(Many thanks to Cameron Bernhardt for his research for this post)

This second post continues the discussion of the role of Renewable Energy Credits (RECs) and Carbon Offset Credits in California policies started in the last post. In the next and last post of the series, I will discuss their role in city climate action plans.

How are renewable energy credits used in California?

Renewable energy credits (RECs) represent the non-power characteristics of renewable electricity generation. Those who possess ownership of RECs are thus able to make claims that the electricity they consumed or generated came from eligible renewable sources. Although these rights to environmental claims are the primary function of RECs, there are a number of different energy policies for which RECs play a significant role. Already in 2008, the California Public Utilities Commission (CPUC) recognized the significance of RECs in, among others, the California Solar Initiative, the Self-Generation Incentive Program, tariffs and standard contracts for RPS-eligible generation, and voluntary greenhouse gas reduction programs.

Compliance Roles

Renewable Portfolio Standard and RECs

The California Renewable Portfolio Standard (RPS) is the primary legislation for compliance RECs in California. The RPS currently requires investor-owned utilities (IOUs), electric service providers (ESPs), and community choice aggregators (CCAs) to procure at least 50 percent of their total electricity generation from eligible renewable resources by 2030. The CPUC implements and administers RPS compliance mandates for retail electricity sellers in California while the California Energy Commission (CEC) certifies generation facilities as eligible (Figure 1) and adopts RPS compliance regulations for publicly owned utilities (POUs).[1]

The primary reason for the establishment of RECs was to provide flexibility for RPS compliance. There are three portfolio content categories (PCCs, or buckets) for the RPS, as described in SB 2-1X (2011, s. 399.16) where the first two categories consist of bundled electricity from eligible generators in or out of state (PCC1), and “firmed and shaped” electricity (PCC2), in which the bundled procurement is matched with an incremental non-renewable portion, respectively. In both these categories, “bundled” refers to the purchase of both the energy and the RECS produced. In the third category (PCC3), the CPUC set the procurement requirements for unbundled RECs from RPS-eligible facilities. This category varies in the percentage of RECs allowed of maximum 25% RECs for the first compliance period (2011-2013) to a maximum of 10% in the last compliance period (2017-2020). Phasing out the use of unbundled RECs would in effect be part of promoting more renewable generation in California itself. As such, the use of unbundled RECs for RPS compliance would be expected to decrease over time.

Tracking and monitoring RECs is an important part of the process. The CEC, which is responsible for many REC monitoring and compliance duties, established the Western Renewable Energy Generation Information System (WREGIS) to track the generation of RECs from eligible renewable electricity sources and verify eligible RPS procurement.[2]^,[3] The CEC’s RPS eligibility guidebook requires all regulated entities (both voluntary and compliance) under California’s RPS to register as account holders within WREGIS. It also functions to ensure that RECs generated by eligible renewable resources are only counted once for RPS compliance. At the end of a compliance year, the CEC verifies how many RECs each retail seller has procured for RPS compliance, and delivers the information in an annual verification report to the CPUC. The CPUC is ultimately responsible for determining whether a retail seller is in compliance with the RPS.[4]

Figure 1. California RPS-Eligible Renewable Generation Facilities, 2014

While it can be difficult for prospective REC buyers to identify RECs that are RPS-eligible, the CEC has a number of resources to help buyers pursue appropriate transactions. Individual RECs typically include information on a number of attributes, including the REC’s eligibility for certification or RPS compliance.[6] In addition, the CEC must certify a renewable facility as RPS-eligible (Figure 1) for its REC procurement to be counted towards a utility’s RPS obligation.[7]

Distributed Generation (DG) and RECs

RECs that originate from distributed generation facilities create additional administrative and legislative complications. These complexities led the CEC to make several decisions regarding ownership of RECs that result from DG systems that participate in ratepayer funded rebate programs. One decision, D.05-05-011, granted renewable DG facility owners the rights to RECs associated with electricity generation from such facilities. these may be eligible for PCC3 if registered with WREGIS. Another ruling, D.07-01-018, granted DG facility owners similar rights over the RECs they procure, but reserves rights specifically to facilities funded under the California Solar Initiative (CSI). This ruling also extended ownership of RECs to facility owners participating in the statewide Self-Generation Incentive Program.

As DG RECs reside with the owner of the DG, this electricity has “null” renewable attributes and does not directly count towards the utilities’ RPS amounts. However, DG RECs reduce the utility’s load, and its RPS obligation amount, thus indirectly contributing to the RPS compliance requirements.

Cap and Trade and RECs

As described in a previous post, in California’ s Cap and Trade Program and its Voluntary Renewable Electricity program ” voluntary purchases of renewable electricity only reduce GHG emissions if tied to retirement of allowances budgeted for the program”. When retired, purchasers of renewable electricity can claim a reduction in GHG emissions based on a conversion factor, calculated by CARB, of 0.428 metric tons carbon dioxide equivalent per Megawatt Hour.

Voluntary Roles

There are significant differences between RECs that are procured or purchased for compliance versus those that are generated and traded on a voluntary basis. Compliance RECs and markets may have stricter regulations than voluntary RECs and markets, such as providing additional specifications for electricity generation facilities to become eligible. Conversely, voluntary RECs and markets are driven primarily by consumer preference and allow consumers to exceed policy requirements. Consumers may procure or purchase RECs voluntarily because they seek such as reduced greenhouse gas emissions, other pollution reductions, or brand development strategies.[9] The voluntary REC market has been growing, and is mostly certified and operated by Green-e. Because of the generally short-term nature of voluntary RECs, it is debated whether voluntary RECs help or hinder the promotion of renewable energy growth in the long term, a topic for a future blog.

