The Law of Solar: A Guide to Business and Legal Issues

The Law of Solar: A Guide to Business and Legal Issues

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Sara E. Bergan
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    Victoria Twogood Practice Group Director 612.373.8842

Monetizing the “Green” in Green Power: Renewable Energy Certificates


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I. Introduction. Renewable energy generation creates at least two distinct commodities that may be sold together or separately. These two commodities are electricity and environmental attributes. The environmental attributes include the emissions benefits associated with the use of renewable energy (e.g., avoidance of greenhouse gas or other emissions) and the source of renewable energy (e.g., solar or wind resources). Because there are two commodities, it is possible to sell the electricity with the environmental attributes or to sell the two commodities separately from each other. Given the ability to unbundle the environmental attributes from the electricity, the buyer of the environmental attributes may be different from the buyer of the electricity.

A renewable energy certificate or “REC” is a marketable unit representing the rights to the environmental attributes of renewable power generation. A REC typically represents the environmental attributes from 1 megawatt hour (“MWh”) of electricity from a renewable energy source (though some states do allow aggregation of smaller units), and includes the reporting rights to the greenness of that MWh of electricity. In the case of electricity from solar generation, the corresponding certificate may be referred to as a solar renewable energy certificate or “SREC.”

This chapter discusses the different types of markets where a solar power developer might sell its RECs, examines criteria that may affect the eligibility of your facility to sell its RECs, and explains how the tracking of RECs can lead to maximizing the value from your REC sales.

II. How RECs Help Finance Your Renewable Energy Project. Financing is usually the biggest challenge facing independent developers of solar energy projects. A profitable solar energy project typically relies on multiple sources of revenue. Electricity sales are obviously the most important, but state and federal incentives, including tax benefits, are important revenue streams as well. In addition to the revenues from electricity sales and the various governmental incentives, RECs can be a significant stream of revenue for a solar energy project, substantially aiding its financing prospects. Investors tend to require long-term certainty to give maximum credit to the cash flows for a project. Because REC markets can be volatile, investors and lenders prefer to finance a contracted cash flow. Therefore lenders or investors may not rely on revenue projections from REC sales absent a long-term REC sale agreement. Some states are also employing various tools to try to create more long-term stability in the REC markets, such as setting floor prices for RECs to enable lenders and financing parties to gain more certainty in modeling long-term REC revenues.

III. Types of Markets for RECs. REC prices are largely determined by market forces. In general, there are two markets for RECs: compliance markets and voluntary markets.

A. Compliance (or Mandatory) Markets. During the first decade of the 21st century, a majority of states passed laws requiring certain utilities to include a minimum amount of renewable energy in the portfolio of generating resources serving the utility’s load. These laws are generally referred to as renewable portfolio standards (“RPS”) or renewable energy standards. They require utilities to add renewable generation to their system incrementally until reaching a standard of anywhere from 10 to 100 percent of retail sales from renewable energy. Many of these initial benchmarks have been reached and will likely continue to be satisfied for the foreseeable future by utilities retiring RECs from existing renewable generation. In response, many states have recently moved to significantly raise their state standard, which has the effect of expanding the compliance market for RECs.

In compliance markets, buyers tend to care only about whether the source of renewable generation meets the state RPS requirements. As such, it is critical to understand how these policies work to either limit or add value to your particular RECs or SRECs. In addition, utilities making long-term purchases of RECs may impose credit requirements on sellers in the form of a letter of credit, a corporate guaranty, or other arrangement, as utilities tend to buy RECs only from sources that will satisfy their RPS needs for the long term.

1. REC Eligibility. Each state RPS program determines whether RECs are tradable and defines what constitutes a REC that will satisfy its own particular standards. Some states specify that the generation source must be located within the state or a particular region or that the electricity generated be delivered to the state or a nearby region to meet the state standard. Some states require their utilities to purchase the electricity and REC together, or limit the amount of the RPS that can be met by purchasing RECs alone (e.g., California). States often also designate an allowable life span or shelf life for RECs to meet state standards. These often range from three to five years (but can be longer) and at the end of the designated period expire for the purposes of meeting the state RPS. And of course states determine what energy generation resources are eligible to meet the state standards, a determination that is widely varied among states. Additionally, solar facilities may be required under state law to be certified in order to sell qualifying solar RECs and such certification may include meeting additional requirements for solar like a capacity cap. Markets for RECs are changing all the time, and while tracking your RECs through a regional tracking system should gather and verify the data necessary to demonstrate compliance for various state policies, the risk of noncompliance is ultimately in the hands of the REC holder (the tracking systems do not verify eligibility). Thus it is critical to track the current RPS policies and eligibility of resources in various states where the parties intend the RECs to be used for compliance.

