16 December 2020

RECs Covid-19 rally 'shows renewables momentum'

Covid-19 and the US election contributed to a turbulent year for RECs and RINs, winners of this year's annual market rankings tell Michael Hurley

US markets for Renewable Energy Certificates (RECs) rode out turbulence caused by a global pandemic in a show of strength that demonstrates the dynamism of the transition to a low- carbon economy, according to the winners of Environmental Finance's annual market rankings.
By comparison, equivalent schemes in other parts of the world, including in Europe, appear to have been hit harder by declines in travel and corporate energy use as a result of Covid-19 – but have nonetheless shown resilience, say this year's winners. 

RECs are a market-based instrument that certifies the bearer owns one megawatt- hour (MWh) of electricity generated from a renewable energy resource. Once the power provider has fed the energy into the grid, the REC can then be sold on the open market as an energy commodity.

In the US, where states implement compliance and voluntary REC schemes, prices of the certificates dropped sharply in line with the initial shock caused by the rapid spread of the pandemic between March and May, but "bounced back very quickly across all markets", says Jonathan Burnston,managingpartneratNewYork- based Karbone.Jonathan Burnston

Karbone won 'best broker' and 'best advisory' for North American RECs markets. It was also voted 'best broker' for Renewable Identification Numbers (RINs – see box).

Compliance buyers are utilities or electric suppliers that are required by state regulations to have a certain percentage of their electricity generation or sales from renewable sources. Voluntary buyers include corporates wishing to purchase RECs to offset carbon emissions associated with their purchased electricity, or to meet commitments for purchasing renewable energy.

In compliance markets, the 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 other fuel types – for example, dropped from about $10-$11 prior to Covid-19, to between $6-$7, "but soon regained their $10-$11 position", Burnston says.

"However, a much more important barometer of the strength of renewables was the voluntary market.The national Green-e market went from roughly a 70-cent product to what is now a roughly $1.50 product.

"If it was not obvious before, it is now: that the push towards renewable energy, decarbonisation, within the business community and the investment community, is a secular trend: society wants this...
[and] the market will have what it wants – whether government guides that or not."

Tim Pabst, managing director of STX, which was voted 'best trading company' for North American RECs, says: "Despite Covid-19 and the overall decrease in energy demand, renewable energy supply saw record growth in 2020," propelled by government policy and corporate demand for voluntary RECs.
Pabst says that, if the more climate- friendly policies of the incoming Biden federal administration can be implemented "it could accelerate renewable energy development, especially by tackling one of the biggest issues, the outdated infrastructure... we expect the federal government to step up in their own green procurement."

In Europe, "Covid-19 has had both positive and negative effects," says Anil Akalin, director of renewable energy at Redshaw Advisors.The London-based firm was awarded best advisory for RECs in Europe.

"Across Europe, whilst overall electricity output has dropped, the share of renewable energy in the power mix is rising ... due to polices and market mechanisms valuing renewables more, and also the costs of renewable energy dropping. The EU Green Deal and other policies will continue this trend."

In the EU, Guarantees of Origin (GOs) are electronic documents which provide proof of the environmental attributes of the generation of one MWh of electricity by a renewable source.

In January, GO prices, as shown by the Association of Issuing Bodies (AIB), "took a dive and dropped from €0.50 to €0.23; they never recovered their January start price", Akalin says. "GOs dropped from a starting point of €0.70 to a low over the year of €0.35.This drop was largely due to Covid. However, oversupply of Nordic hydro also hit prices.

"Polish generators are holding back on showing volumes for 2022 and onwards as they anticipate joining the AIB.Whilst this is keeping prices higher than they might otherwise be, the outlook is mainly bearish and some suppliers, mostly from Spain and Italy, are sometimes not showing volumes because of low price bids.

"The low prices on offer have helped end-users buy more volume and hedge future increases in price.With corporates perceiving current prices as low, they are keen to lock in longer term deals. However, most generators prefer to only show prices for up to three years," Akalin says.

Oliver Crouch, chief product officer at Natural Capital Partners, which was voted 'best broker' for RECs in Australia, says increasing voluntary demand for RECs from large global companies, "particularly in the IT and professional services sectors, wanting to cover their scope 2 energy use in all countries where they operate" has bolstered demand in Australia.

"As part of the same commitment and interest from large global corporates, there's a continued growth in International RECs (I-RECs). For instance, we worked with [standard setting body] I-REC to help establish their tracking system in Israel in response to one client's specific interest in that area."

I-RECs are similar to RECs in North America and European GOs but are available for companies to source in countries across Africa, Asia, South and Central America and the Middle East.

John Davis, commercial director for the Asia Pacific region at South Pole, which was voted 'best trading company' and 'best advisory' for RECs in Australia, and 'best advisory' in China, says: "Without a doubt, there has been more demand [for RECs] in the APAC region, due to Covid-19 prompting companies to pay more attention to supply chain resilience.

"APAC countries are being pushed to hasten their transition to renewables, as big companies from Europe, the US,

Singapore and Japan work to lower their emissions and procure renewable energy across their supply chains.

