So far, buying interest in California RECs stems mostly from competitive retail suppliers. Other buyers are remaining on the sidelines for various reasons.

The state's big-three regulated utilities -- Pacific Gas and Electric, San Diego Gas & Electric and Southern California Edison -- as well as some publicly-owned utilities say they are already meeting the 20% renewable target required under the first compliance period, and will not face a shortage until future compliance periods.

Public power utilities that will need to buy more RECs to meet the 20% target have yet to enter the market. They are waiting until the California Energy Commission finalizes an ongoing RPS rulemaking process.

Next page: Compliance REC markets

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