Renewable Energy Credit EXECUTIVE SUMMARY: Renewable Energy Certificates Supply and Demand Dynamics, Policy Factors, Industry Issues and Challenges, and Key Players: Market Analysis and Forecasts Published 2Q 2010 NOTE: This document is a free excerpt of a larger research report. If you are interested in purchasing the full report, please contact Pike Research at sales@pikeresearch.com Meg Hendricks Industry Analyst 2009 Pike Research LLC. express written permission of Pike Research LLC 3 Clint Wheelock Managing Director
Section 1 EXECUTIVE SUMMARY 1.1 Market Overview The renewable energy industry is young and emerging. Like most infant industries, growth of the sector is supported by various mechanisms that subsidize product development. For the renewable energy sector, one such mechanism that emerged in the late 1990s and early 2000s was the Renewable Energy Certificate (REC). Designed to compete with the energy generated from conventional sources, the Renewable Energy Certificate is a market-based subsidy that supports electricity generated from renewables. The REC is the environmental attribute associated with the generation of one megawatt hour (MWh) of green energy. It is considered to have value in the market because the generation of energy using wind, hydropower, solar, geothermal, and biomass displaces energy that would otherwise be sourced from fossil fuels. Two distinct markets exist for RECs. The voluntary market comprises companies, institutions, organizations, and individuals who purchase certificates to demonstrate their environmental stewardship. The compliance market is mandated by state-level policies called Renewable Portfolio Standards (RPS) that require load-serving entities or electricity providers to source a set percentage of their electricity load from renewable energy sources. The economic conditions, recent federal interest in renewable energy, and a growing awareness of both climate change and the numerous benefits that renewable energy provide have resulted in market trends such as lower prices, increasingly aggressive Renewable Portfolio Standards, and demand preferences for certain resources. Even with the current economic recession, both markets continue to grow. 1.2 Market Drivers The voluntary market and the compliance market are both driven by a growing awareness and value placed on the environment, as well as energy security concerns. This social change is evident in the type of advertising and packaging strategies companies are using; the type of products available in mainstream stores; and the extensive media attention given to environmental issues. Additionally, the benefits of renewable energy, such as job creation, have further driven the development of the renewable energy industry. The result of improved environmental awareness has motivated the creation of federal, state, and local incentives that subsidize the renewable energy industry. Various types of incentives including tax credits, production incentives, and rebates have helped reduce the cost of building renewable energy facilities and are subsidizing the research and development needed for new technologies. These incentives are dominant drivers in the Renewable Energy Certificate market. Another key driver is carve-outs in Renewable Portfolio Standards. Carve-outs, or set asides, are mandates that require load-serving entities to source a set percentage of energy from a specific technology. By creating demand for certain types of RECs, policy carve-outs motivate facility developers to build more plants to capture specific resources. As of March 2010, 16 states plus Washington, D.C., have included a solar carve-out in 1
their renewable energy policies. The excellent potential of solar as an energy source is well known; however, the actual percentage of solar energy used in the United States is very small. Consequently, solar carve-outs have become particularly popular in the past few years. 1.3 Key Stakeholders Many stakeholders are involved in the renewable energy market, including facility developers, retail and wholesale marketers, brokers, consumer protection agencies, and regional tracking systems. The most competitive groups are the retail and wholesale marketers and the brokers. Because demand for renewable energy is growing by leaps and bounds, the facility developers do not have much competition. And only one consumer protection agency dominates, which suggests there is little to no competition within that stakeholder group. As for the regional tracking system, each registry covers a specific territory, virtually eliminating competition. The REC marketers, both retail and wholesale, compete with one another to win the business of the companies and utilities that purchase RECs in the voluntary market. Approximately 115 retail and wholesale companies operate in the REC marketplace to help their customers form relationships with facility developers. By purchasing and holding RECs before certificates are sold to voluntary buyers, marketers take on the risk that others cannot. Typically, the utilities are able to source RECs from facility owners, which reduces costs by cutting out the middleman. Brokers, unlike marketers, never take possession of Renewable Energy Certificates. For a small transaction fee, they instead work with buyers and sellers of RECs to create markets. While there are some brokers who only participate in the environmental markets, others trade all types of energy products. 