2. Solar Carve-Outs or Set Asides. In an attempt to pull more solar energy into their markets than would otherwise happen under a traditional RPS where lower-cost renewable energy (e.g., wind energy) will likely be utilized first to meet the requirements, many states have legislated unique standards, carve-outs, or additional incentives for solar energy. A solar carve-out or set aside is a requirement that a certain percentage of the electricity acquired by utilities subject to a state RPS be generated by a solar energy resource. Sometimes this is laid out in a graduated class or tier system whereby utilities are required to get a certain percentage of their electricity from each class or tier over time and where solar may occupy one class by itself or be classified with other similarly situated technologies. In other cases, there is simply a stated percentage of electricity (most common) or percentage of the total RPS that is required from eligible solar technologies, and the percentage too may increase over time. In certain cases the state legislature may have added a separate solar standard years later on top of the traditional RPS. Other states have chosen to set a capacity (MW) or production (MWh) target for solar energy that may or may not be directly carved out of the state RPS.

3. Multipliers or Factors. Many states also allow solar energy RECs or generation to be multiplied by some factor (e.g., two or three) such that a utility could use less solar energy to comply with the state RPS. These measures, if put to use, effectively lower the total state renewable energy requirement and may also include a cap or sunset date to curb this effect. Multipliers may be used in lieu of or in addition to a carve-out.

Other states create priorities within solar generation by assigning different solar REC factors for different types of installations (e.g., 1 for community shared solar projects vs. 0.8 for generation on brownfields). And the multipliers or factors themselves may be for any number of things potentially affecting a solar energy facility and may be mutually exclusive or additive. For example, states may include a multiplier for the type of technology (e.g., solar), scale of technology (e.g., under x number of MW or distributed generation), type of system (e.g., ground or building mounted), time of generation (e.g., peak hours), location (e.g., in state or in-service territory), type of entity (e.g., community based), or development characteristics (e.g., use of in-state manufactured content or labor).

4. Regulating Value. States have employed a variety of legislative and regulatory efforts to stabilize the long-term market prices for solar RECs. Some states, for example, set solar alternative compliance payments (“ACPs”) that aim to create a ceiling on solar REC prices on the theory that a utility would simply opt for the lower priced ACP in order to meet its requirements if solar REC prices became too high. Thus when there is a shortage of solar REC supply, the ACP could virtually set the market price for the solar RECs. In the case of New Jersey, the legislature set forth a 15-year schedule of ACPs to encourage more certainty in the market.

Efforts to stabilize solar REC prices under the opposite conditions—where there is an oversupply—include various methods of encouraging long-term contracts and establishing an effective price floor. Massachusetts, for example, addresses oversupply through its Massachusetts Solar Credit Clearinghouse Auction program, which aims to auction off any available solar RECs that are not being sold on the open market through a series of fixed-price auctions. If the available credits are not cleared by the bids at the fixed price during the first auction, another auction is held at the same fixed price but where the shelf life of the REC is extended, thereby adding value to the REC. If the shelf-life extension remains insufficient to clear the volume, the state increases the utilities’ obligations for the next year in proportion to the volume of available SRECs. These actions all aim to create a market floor price and create a more stable financeable product.

The factors mentioned above also work to control the effective value of the environmental attributes associated with solar generation. In Massachusetts, for example, once a 1,600 MW program cap has been reached, the solar REC factor values will switch from a range of 0.7 1 to 0.5 0.7, resulting in the need to generate more MWh to achieve the same revenue from REC sales.

