Renewable Energy Certificates

  • Date15 May, 2022
  • Author Karl Ehlert

Since 1978, American regulators and policymakers have looked to incentivize the investment and development of generating renewable energy. Individual states began enacting Renewable Portfolio Standards (RPS) to support this mission by requiring a specific percentage of a utility’s energy portfolio to come from renewable sources. Renewable Energy Certificates (RECs) were created as a way for states to comply with these standards by providing incentives for companies to invest in renewable energy even though the return on investment may not be realized until many years later. Sources of REC production include solar electric, wind, geothermal, hydropower and others.

When a renewable energy source generates a  Megawatt hour (MWh) of power it is sold into the local grid, normally through a PPA (Power Purchase Agreement) with a local utility provider. Additionally, the power generator may also earn a REC. The REC can be used by the power generator as a tax credit or sold as a commodity on the open market. RECs act as a tracking mechanism for green energies since clean electricity is indistinguishable from those produced by other sources. They are uniquely numbered and once sold, cannot be purchased again and the seller forfeits the ability to make any claims about “using” renewable energy. For each REC purchased, the customer can claim the equivalent MWh of energy reduction as an offset to their conventional energy use.

RECs can be purchased directly from outside suppliers or from utility providers that offer a green power program. They can also be traded directly from buyer to seller. Third-party marketers and brokers are also commonly found in the marketplace to assist in finding a buyer. Pricing in these marketplaces depends on many factors including the specifics of where, when, and what renewable resource produced it. REC valuation can also differ if they come “bundled” with electricity. As with any commodity market the valuation of a REC is ultimately driven by supply and demand.

Renewable Energy Credits and Business Income Losses

In several renewable energy losses we have worked on, whether it is a wind, solar or another form that earns RECs, the insured has brought up the subject of lost RECs and whether the value should be considered in the loss. Ultimately the adjuster and carrier will have to determine whether the insurance policy covers the value of the lost RECs but the accountant can assist with determining the number of RECs and their valuation.

The number of lost RECs will be determined in the same manner that lost production is determined since it is driven by production. Valuation can be a bit more difficult. Pricing can depend on region and the type of REC but websites such as the GATS (Generation Attribute Tracking System) Bulletin Board can be a useful tool. This website allows both buyers and sellers to post the specific criteria of the RECs they are either trying to sell or purchase as well as price. The history of the insured’s REC sales, if any, can also be analyzed to help determine value.

However, not all insureds sell the RECs they earn and may use them as credits instead. In this case, the insured may make the argument the value of the REC would have to be “grossed up” to include taxes that will be assessed if recovered under the policy. The basis of the argument is that the insured normally gets a credit for the REC but is now receiving money it will have to report as revenue and ultimately increase its income tax liability. If the income tax “gross up” is to be contemplated as recoverable under the policy, then the insured’s effective tax rate should be analyzed rather than assuming a corporate tax rate would apply. Normal operating losses could negate the tax implication of receiving money instead of credits.

Renewable Energy Credits are not unique to the United States and may come up as an issue in losses all over the globe. These credits are important to the insured and help the insured recover the significant investment it made to develop and build the wind, solar or other renewable energy generation site. In handling renewable energy business income losses, the adjuster and carriers should be prepared to determine whether the lost value of the RECs is covered under the business income loss provision of the policy.

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