1.4 Market Analysis As mentioned, there are two distinct markets for Renewable Energy Certificates: the voluntary market and the compliance market. The voluntary market is fed by companies, institutions, organizations, and individuals who choose to demonstrate their environmental stewardship through the voluntary purchase of RECs. Approximately 84% of the voluntary RECs are certified by Green-e, a labeling and verification program managed by the Center for Resource Solutions (CRS). Closely tracked to avoid double-counting, the Green-e label provides assurance to voluntary REC buyers that their purchase has value. The compliance market for RECs has developed in response to the RPS mentioned earlier. Mandating covered utilities to use a certain percentage of renewable energy in their electricity mix, these state-legislated policies currently affect thirty-one states. Each state has a unique policy created to meet its needs and support the development of its renewable energy industry. For example, in Colorado, utilities must source 20% of their electricity from renewable sources by 2020. 1.5 Regional Tracking Registries There are nine different regional tracking registries in the United States, each of which covers a specific regional area; some registries track many states, while others track just one. Created specifically for the REC markets, the registries help load-serving utilities keep track of the certificates they purchase and ensure that the RECs are retired after they are used to meet state policy requirements. The primary feature of the regional tracking systems is to prevent double-counting. However, they also track all trades within the 2
region as well as information on numerous generating facilities, providing facilities with extensive data. 1.6 Pricing of Renewable Energy Certificates One of the least transparent aspects of the REC market is the pricing of a certificate. Many factors influence the cost of a certificate, such as where it originated, what resource was used to generate the megawatt hour, when the facility was built, what the certification of the facility is, and how much demand for a particular type of REC is generated by Renewable Portfolio Standards. Although certificates in the voluntary market are typically much less expensive than those in the compliance market, the price in both markets has dropped significantly in the past year and a half. Currently, a REC is priced between $1 and $650. 1.7 Market Forecasts Pike Research s forecast for these two markets is dependent on economic conditions as well as legislative achievements. But despite the changes that may occur in the U.S. economy in the next five years or the moves that Washington might make, the REC market holds promise for growth and increased transparency in the future. This report includes scenario-based forecasts of both the voluntary and the compliance market. The voluntary market forecast assesses two economic environments and examines what type of impact those conditions could have on the market. A key driver of the voluntary market is the amount of discretionary income held by companies and individuals. The more discretionary income in the pockets of companies, the more inclined they are to purchase Renewable Energy Certificates. The first economic scenario is the status quo, which assumes that the U.S. economy will remain sluggish for the next five years. Even with slow or no economic growth, Pike Research forecasts that the voluntary market will grow at a compound annual growth rate (CAGR) of 8.6%. Under a scenario that contemplates more normal economic growth of 2.0% to 2.5%, the voluntary market will continue to flourish with a CAGR of 17.2%. Our compliance market forecast assesses two political scenarios: 1. Washington passes a federal Renewable Portfolio Standard of 15%, to be achieved by all 50 states by 2015. 2. A stalemate continues to plague our national legislative bodies. A national renewable energy policy would stimulate a surge in demand because it would bring an additional 20 states into the compliance market demand pool. Under this scenario, the compliance market would grow at a CAGR of 16.7%. If Washington cannot agree on a renewable energy standard or a cap-and-trade policy, the compliance market will continue to grow at a CAGR of 11.5%; moreover, trends such as solar carve-outs and installation of distributed generation facilities will continue to grow in popularity. 3