B. Voluntary Markets. Although the compliance market is a critical driver of REC sales today, the concept of RECs or green tags was originally developed for voluntary actions where individuals or companies aspired to meet certain renewable or sustainability goals. In these markets, sales are driven by customer demand. Voluntary buyers may be motivated by a desire to “do the right thing,” or to enhance or affirm their corporate identity, corporate climate or sustainability goals, or general environmental awareness. Buyers include marketers, brokers, businesses, nonprofit organizations, and individuals. More recently, voluntary corporate procurement of renewable energy has been increasing dramatically as large energy users seek to meet internal goals or hedge against volatile energy market pricing. The Midwest Renewable Energy Tracking System (M-RETS), for example, has tracked voluntary market retirements for nearly a decade and shows 2017 on pace to be by far the largest year of voluntary REC retirements in its system. The following sections provide an overview of the different ways electricity customers participate in the voluntary markets for “green” electricity.

1. Green Pricing. Early examples of voluntary REC markets include utility “green pricing programs,” which started with a small number of utility programs in the early 1990s and now number in the several hundred. In these cases utility customers generally sign up to pay a premium on their utility bill for renewable energy and the utility then procures and retires RECs in proportion to the amount of green power purchased by the customers involved in the program. Some of the top programs (e.g., Portland General Electric) have well over 100,000 participants in their green pricing programs and the top 10 sell well over 5 million MWh of green electricity each year. While these programs have historically purchased primarily wind energy generation, solar procurement under the programs is on the rise and some utilities are offering the customers an option to procure from solar specifically. The RECs associated with these programs may be sold bundled with the electricity or separately as unbundled RECs.

2. Green Tariffs. In recent years, to accommodate the increasing desire for green power, the need for competitive and stable electricity prices, and customer goals to procure the associated RECs, utilities in some states have launched “green tariff” programs. Specifically, a “green tariff” is a price structure or rate offered by the utility and approved by the state’s public utility commission that may provide for up to 100 percent of eligible customer electricity needs to be sourced from renewable resources. These green tariff programs vary widely depending on level of customer participation or price structure. Some are aimed at smaller customers and are known as “subscriber” utility programs. In such instances, the utility maintains full control over the procurement and pricing terms of a renewable energy project and the customer “subscribes” to the utility program for a portion of the project. Other “green tariff” programs primarily involving larger customers give the customer direct control in the negotiation of the renewable power purchase agreement (“PPA”). In such instances, the customer, the utility and the solar developer enter into a “sleeved” agreement. The associated green tariff then replaces the customer’s standard electricity rate with the cost of the renewable energy under the PPA and a rider added to the standard electricity rates (accounting for the total of the cost of renewable energy plus credit for the avoided cost (i.e., fossil-fuel power replaced through the renewable energy project)). Lastly, in a market-based green tariff, the customer signs a PPA for the energy and RECs from a dedicated renewable energy facility and the utility sells the resulting output into its wholesale market (e.g., Southwest Power Pool or Midcontinent Independent System Operator) and credits the wholesale market price to the customer. In all of the above green tariff variations, the utility and customer have unbundled the cost of service rate and substituted for the cost of service for the renewable resource. The various iterations of green tariffs are still relatively new and the ability of such arrangements to facilitate renewable transactions, at least in part, depends on the value proposition to the customer and whether it will yield savings.

3. Corporate Purchases. Alternatively, certain corporate purchasers enter into “synthetic” or virtual PPA transactions, which provide the ability to contract directly with the renewable energy generator for the sale of electricity and/or RECs without the actual delivery of the physical power. These arrangements are often used by customers with intensive energy use, who are interested in a long-term hedge given the volatility of the energy market or who are subject to corporate sustainability goals. Essentially, in these transactions, the buyer and the seller engage in a hedge or a swap, whereby the parties sell into the wholesale marketplace but agree on a “strike” price at a known hub or trading point. The buyer will pay the seller if the market price is below the strike price, and the seller will pay the buyer if the market price is above the strike price. The RECs may be built into the deal or treated separately. Synthetic PPAs can provide the buyer with long-term price security for both power and RECs, and if the strike price is financially attractive for the seller, it allows the seller to finance the project for the term of the agreement with the certainty that it will be paid no less than the strike price for the power produced. Determining whether and how to best structure such a deal is highly dependent on the particulars of a state’s energy regulatory system.