"We've also seen countries send positive market signals to companies: China, Japan, and South Korea have recently set Net Zero greenhouse gas emissions targets, which clearly encourages companies to start shifting towards renewables sooner rather than later – with RECs being the simplest and fastest option for companies to use immediately."

Davis adds that South Pole is planning to grow its presence in the region – including doubling the size of its Singapore office – to meet growing corporate demand across Asia.

Paul Curnow, global head of Baker McKenzie's sustainable finance practice and global co-head of its renewable energy & clean technology practice, says oversupply could hit prices in Australia, as the country's Clean Energy Regulator has indicated that a national target of 33,000GWh of additional renewable energy between 2020 and 2030 will not be raised.

This is despite the regulator acknowledging that the target has already been met, and the fact that new renewable energy power stations may still be accredited under the scheme.

Liable entities are obliged by legislation to purchase and surrender a certain number of large-scale generation certificates (LGCs) each year.

"It is likely that as the number of accredited projects – and, therefore, the number of LGCs created – under the scheme increases, the value of LGCs will drop considerably." Australia's Clean Energy Council has said futures markets indicate the value of LGCs may eventually drop to zero by 2030.

Nonetheless, "we are at a fascinating moment in the renewable energy markets in general.The price dynamics are now driving policy, as much as the other way around," Curnow says. "Australia has the world's highest penetration of domestic rooftop solar.This is not because of a renewables or climate policy so much as the simple fact that solar power has become cheaper for household use in many cases."

Baker McKenzie was voted 'best law firm' for both Australia and China.

US election amplifies RINs uncertainty

Uncertainty reigns in the market for Renewable Identification Numbers (RINs), as the agency responsible for setting compliance requirements deferred to do so, due to November's federal election, says Susan Lafferty, a New York-based partner at Eversheds Sutherland, which was voted 'best law firm' for RINs.

To implement the US federal government's Renewable Fuel Standard (RFS) programme, the Environmental Protection Agency (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' (RVO).

The Trump-administered 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 undermined demand for RINs. However, many of these were struck down in landmark legal cases over the last 12 months, which led to a sharp increase in demand, this year's winners say.

At the time of going to press, the market was awaiting the EPA's decision on the 2021 volumes of renewable fuel each obligated party will be required to blend into their fuel, or otherwise obtain RINs to demonstrate compliance.

"The EPA was seemingly on track to issue the 2021 standards by the statutory deadline, which was November 30. They sent a draft proposal to the Office of Management and Budget (OMB) in May – that's the last step in approving a regulatory action. But that proposal has just been sitting at OMB," Lafferty says.

"We may not have final standards until some point in the second quarter of next year, which is not a good place for the industry. The big uncertainty continues to grow."

Lafferty adds that the outcome of the US election further complicates the market. "Under a Biden administration, the question would be, 'are they going to really try to push the volume requirements and make them more ambitious?' That's where an obligated party gets even more nervous.

"Will the 2021 RVOs see a modest increase, like expected under the Trump administration, or is the new EPA going to really try to push for more volumes? Then comes the question, how do they factor in Covid-19 and presumed continued decreases [in activity] into next year. The uncertainty is not a good position to be in."

Randall Lack, founder and co-president of Element Markets, voted 'best trading company' and 'best advisory' for RINs, says: "We are hopeful that, under a Biden administration, the EPA will take a more aggressive view on growth, instead of maintaining 'status quo' growth, and focus not only on propelling growth that will be needed to support renewable natural gas (RNG) but also the growing supply of new renewable diesel capacity that's being planned in the US from refinery conversions.

"Several companies have shut down large refineries and are looking to shift to renewable diesel, including Marathon, Phillips 66 and CVR.

"There is a significant amount of renewable diesel coming into the market – which represents a direct drop in diesel fuel, as it can be used in its place – but the way the RVO is set, there is not enough depth in the D4 market, where renewable diesel sits, to absorb the volume coming on."

"We are hopeful that, under a Biden administration, the EPA will take a more aggressive view on growth, instead of maintaining 'status quo' growth" Randall Lack, Element Markets

Lack adds that several states are likely to push ahead with plans to establish schemes similar to California's Low Carbon Fuel Standard (LCFS), whereby obligated entities can generate RINs as well as LCFS credits, including Colorado, Washington, and Minnesota.

In particular, California's push to decarbonise the carbon-intensive transportation sector is likely to be replicated in states with similar programmes. "There is now a massive amount of investment going into renewable diesel and RNG, all predicated on confidence in the renewable fuel and LCFS markets in the US," he says.

Shashi Menon, CEO of EcoEngineers, voted 'best verifier', says: "We don't anticipate a dramatic change in the RVO growth from previous years. The real question is how the RFS will be integrated into a larger climate programme under the new administration. There is no clear answer to that right now.

"Currently, the RFS is a combination of farm policy that supports biofuels and climate policy that incentivises decarbonisation of the transportation sector. The new administration could continue with this agenda, or it is possible that these goals might bifurcate and be administered under separate programmes i.e., a climate strategy that lays out an overarching decarbonisation agenda will work in tandem with a farm policy that supports decarbonisation of the agriculture sector."