Double Counting Virtue

If you’ve installed solar at your home and are now basking in the I’m-saving-the-planet warm glow, you may be in for a splash of ice water.  There’s a good chance someone else has purchased your halo and is wearing it right now.

You see, in practically every state, rooftop PV is recognized as green with Renewable Energy Certificates (RECs) that correspond to the amount of electricity they produce.  But if you are leasing the panels or buying the electricity they produce under a power purchase agreement, then the third-party owner (TPO) of the system gets the RECs.   Most TPOs are selling those RECs to another electricity vendor or customer, who can match them up with power from a “brown” source and magically turn those brown electrons green.

Certificate image              A Renewable Energy Certificate (Source: EnergyBrokerNetwork.com)

Here’s how it works: Joe’s Solar puts a 5 kilowatt system on your roof and sells you the electricity under a power purchase agreement. Because Joe owns the panels, he gets credit — in the form of RECs —  for the 7000 kilowatt-hours (kWh) of renewable electricity it produces each year.  Meanwhile, Bob’s all-fossil utility wants to “green up” so it buys the RECs from Joe to match with its coal or gas-fired generation.  Then Bob can claim that 7000 kWh of its power is renewable.

Before discussing why that might be a problem, let’s first remember why such renewable energy accounting systems exist, and can be a good idea.  Let’s say a state has a 20% renewable electricity standard for utilities. Utility A is in an area with few opportunities for renewable generation, but utility B has lots of wind and sunshine, and can cost-effectively generate more renewable power than it needs to meet the standard.  Utility B can build extra renewable energy sources in its area and sell the extra certificates to utility A.  In that way, utility A is helping to finance new green generation in area B. RECs are the currency that allows the overall goal to be met at lower cost.

REC_Diagram_3Degrees            A nice graphic of how RECs work from 3degrees (a company that brokers RECs)

Let’s say utility B generates 28% of its power from renewables, but sells the RECs from the extra 8% to utility A.  No problem with that.  But most people would be concerned if utility B still claimed it was 28% green powered, while utility A also counted those RECs it bought towards its own renewables goal.  That’s essentially the problem that is cropping up with some rooftop solar.

About 70% of new rooftop solar systems are now owned by third parties, and nearly all of the RECs associated with such systems are retained by the TPO.  (The solar homeowner is notified in the fine print of their contract, which s/he probably never reads.)  The TPO companies typically sell those RECs either to a company with a well-publicized goal of being “carbon neutral” or to a “community choice aggregator” that wants to claim a high percentage of green energy for its customers.

One might see this as a creative way to make both the solar homeowner and the RECs buyer feel good about saving the planet.  But the Federal Trade Commission and the Vermont Attorney General are killjoys when it comes to such double counting of virtue.  If the certificates are stripped off and sold to some other entity as “unbundled RECs” (that is, sold separately from the electricity), the FTC says (see §260.15) it is deceptive for the TPO to advertise or tell solar buyers they are getting “clean,”  “renewable,” or maybe even “solar” electricity with their lease or power purchase agreement.

Example 5: A toy manufacturer places solar panels on the roof of its plant to generate power, and advertises that its plant is ‘‘100% solar-powered.’’ The manufacturer, however, sells renewable energy certificates based on the renewable attributes of all the power it generates. Even if the manufacturer uses the electricity generated by the solar panels, it has, by selling renewable energy certificates, transferred the right to characterize that electricity as renewable. The manufacturer’s claim is therefore deceptive

From the Federal Trade Commission’s guidance on marketing renewable power

Just to be clear, there is nothing wrong with installing solar panels in one location while credit is claimed by someone in another location, as long as everyone understands that is happening.  But I suspect many PV homeowners wouldn’t be too happy if they knew their systems were being used by some fossil-powered company to claim it had gone green.

The problem is exacerbated in California, because none of the large utilities here are allowed to buy more than a tiny number of RECs from rooftops solar installations to meet their renewables goals. Due to high electricity prices, lots of sunshine, and generous compensation for rooftop solar generation, we still have about 45% of the nation’s new rooftop PV — mostly under leases or power purchase agreements — which are creating a glut of unbundled RECs that sell for practically nothing. That means that the RECs aren’t doing much to incentivize new rooftop solar systems, but the REC buyers still get to claim their electricity is green. That’s all legal, as long as all parties to the transaction, including the homeowner, are consenting (and fully informed) adults.

