Vol 1. | Issue 2. | April 2006  

Standard Contracts Could
Boost REC Markets

Committee works to create clear language for energy transactions.

By William Opalka

For renewable energy markets to really blossom, advocates are in virtually unanimous agreement that the output of wind, biomass and other projects have to be treated like a commodity, as is any output is from traditional electric generation sources.

And as the state renewable portfolio standard has become the de facto dominant market driver, means have to be developed to encourage trading of the commodity that both parties to the transaction fully understand.

This is the consensus of industry participants who are striving in one initiative to clarify one hurdle in the development of a liquid market - creating a definition of a national renewable energy certificates (REC) contracts. And parties to those contracts in different jurisdictions have to fully agree upon what they are buying or selling for REC contracts to be used to boost energy markets.

"RECs have been established at the state level, but each state has a different way of dealing with where the best locations of the projects that produce them are," says Mike Eckhart, president of the American Council on Renewable Energy (ACORE), which is spearheading the effort. "For each New England state to have to have its own large wind farm doesn't make any sense."

Practical considerations like siting, available land and wind resources, let alone the political environment of each state, are some of the obvious problems.

ACORE has established a REC Trading Committee, which is working on a venture with the American Bar Association (ABA) and the Emissions Marketing Association to solidify a legal definition of a REC trading contract.

This effort has avoided the major controversy over ownership of the environmental attributes that has divided some segments of the renewable energy industry. Obviously, it's beyond the reach of this initiative to unify REC definitions that could conceivably differ in dozens of ways - one for each state and Canadian province that might engage in cross-border trading.

But the benefits of a liquid REC market are well-known throughout the renewable energy industry.

The ultimate goal of the effort is a way to further monetize the project, so that project developers can more fully tap into the inherent value of a renewable energy site when arranging financing over the long term.

"What we've set out to do is to create a contract with minimal tailoring," says Roger Feldman of Washington, D.C., law firm Bingham McCutcheon LLP, who is part of the ABA representation. The goal is to create transactions that could more easily move the environmental attributes across state lines, he adds. Feldman says the attempt to commoditize the renewable energy is needed to create a fungible market in what are inherently complex deals.

Essentially, the effort is meant to create a series of "check boxes" for the parties that would define, for example, sourcing of the energy.

"The ideal is that you're creating this big tent, so that everybody knows what they're buying, everybody knows who's being represented, and even has provisions if the governmental laws change or some other regulatory changes tend to move the market," Feldman says.

There are other benefits to standard REC contracts that would impact market development. Project off-takers and developers alike would be able to locate projects where they would have the most benefit.

"If a state RPS is passed, and in the event that a project there is not economic, the opportunity exists to have renewable energy production where it is more cost-effective," says David South, who is a REC committee member and vice president and executive director of Pace Global Energy LLC in Fairfax, Va. "Interstate commerce would arise, and this could be a means to create a national renewable portfolio standard without actually [legislating] one."

So far, the voluntary market - the green power market popularized in large part by retail sales to individuals who want to promote cleaner electricity, and increasingly corporations and institutions with similar goals - has provided much of the impetus for early-stage renewable energy development. But this market is too small to carry large-scale project development very far.

The pro bono effort among the lawyers has been ongoing for about a year and will continue for the next few months. Drafts will be circulated over the next couple months.

There are several other areas in which REC liquidity needs to be addressed. These include nationally recognized trading standards, ownership of the environmental attributes, and tracking mechanisms and monitoring. Creation of standardized contracts will also have implications for the nascent movement toward a carbon-trading regimen that would further encourage renewable energy development.

When these issues come closer to resolution, renewable energy advocates believe the market can flourish over the coming years.