Demand for Renewable Energy Certificates (RECs) could be set to soar as companies look to decarbonise their supply chains, Michael Hurley writes
Sales of renewable energy certificates (RECs) are set to be boosted in coming months by a boom in interest among corporates to source their energy from renewable sources, and to reduce the carbon intensity of their supply chains.
Ab Kasmi, head of carbon and renewables partnerships at multiple winner South Pole, says: "Over the last 12 to 18 months, corporate demand has increased immensely... We are still working on a lot of requests for information from corporates. The number of people saying we are interested and we will start from 2020 is amazing."
South Pole was awarded best advisory for European RECs, and best advisory and best trading company for Australian RECs.
Kasmi says RECs markets worldwide have benefited from a growing interest in the topic of sustainability among corporates – and in particular those signed up to the Renewable Energy 100 (RE100) initiative. The global project, developed by The Climate Group and CDP, brings together companies that are working towards buying 100% of their electricity from renewable sources. It currently has 219 signatories – up from 155 a year ago.
Companies also see the purchase of RECs as a way to reduce the carbon intensity of their supply chains, Kasmi adds. "They are now also looking into their supply chain, and they want the products they buy to be carbon neutral.
"Supply chains are often based in Asia – so we would expect increased demand from there. We are also seeing more demand, to a certain extent, from Africa," he says.
In Australian markets, long-term power purchase agreements (PPAs) and virtual PPAs have become increasingly popular – "which, in turn, increases demand for credits, simply because every renewable MWh has to be tracked with an Energy Attribute Certificate," according to Kasmi.
Unlike a physical PPA, a virtual PPA 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.
Chris Halliwell, manager of renewable energy and environmental markets at TFS Green, which was again voted best broker for the Australian REC market, said there is expected to be significant oversupply of RECs from next year, due to "a boom of solar and wind projects in construction, that will be starting generating next year".
"Certificate prices are expected to be suppressed from that point on", until the country's government increases its renewable energy target – which is not currently expected, he says.
Bernadett Papp, a senior market analyst at Vertis, agrees that "every day, internal and external pressures" increase for companies around the globe to improve their sustainability credentials. In turn, this is driving further demand for RECs.
In addition, new countries becoming members of the Association of Issuing Bodies (AIB) "has created liquidity" and encouraged trading across national borders. AIB members adhere to the European Energy Certificate System for the European Guarantees of Origin for Electricity (GOs).
"However, in January, a large amount of certificates came into the market from Spain and this affected the prices in a negative way. The purchasing demand has also been lacking periodically, leading to lower average prices."
Papp added that Vertis will be closely monitoring the effects on REC prices of the Netherlands' implementation of a so-called 'full disclosure' requirement – from 1 January 2020, Dutch electricity suppliers will be obliged to prove the origin of all electricity they physically supply – "as well as the volumes entering the market from the new AIB member states, Serbia, Slovakia and Greece".
Vertis was awarded Best Trading Company for European RECs.
In North America, "overall, it has been a positive year, mostly driven at the sub-federal level," according to Jonathan Burnston, a managing partner at Karbone. This was characterised by "incredibly robust activity out west in California" and strong activity in other states, he says.
The New York-based firm won Best Advisory for North American RECs markets.
State-level policy initiatives and proposed policy initiatives have encouraged pricing and continued activity "pretty much across the board" from states and municipalities, he says, in parallel with voluntary interest from corporates.
In particular, there was a recovery in prices for Nepool Class 1 RECs – which encompass credits traded between New England states. "Front-of-curve pricing had got down to as low as high single-digits to low teens. Now it is back to being in the $20 and $30 range."
For PJM (Pennsylvania, New Jersey, Maryland) 'Tier 1' RECs – typically among the highest-value RECs, which consist of wind, landfill gas, low emissions biomass, run of river hydro, and various other fuel types – the bottom of the price curve hit a low of between $4 and $5, but has since recovered to more than $8, Burnston says.
Meanwhile, the solar-REC 'carve-out' segment has seen "consistently long" pricing in key markets like New Jersey and Massachusetts, Burnston says. "We have seen shining strength in Pennsylvania and Maryland. Prices have gotten as high as $75 to $85 in Maryland, and in Pennsylvania to about $50 to $60. Those are really healthy levels, projects can get built at those levels."
Peter Zaborowsky, head of renewable energy markets and co-founder of Evolution Markets, says increased demand for RECs is being fuelled by regulatory changes. Evolution Markets was awarded Best Broker for North American RECs.
"Many of these state-wide programmes have steadily increasing requirements for renewable energy, which are built to an end target – be it 30%, 40%, or 50% renewables in the [state's] energy mix, by some end date.
"Massachusetts, for example, recently instituted a clean energy standard that laid on top of the renewables requirement, further accelerating need clean energy generation.