The lesson here is that if you choose to go solar, find out what will happen to the RECs.  If they are sold to someone else, you still get to use the electricity, but you have to give back the halo.

 

I’m still tweeting energy news articles and new research papers @BorensteinS 

 

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13 Responses to Double Counting Virtue

  1. Pingback: Double Counting Virtue - Berkeley-Haas Insights

  2. Scott Young says:

    It seems that the TPO should only be able to sell the RECs for the solar energy that the homeowner doesn’t use from the solar system. Why doesn’t the system work that way?

  3. Mark Lively says:

    If the toy company is under an obligation to be 20% solar/renewable, then it could only sell the RECs up to when it the retained solar/renewable is 20% of its actual usage.

  4. Joe Far says:

    Considering the subsidies that the local utility provides both in the form of direct rebates and through net metering (where the local utility pays retail rates for energy it can purchase are a fraction of the cost wholesale) the local utility should be the party able to claim the RECs.

  5. Almost_There says:

    I’m in California and I checked with our solar installer when we had our panels installed in 2012. They said they could keep them or we could keep them, but there was no value to us to give them away. So we kept them. Because the value is so low in CA, there’s no incentive to not keep them, like in some other states where you can get a large payment for your RECs.

  6. Mike says:

    The wealthy who put in leased solar systems on the roof can’t have the smugness points too. There is plenty of smugness going around when electric and hybrid car owners can drive in the diamond lane without paying or worse yet don’t get a ticket for having one person in the car. It is even worse that they aren’t paying their fair share for the roads. People who pay for the solar systems on their roofs should be able to sell the RECs to the utility by not having to pay the connection fee, but they shouldn’t get smugness points. If the home owner pays the for the solar system and pays the utility connection fee, he or she is entitled to the smugness points or halo as the blog authors like to put it. That is way things are folks; usually the poor schmuck loses.

  7. Tom Kabat says:

    Perhaps a standardized contract would help clarify the choice of REC disposition. e.g. Check this “REC Retention” box if you want to purchase and retain the RECs from the system on your roof to make a difference in the world, or check this other “REC Release” box if you want to relinquish the RECs so someone else can purchase and count the renewableness of the energy toward meeting their own targets so they do not have to install as much solar while you get only brown power from the system on your roof.

  8. Azmat says:

    In the 2000-dot-com boom-bust the ‘claimed’ market share of telecom equipment [and many related products] was 10-20% by something like 25-100 companies. When the math hit people we know what happened. The same goes on today with so many incubators claiming [the same] achievements by their tenants. Multiple-counting is endemic.

  9. Before you sign a Solar PPA, make sure that the solar RECs and other environmental attributes (except for tax attributes) remain with the meter owner. 100% of our Solar PPAs with schools and municipalities leave these environmental attributes with the host customer, and all of them (so far) are simply retiring them, not re-selling them, so they have full bragging rights to the halo.
    David Kunhardt, SolEd Benefit Corp.

  10. Alex Gilbert says:

    Good piece. Any sense on how much of the RECs from rooftop solar are actually retired? It makes sense that a TPO setup would generally lead to most of the RECs being sold. But the degree to which homeowners keep their own RECs could become a big question in trying to determine impact of rooftop solar on RPS compliance. 90% of the RECs being retired for rooftop solar systems could be very different for utility compliance than only 40-50% of RECs being retired.

  11. Pingback: Feeling Smug About Your Solar Rooftop? Not So Fast « The Berkeley Blog

  12. Very glad to see Severin and others picking up on this issue. And there is a literature on the twisted logic that has developed around RECs. At the root of the problem is the belief that an environmental commodity can be effective while being defined so ambiguously (i.e., that it represents “all benefits” or “all environmental attributes”) and be used for so many different purposes (e.g., numerous different RPS compliance mechanisms and unregulated voluntary green power claims markets).

    To start, I would suggest readers look here for a deep dive on how this mess plays out in environmental accounting, and specifically carbon footprinting:
    https://scope2openletter.wordpress.com/

  13. Pingback: Does Your Rooftop Solar System Reduce Your Carbon Footprint? It Depends… | The EPIC Energy Blog

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