Examples of the Use of RECs

As an example of REC use by a utility, SDG&E has purchased between 4% and 8% unbundled RECs in the years 2010 to 2014.[8] This corresponds to between about 3% and 7% of sales. As a Community Choice Aggregator (CCA), Sonoma Clean Power reports that 3% of its power mix comes from unbundled RECs in order to be able to offer higher renewable energy content to customers as well as meet its RPS goals. RECs can be useful to CCAs as they build their initial customer base. Finally, voluntary RECs are purchased by many businesses, such as Whole Foods and Intel, which therefore can claim to provide 100% of their electricity as renewable.

What are the roles of carbon offset credits in California?

Carbon offset credits represent reductions in greenhouse gases from certified or approved projects. The variety of projects that can generate carbon offset credits is large, the number of roles that carbon offsets can possess for individuals, companies, and legally covered entities is also vast.

Compliance Roles

As mentioned in the previous post, the primary compliance role that carbon offsets possess in California is in the California cap-and-trade program. More than 350 companies are now subject to the cap and trade law. While covered or opt-in entities in the program must account for their carbon emissions reductions to meet their annually decreasing allowance cap primarily through the annual surrender of carbon allowances, they can cover a small percentage of their emissions by generating or purchasing carbon offset credits. The California Air Resources Board (ARB), administers the California cap-and-trade program and limits the quantity of offset credits that can be used in one compliance period to 8 percent of a firm’s total allowances. The ARB mandates that greenhouse gas reductions from offsets be recognized as real, additional, verified, enforceable and permanent (100 years) and must come from carbon reduction projects that:

• Are not mandated by law or regulation
• Would not occur in business as usual scenarios
• Commence after Dec. 31, 2006
• Are located in North America

These regulations ensure that covered entities take an active role in relevant sustainability projects to be able to obtain offset credits.

The ARB has created Compliance Offset Protocols that projects must comply with to generate ARB offset credits. There are six offset protocols dealing with forests, livestock, ozone depleting substances, mine methane capture, rice cultivation projects and urban forest projects. Capped entities may also receive “early action offset credits” from the Climate Action Reserve (CAR), the American Carbon Registry (ACR), and Verified Carbon Standard (VCS), offset project registries that help to administer the Compliance Offset Program and where entities may submit their early action offset credits to the ARB for consideration for conversion to ARB offset credits.

In addition, the ARB requires third-party verification of all GHG emission reductions or removal enhancements before any ARB offset credits can be issued. These third-party verification bodies must be approved by the ARB in order to offer verification services under the Compliance Offset Program.

The American Carbon Registry forecasts a significant 35% shortfall of carbon offset credits for 2020 (Figure 2).

Figure 2: Forecasts of Compliance Offset Protocol Projects and Demand. The top line represents the estimated total demand for compliance carbon offsets, American Carbon Registry, 2012.

California enforces the quality of the compliance carbon offsets. For example, in October 2014, CARB invalidated 231,154 offsets from a 4.3 million it seized for investigation. As a result, it seems unlikely that this quality of carbon offsets would be available to help cities meet GHG emissions targets in climate action plans.

Voluntary Roles

Carbon offset credits are relevant for any individual or entity trying to reduce its carbon footprint. Since carbon offsets represent avoided or reduced greenhouse gas emissions, owners or producers of offsets can make environmental claims about their actions. We have seen such schemes offered by the airline industry as explained in the last post. Purchasers of carbon offsets can be selective about the type of offset project they wish to support and choose to purchase credits from a variety of offset registries. There is no regulation of the voluntary carbon offsets market although Green-e attempted to develop a certification program for voluntary carbon offsets in 2008 and California flirted with the idea in the same year. There are voluntary standards such as The Gold Standard, which provide some level of quality assurance.

A study by the US Government Accountability Office (GAO) found that there was growth in the voluntary carbon offset market from 6.2 million tons in 2004 to 10.2 million tons in 2007 with more than 600 entities developing, marketing and selling to a variety of buyers, including governments. In 2015, a market study stated that 77 million metric tons CO₂e/year were sold on average per year since 2008 (Figure 3). However, this is also reported to fall short of what was expected in the voluntary market and may have been due to the increased demand for compliance offsets.

Figure 3. Growth of the Voluntary Carbon Offset Market since 2008. These are worldwide numbers, from the Ecosystems Marketplace Study of 2015.

The next post will touch on how cities and counties are including RECs and carbon offsets in their climate action plans, the significance, if any, of the quality of RECs and carbon offsets for cities and counties, and the potential costs of RECs and carbon offsets upon climate action plan implementation.

[1] http://www.cpuc.ca.gov/PUC/energy/Renewables/

[2] https://www.wecc.biz/WREGIS/Pages/Default.aspx

[3] http://docs.cpuc.ca.gov/word_pdf/FINAL_DECISION/86954.pdf

[4] http://www.cpuc.ca.gov/PUC/energy/Renewables/FAQs/05REcertificates.htm

[5] http://www.ucsusa.org/clean_energy/smart-energy-solutions/increase-renewables/renewable-energy-in-california.html#.VdbHYvlViko

[6] http://www.epa.gov/greenpower/documents/gpp_basics-recs.pdf (website is no longer accessible, try to find another source)

[7] http://www.energy.ca.gov/portfolio/documents/rps_certification.html

[8] EPIC calculations based on SDG&E filed data.

[9] http://www3.epa.gov/greenpower/gpmarket/markets.htm