"Another development is that more corporates are signing long-term renewables PPAs. Because a lot of corporates have no intention to sell RECs, they are retiring the RECs voluntarily, in markets where there is a compliance value. That is contributing to increased demand and feeding the rally in these markets.
"The RECs markets are all in a fairly good place right now. We are expecting more of the same next year – these markets continue to grow," says Zaborowsky.
Scott Eidson, vice president of environmental markets at San Francisco-based 3Degrees, says that as well as growing demand for RECs, a combination of factors are aligning to drive supply of renewable energy.
"There has also been a lot of supply growth [due to] renewable energy development in the US over the last few years. [And] some of the tax credits and other support mechanisms are slated to be phased out over the next few years, which means a lot of people are trying to build projects," says Eidson.
"We expect there will be continued growth in the voluntary market demand. There has been a healthy growth in new corporates focusing on sustainability for the first time.
"The voluntary market, in general, for RECs is becoming increasingly globalised. More and more, we are working with customers based around the world, helping our customers source high quality RECs from around the world. Our business over the last couple of years has increasingly become global.
"A lot of the bigger corporations we work with are not only looking at their own environmental impacts, but also that of their suppliers," adds Eidson.
Uncertainty reigns in RINs markets
The choppy waters of the US renewable fuels markets failed to settle in 2019, with further uncertainty on the horizon.
Randy Lack, chief marketing officer at Element Markets, which won Best Broker, Best Trading Company and Best Advisory for Renewable Identification Numbers (RINs), says: "Over the last year we have seen tremendous volatility – a lot of that is down to the Environmental Protection Agency (EPA)'s stance."
To implement the US federal government's Renewable Fuel Standard programme, the EPA tracks production and use of renewable fuel using RINs. These are generated by renewable fuel producers or importers and are bought and sold "attached" to the renewable fuel until the fuel is purchased by an "obligated party" – a refiner or importer of gasoline or diesel fuel – or blended with a petroleum-based transportation fuel.
The RIN is then "separated" from the fuel and may thereafter be independently bought or sold until it is retired to meet an obligated party's renewable volume obligation.
The EPA has in recent years granted increasing numbers of exemptions to some small refineries, which mainly produce gasoline and/or diesel. Market observers suggest this has undercut demand for RINs.
At the time of going to press, the market was awaiting the EPA's decision on the 2020 volumes of renewable fuel each obligated party will be required to blend into their fuel, or otherwise obtain RINs to demonstrate compliance.
Susan Lafferty, a partner at Eversheds Sutherland, which won Best Law Firm for RINs, says: "Where we find ourselves now, is that the EPA by law is set to be issuing annual standards for 2020 by 30 November, which it has obviously missed, so now industry is hoping for the EPA to make the announcement by the end of 2019 – and given that the obligation kicks in on 1 January, that doesn't give industry a whole lot of time to react.
"Currently the proposal is for the total volume requirements to be just over 20 billion gallons of renewable fuel: a slight increase over last year's volume – which was 19.92 billion.
"But we have seen recent news reports that certain farm-friendly senators have been asked for input by the [federal] administration."
The suggestions are that the EPA might "tweak the standards a little more" and find a way for them to be more in step with what farmers, and the renewable fuel industry, would prefer, Lafferty suggests.
They want the EPA to address the 1.3 billion gallons that was "lost" due to exemptions for small refineries, she adds: "If that were added in it would help the renewable fuel industry feel more bullish about where it is going. At the moment the industry is more bearish.
"That said, low-carbon renewable fuels, such as renewable diesel and biogas, are pretty optimistic about the coming year and expect to see low-carbon fuel standard programmes expand to more states and new markets grow such as the use of renewable jet fuel and efforts to decarbonise the electricity grid," says Lafferty.
Element Markets' Lack says: "RINs prices are off from where we saw all-time highs, with prices down over 90% – for ethanol they are down about 65% for biodiesel, and prices down about 70% off their highs for the cellulosic category.
"The EPA's interventions have created a lot of volatility... but where there's volatility, there's also opportunity.
"While there's general pessimism leading into next year, especially on the ethanol side, there is growing excitement around the lower carbon intensity fuels," Lack says.
Element Markets has focused, in particular, on trading cellulosic fuel. The latter uses wood, grasses, algae, or other plants to produce renewable fuels.
He says there has also been "tremendous growth" in demand for biogas and biomethane gas, which is derived from organic matter, often from landfills.
"We have [also] created a sub-speciality in agricultural biomethane, which is described as having an 'ultralow carbon intensity'. When you move it to California you get a RIN and a credit under [the state's] Low-Carbon Fuel Standard – that credit for low-carbon intensity fuels is very valuable. Our attention this year and next is focused on [trading] these very low carbon intensity fuels."