RECs in reverse

This year has seen a reversal of fortunes for some renewable energy certificate (REC) markets, with some of last year's best performing US markets seeing big price drops, while EU and Australian markets saw record gains. Hamza Ali reports

Renewable energy certificate (REC) markets have had a tough year in the US, as the supply of certificates outstripped demand.

"Power consumption has been lower this year, and that's just a factor of the weather being warmer and an increase in the uptake of energy efficiency upgrades, so you've had less electricity usage overall and this lowered demand for RECs," says Izzet Bensusan, CEO of Karbone, which was voted Best Advisory and Best Broker for the North American RECs markets in this year's poll.

In the US, 29 states and the District of Columbia have put in place mandatory requirements for electricity suppliers to source part of their electricity load from renewable sources.

Each REC is essentially proof that a megawatt of renewable energy has been delivered to the grid and sufficient certificates have to be presented by electricity suppliers to regulators at regular intervals to meet the mandatory targets, known as Renewable Portfolio Standards (RPSs).

While RECs are tradable separately from the renewable electricity they represent, lower power usage means demand for RECs falls as electricity suppliers need fewer certificates to comply with the RPS, says Bensusan.

Even as demand fell this year, build rates of renewable energy plants did not taper off, which meant compliance markets such as the Pennsylvania, New Jersey, Maryland Power Pool (PJM) – the largest RECs market in the US – saw an oversupply which caused prices to fall.

"Certain compliance markets, such as PJM, have remained extremely volatile, currently trading below $10 per MWh from a high around $20 per MWh," says Scott Eidson, vice president, environmental markets at 3Degrees, which won the title of Best Trading Company for North American RECs for the second time.

Markets like PJM include RECs generated by different renewable energy technologies and different states.

Within these larger markets, some states set additional RPSs to give additional support to certain technologies. For example, Pennsylvania and others have Solar RECs (SRECs), which set targets purely for solar technologies.

Prices for SRECs dropped sharply in many states in 2016, as the falling cost of the technology led to more projects being built, resulting in an oversupply of certificates.

The Maryland SREC market, for example, has seen prices fall from $170 per MWh in December 2015 to an all-time low of $18 in November. Solar farm build rates in the state reached 30MWh/month during the first quarter of 2016, which far outstripped demand of 6MWh/month.

Although this slowed towards the end of the year, the market is forecast to have an oversupply of 291,000 SRECs or 80% of the RPS in 2016, according to SRECTrade, a management firm specialising in solar RECs.

Similarly, prices have fallen in the New Jersey SREC market from a peak of $260 in 2015 to $206 in 2016.

"In New Jersey we saw build rates continue to rise as prices began to go down, as projects were fully hedged for the fall in SREC prices," says Rich Weihe, managing director of Karbone. "It's kind of what we saw in Maryland where build rates had not been declining as fast as prices."

"It's not often that you see such dramatic price jumps in this market"
Suvi Viljaranta, Enegia

The reason developers can continue to build, despite the low price of power and RECs, is that costs have also fallen dramatically, agrees Todd Alexander, a partner at Chadbourne & Parke, which shared the title of Best Law Firm for North American RECs with Baker & McKenzie.

"Contractors are achieving greater economies of scale and operators are lowering costs through the use of new technologies and the benefits of having more projects in closer proximity. We now see solar projects willing to offer energy prices near 3 cents per kWh," he says.

Another factor affecting RECs prices is the federal government's extension of the Investment Tax Credit (ITC) and Production Tax Credit (PTC), notes Alexander.

The ITC is a tax break for renewable energy which allows some investors to recoup up to 30% of the value of the project and was due to expire at the end of 2015. The PTC provides renewable energy generators with tax relief of 2.3 cents per kWh.

ITC and PTC were extended in a surprise bipartisan move by Congress in December 2015, for another five years. However, many projects that had been rushed through before the credits were due to expire, came online in 2016. These added to the oversupply of RECs, explains Alexander.

However, while RECs prices have fallen in some markets, various factors, including the election victory of Donald Trump, could cause power prices to rise in the coming year, according to Bensusan.

"The immediate effect of the US election was that the yield on 10-year Treasuries went up, and this is impeding some people from making deals that they could have made a month earlier, due to their cost of capital going up," he says. "REC prices may go up next year, if it becomes apparent that there isn't more supply coming online."

As most RECs markets are state regulated, Bensusan expects the market to continue to grow as "states that have a RECs markets will pursue the course even deeper."

Chadbourne & Parke's Alexander agrees saying: "I do not expect that we will see a repeal of either the investment tax credit or the production tax credit, which are the two principal federal incentives available to renewable energy projects. Rather, I expect that Congress will allow the current phase outs of these tax credits, which are already underway, to continue to take effect."

Across the Atlantic, the price of Guarantees of Origin (GOs), the EU version of RECs, more than doubled early in 2016.

For example, prices for Norwegian hydro GOs climbed to 0.40 ($0.43) per MWh February from 0.15, before seeing prices drop back down to 0.20. This unusual level of volatility was attributed to a surprise announcement by the UK regulator, Ofgem, that foreign GOs could be used to comply with its national system.

However, the UK, which operates a separate renewable certificate market called Renewable Energy Guarantees of Origin (REGO), dampened market exuberance when it later clarified that the scheme would not affect 2016 supply, causing prices to fall back slightly.

"It's not often that you see such dramatic price jumps in this market," says Suvi Viljaranta, portfolio manager at Enegia, which was voted Best Broker for European RECs for the second year in a row. "All of a sudden, in February, Ofgem makes an announcement that some GOs could be used to get exemptions from the feed-in-tariff and the price of GOs jumps to €0.40."

GOs have also been boosted by a rise in European demand for renewable energy of just over 9% since 2014. Initiatives such as RE100 – through which companies have pledged to source 100% of their electricity from renewable sources – have added to the traditional household demand for green energy in Europe, says Marie Christine Bluett, head of renewables portfolio management at South Pole Group, which was voted Best Advisory for European RECs.

"We now have large end-consumers prescribing themselves to renewable energy consumption goals on a never before seen scale," she says.

Five countries account for three quarters of the RECs demand in Europe – Germany, Sweden, Switzerland, the Netherlands and Italy. But Germany, which has for the past few years been the biggest importer of GOs, has seen demand fall for the first time in five years. The country purchased 65 TWh during the first half of 2016, a drop of 5% year-on-year, but remained the biggest market.

Norway, Austria, Finland, Denmark, France and Belgium currently make up the next group of countries – each with a steady market demand of between 10 and 35 TWh annually, according to Viljaranta.

"We have seen a tremendous drop in the cost of these projects"
Izzet Bensusan, Karbone

Meanwhile, in Australia, the RECs market reached record highs, after the government's new targets for renewable energy, announced in June 2015, gave a boost to trading.

The new targets are 33,000 GWh by 2020 for large scale renewable energy such as wind farms (the Large Scale Renewable Energy Scheme) and a Small Scale Renewable Energy Scheme for technologies, such as solar PV on residential properties, which has an aspiration, but not a target, of 4,000 GWh by 2020.

While these new targets have helped revitalise investment in renewables, a forecasted shortfall in supply caused the price of large-scale generation certificates (LGCs) – formerly known as RECs – to rise steadily over the past year, from AUD65 ($48) to AUD90 in November.

"For a period we had a lot of uncertainty around the government's renewables targets which has now been settled," says Martijn Wilder – head of the global environmental markets practice at Baker & McKenzie. "We have seen the reengagement of investment in renewables and increased demand for these products."

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