17 December 2018

REC markets prepare for rising demand

The future looks bright for renewable energy certificates (RECs) after a year of volatility, says Elena K. Johansson

Further strong growth in sales of renewable energy certificates (RECs) is expected in 2019 as increasing numbers of companies aim for ambitious, self-imposed targets for clean energy use.

Jonathan Burnston, partner at Karbone, which retained the title of Best Advisory firm in North American markets, says that the “maturing” of the mandatory market is leading to increased activity in this voluntary market.

In the US, volumes in the voluntary REC market rose, as some of the mandatory markets became oversupplied. Peter Zaborowsky, managing director at Evolution Markets, which was voted Best Broker in the North American section of this year’s poll, said there has been oversupply in several regional markets, including Texas and PJM (Pennsylvania, New Jersey, Maryland). And, in the case of New England, the oversupply was sufficient to send prices “to historic lows.”

But he expects prices to recover as a result of the annual increases in the Renewable Portfolio Standards (RPS), which determine the amount of electricity utilities sell that must come from renewable resources. There is an “expectation of a higher price” as development of projects is unlikely to catch up with rising compliance demand, he explains.

In addition to corporate buyers, another driver of growth in the voluntary market is the use of Virtual Power Purchase Agreements (VPPA). Unlike a physical PPA, a VPPA is a financial contract rather than a contract for power. The purchaser, or ‘off-taker’, does not receive, or take legal title to, the electricity and pays a fixed price, irrespective of movements in the market price of power.

Jonathan Burnston, KarboneCommunity choice aggregation (CCA) programmes are another driver, Burnston says. These allow residents and businesses in a particular location to leverage their combined demand to buy the kind of power supply and energy services that meet their goals and values. He points specifically to community solar as a growing trend.

The varied drivers of supply and demand have combined to cause unusual swings in the price of RECs in the voluntary market.

“It’s been at least five years since we’ve seen such volatility,” says Burnston. For example, he cites RECs related to wind power that have qualified for certification under the widely used Green-e system.

“The market bottomed out at roughly 30, 35 cents a MWh, grew up to like a dollar, fell back down to about 40 cents and has since climbed yet again to 70-some cents.”

In Europe, where renewable energy generation is certified by Guarantees of Origin (GO), there has also been significant volatility, partly due to the weather.

"It's been at least five years since we've seen such volatility"
- Jonathan Burnston, Karbone

Prices soared on the back of a summer heat wave which triggered strong demand, sending GOs from EU wind sources soaring from €0.35/MWh in November 2017 to €2.45/MWh in September 2018, says Robin Timoteo, managing director at Cleanworld, which held on to the title of Best Broker in the European market.

Corporate buyers have helped boost activity in the European GO market this year, notes Marie Bluett, head of the renewables portfolio at South Pole. The Zurich-based project developer and advisory firm retained the European crowns of Best Trading Company and Best Advisory firm while adding the same titles in the Australian RECs market.

Regulatory changes roil RINs market

Interventions by the Environmental Protection Agency (EPA) caused consternation in the US renewable fuels markets in 2018.

David McCullough, partner at Eversheds Sutherland, which was voted Best Law Firm for Renewable Identification Numbers (RINs), says: “We’ve seen in 2018 RIN prices have trended downward from the beginning of the year, in no small part due to a series of actions taken by the Trump administration to grant waivers to certain small refiners … thereby allowing excess RINs, or surplus of RINs, in the market place.”

RINs are the credits that obligated companies use to demonstrate compliance with the national Renewable Fuel Standard, which sets the levels of biofuel that must be blended into various transport fuels.

Prices for advanced biofuel RINs plummeted by 98%, biomass-based diesel RINs by 50%, and cellulosic biofuel RINs by 12.44%, in 2018, according to EPA’s figures.

EPA granted 29 waivers last year, which exempted some refineries from the blending requirements. These represented 13.6 billion gallons of renewable fuel, a sharp increase on the 7.8 billion gallons exempted in 2016.