4. Community Choice Aggregation. Some states allow communities to aggregate their loads and procure green power in larger quantities through an alternative electricity supplier. For example, in California, community choice aggregation (“CCA”) programs have been established by individual jurisdictions (such as a city) or by two or more jurisdictions pursuant to a joint powers authority agreement. CCAs typically provide different product offerings that allow customers to choose how much of their energy will be derived from renewable energy resources. To serve these customers, CCAs enter PPAs with energy suppliers. Most commonly, these agreements call for the delivery of both the electricity and RECs generated by the applicable project. However, during the first few years of a CCA, the program may purchase unbundled RECs to meet its renewable energy supply requirements until contracted renewable energy projects come online. While CCAs provide for procurement of electricity and RECs, the existing utility will typically continue to provide energy delivery over its distribution system, as well as performing other services (e.g., monthly billing).

5. Community or Shared Solar. Increasingly, electricity customers also have the option to subscribe to a shared solar project, which is currently a small but growing market. Please refer to Chapter 9 for more detail on community solar in general. For the purposes of this chapter, we note that the treatment of the environmental attributes associated with shared solar programs can vary widely and can have dramatic effects on the project’s financing. In Colorado where the utility issues a request for proposals for community solar, the winning bids recently employed negative REC pricing to the surprise of many. By contrast in Minnesota, regulators initially set an effective fixed REC price of $20/MWh for all RECs transferred from community solar generating assets to the utility by raising the bill credit rate paid to subscribers in those situations by $0.02/kWh. More recently, Minnesota regulators shifted to a value of solar rate structure that, by definition, does not separately account for the environmental attributes but instead folds them into the value of solar calculation and assumes the RECs transfer to the utility alongside the electricity.

IV. Tracking RECs. Many states that have RPS legislation allowing RECs to count toward the requirements also require the RECs to be retired through a specific tracking system, such as M-RETS, WREGIS, NEPOOL GIS, or PJM. There are at least 10 regional REC tracking systems in the United States and many more now around the world. These electronic systems track each REC from “birth” to retirement. Each unit of generation is assigned a unique ID that includes its attributes, such as the date the energy was generated, the facility location, the date the facility went online, the type of renewable facility, the emissions profile, and all transactions associated with that unique ID. Operating procedures for these tracking systems generally require that the RECs remain whole and that all generation from a particular unit be reported in one tracking system to avoid double counting. A utility, or other entity, can then elect to retire that unique certificate to show compliance with a state requirement.

Initially these tracking systems were somewhat isolated and did not allow for trading into or out of another system. While a state like Michigan continues to maintain a state-specific REC tracking system (MIREC), it is also integrated with the broader M-RETS to facilitate trading across many more states in the Midwest. Today the various tracking systems are continuing to become increasingly integrated with one another.

Even so, the trading in or out of certain systems comes down to compliance with particular state policies. Some states are relatively open with respect to where the RECs can be sourced and others limit the RECs that can be retired for compliance purposes to a single state, neighboring states, or a regional tracking system. The geographic limitations imposed in state policy have deterred market liquidity for RECs and have also been subject to various legal challenges asserting that favoring in-state products above out-of-state products runs counter to constitutional provisions aimed at limiting state protectionism. Some states have changed their policies in favor of a more open approach, but legislators also like to make sure the benefits of legislation accrue locally. Thus, it is important for a developer to carefully track the eligibility of its RECs to be sold into prospective compliance markets.

V. Conclusion. RECs, and solar RECs in particular, can be a valuable revenue stream for a solar developer. Selling an intangible attribute into a growing and evolving market for cash is a great way to enhance the viability of a project. Solar RECs can be particularly valuable where they can qualify utilities to satisfy a state’s RPS standards and those with specific carve-outs, multipliers, or separate standards for solar energy. Additionally, the voluntary market for RECs is seeing dramatic growth. A project’s success can be highly dependent on a detailed understanding of the ability of a solar generation resource to meet certain state standard requirements or corporate sustainability goals, the value eligibility brings to the project, the mechanics of tracking and trading the RECs, and the appropriate contract terms to facilitate the transfer of rights to the attributes in exchange for an important project revenue stream over time. Download The Law of Solar - 5th Edition (PDF)

Key Contributors

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    Victoria Twogood Practice Group Director 612.373.8842
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