The EPA is now facing a legal challenge for granting the waivers, and McCullough says: “If the court says that […] EPA acted improperly, and they should have redistributed the volumes, then the court could order those volumes to be redistributed across the industry, which would have a real upward pressure on RIN prices: […] Suddenly those subject to the programme would need to go out and purchase those RINs.”

Among the various fuels covered by the RFS, cellulosic biofuel is the ‘shining star”, says Randy Lack, chief marketing officer at Element Markets, which retained the titles of Best Trading Company and Best Advisory Firm in the RINs market. “The market is dramatically undersupplied in the cellulosic category allowing for a lot of running room on new volumes, and this is bolstered by lower [gasoline] prices at the pump,” he says.

Further regulatory action could shape the market in 2019, as industry participants await expected reforms of the RFS.

“It’s not going to be clear what the standards will look like [after 2019] until they are released and published by the EPA, which could be as early as next year, at least as a draft,” McCullough explains.

Companies involved with the RE100 initiative have played a particularly important role, she says. This global project, developed by The Climate Group and CDP (formerly the Carbon Disclosure Project), brings together companies that are working towards buying 100% of their electricity from renewable sources. It currently has 155 signatories.

Latest RE100 data, published in November, shows that European members already get an average of 62% of their electricity from renewables, compared with 56% for US signatories.

Christopher Jones, principal at Baker McKenzie, which was voted Best Law Firm in the North American, European and Australian markets, says continuously rising demand from RE100 companies will spur further growth in the GO market.

He says: “If you just take the demand of the RE100 companies that have already signed up – the 155 [companies] – and you look at the energy that they are going to have to purchase between now and 2030, this amounts to 67TWh, roughly the demand of Belgium. They are going to acquire long-term contracts, on the assumption that they will meet their obligations and move to 100% renewable [energy] by 2030.”

Regulatory developments could also boost the European GO market. Most notably, the revised Renewable Energy Directive (RED II), adopted by the EU Council of Ministers in early December, sets a new renewable energy target for the EU for 2030 of 32%, replacing a previous target of ‘at least 27%’. It also includes the possibility of a review before 2023 allowing for a further upward revision of the target.

While the transposition of RED II by member states may not happen before 2021, Jones says many member states may act in anticipation of the change.

Marie Bluett, South PoleThe GO market could also be buoyed by the trend for auctions of renewable power to replace feed-in-tariffs or feedin premiums, in some EU countries. “As you enter a subsidy-free environment [for renewable energy], developers are looking to maximise value. So they obviously see value in GOs as an additional source of revenue,” explains Marc Fevre, partner, energy & infrastructure, at Baker McKenzie.

In Germany – the biggest European GO market – a change to the technical rules applicable to PPAs and a continued reduction of renewable energy subsidies, as proposed in the domestic ‘Energy Collection’ draft law, could boost demand for GOs from next year, according to his colleague Jones.

Meanwhile, in Australia, rapid growth in the REC market is being driven the country’s Renewable Energy Target (RET) which calls for at least 33TWh of Australia’s electricity – about 23.5% of total supply – to come from renewable sources by 2020. This compares with about 16% in 2016.

During 2018 and 2019 the country is likely to install about 10.4GW of new renewable capacity, representing 30% of peak demand, The Energy Change Institute, a research organisation, estimates.

"Corporate buyers have boosted activity in the European GO market"
- Marie Bluett, South Pole

Chris Halliwell, manager of renewable energy and environmental markets at TFS Green, which was again voted best broker for the Australian REC market, notes that the Labour party has pledged to increase the renewable energy target to 50% by 2030. So, if it wins next year’s national election, he predicts a boom of activity in coming years.

Taking a global view, Scott Eidson, vice president, environmental markets, at 3Degrees Group, voted Best Trading Company in the North American market, expects continued strong growth, and an increasing focus on globally diverse procurement.

But he believes more education and harmonisation are key factors to unlock further growth of the REC markets in 2019 and beyond. And, he warns, the integrity of the market needs to be ensured: “In terms of how people account for what’s included in a REC: what are the benefits, is it doublecounted or not, what are the carbon benefits, is it regulatory surplus or not?”