Section 12 TABLE OF CONTENTS Section 1... 1 Executive Summary... 1 1.1 Market Overview... 1 1.2 Market Drivers... 1 1.3 Key Stakeholders... 2 1.4 Market Analysis... 2 1.5 Regional Tracking Registries... 2 1.6 Pricing of Renewable Energy Certificates... 3 1.7 Market Forecasts... 3 Section 2... 4 Market Overview... 4 2.1 Renewable Energy... 4 2.2 The Development of a Nascent Industry... 7 2.2.1 Green Pricing Programs... 8 2.2.2 Green Power Marketing... 8 2.2.3 Renewable Energy Certificates... 9 2.3 Market Drivers... 13 2.3.1 Production Tax Credit... 13 2.3.2 Investment Tax Credit... 13 2.3.3 MACRS + Bonus Depreciation... 13 2.3.4 Resource Carve-Outs... 14 2.3.5 Increased Awareness of the Environment... 14 Section 3... 15 Key Industry Players... 15 3.1 Facility Developers and Owners... 15 3.1.1 SunEdison... 15 3.1.2 Renewable Energy Systems... 16 3.2 Wholesale and Retail Shops... 16 3.2.1 Bonneville Environmental Foundation... 18 3.2.2 3Degrees... 18 3.2.3 Renewable Choice Energy... 19 3.3 Brokers and Traders... 20 3.3.1 GT Environmental Finance... 20 3.3.2 Evolution Markets... 21 3.4 Load-Serving Entities... 21 Section 4... 23 Market Analysis... 23 4.1 The REC Compliance Market and Renewable Portfolio Standards... 23 4.2 The Voluntary REC Market... 26 4.2.1 Green-e Certification and the Center for Resource Solutions... 28 4.2.2 The Green Power Partnership... 30 Section 5... 34 Regional Tracking Registries... 34 5.1 Introduction to Tracking Systems... 34 5.2 WREGIS... 34 5.3 M-RETS... 35 5.4 ERCOT... 35 5.5 NARR... 35 67
5.6 NEPOOL-GIS... 35 5.7 PJM-GATS... 35 5.8 MIRECS, NYSERDA, and North Carolina Renewable Tracking System... 36 Section 6... 40 Pricing of Renewable Energy Certificates... 40 6.1 Introduction to REC Pricing... 40 6.2 Pricing in the Compliance Market... 40 6.3 REC Pricing in the Voluntary Market... 46 Section 7... 48 International REC Markets... 48 7.1 Australia... 48 7.2 Canada... 48 7.3 Europe... 50 Section 8... 51 REC Market Issues and Challenges... 51 Section 9... 53 Market Forecasts... 53 9.1 Introduction to Market Forecasts... 53 9.2 Voluntary Market Forecast... 53 9.2.1 Stagnant Economy Scenario... 53 9.2.2 GDP Growth Scenario... 55 9.3 Compliance Market Forecast... 55 9.3.1 Washington Turns Green Scenario... 55 9.3.2 Stalemate in Washington Scenario... 57 Section 10... 59 Company Directory... 59 10.1 Consumer Protection/Tracking... 59 10.2 Brokers... 58 10.3 Retail, Wholesale/Commercial... 60 10.4 Information Sources... 64 Section 11... 65 Acronym and Abbreviation List... 65 Section 12... 67 Table of Contents... 67 Section 13... 69 Table of Figures... 69 Section 14... 70 Scope of Study... 70 Sources and Methodology... 70 Notes... 71 68
Section 13 TABLE OF FIGURES Chart 2.1 United States Energy Supply by Resource... 4 Chart 2.2 Annual Renewable Energy Production and Consumption: 2001-2008... 6 Chart 4.1 States Adopting Renewable Portfolio Standards, United States: 1983-2009... 26 Chart 4.2 Number of New Green Power Partnerships by Year: 2005-2009... 31 Chart 6.1 Sample Renewable Energy Certificate Prices: 2009... 40 Figure 2.1 Renewable Energy Resource Abundance Maps... 5 Figure 2.2 REC and Electricity Pathway Split... 10 Figure 2.3 Market Drivers of Renewable Energy Certificates... 13 Figure 4.1 Map of State Renewable Portfolio Standard Requirements and Voluntary Goals... 25 Figure 4.2 Green-e Logo... 29 Figure 5.1 Map of Regional REC Tracking Registries... 37 Figure 6.1 Solar Renewable Energy Certificate Markets and Trade Eligibility... 43 Table 2.1 Levelized Cost of Energy... 7 Table 2.2 Renewable Energy Certificate Market Size, United States: 2004 and 2010... 12 Table 3.1 REC Retailers and Products... 17 Table 4.1 State Renewable Portfolio Standard Requirements... 23 Table 4.2 Estimated Annual REC Sales (Millions of kwh): 2005-2008... 27 Table 4.3 Minimum Green-e Commitment Requirement for General Usage Claims... 29 Table 4.4 Green Power Partnership Membership Requirements... 31 Table 4.5 Top 20 Green Power Partners... 32 Table 5.1 Tracking Registry Account Holders... 38 Table 5.2 Comparisons of Existing APX Environmental Technology Deployments... 39 Table 6.1 State Geographic Eligibility for Renewable Energy Certificate Trading... 41 Table 6.2 State Renewable Portfolio Standards Alternative Compliance Payment... 44 Table 7.1 Canada s Renewable Energy Target Initiatives... 48 Table 9.1 Renewable Energy Certificate Compliance Market Forecast, United States: 2011-2015.. 57 69
Section 14 SCOPE OF STUDY Pike Research has prepared this report to provide all participants, at all levels, of the Renewable Energy Certificate market, including renewable energy facility developers, financiers, venture capitalists, brokers, REC marketers, regional tracking systems, utilities and companies dedicated to or interested in environmental stewardship with a comprehensive analysis of the state of the market as well as a welldeveloped forecast model that accounts for both economic and political factors. The objective of this report is to provide a thorough analysis of the Renewable Energy Certificate Market with a primary focus on both the voluntary and compliance markets in the United States. Additionally, the report presents a 5 year forecast for each market through 2015. Three foreign markets, including Canada, Australia and Europe are briefly touched upon. The study aims to examine the supply and demand chain for RECs in both the voluntary and compliance markets. Highly influential factors influencing the supply and demand of RECs are addressed, such as state policy mandates for renewable energy, called Renewable Portfolio Standards, as well as on the market drivers for the voluntary purchase of certificates. Stakeholders or market participants engaged in the supply and demand of certificates, beginning with facility developers and ending with purchasing entities such as utilities and companies is reviewed. Also of equal importance is the effort to examine both challenges as well as opportunities for growth in both the compliance and voluntary markets. SOURCES AND METHODOLOGY Pike Research s industry analysts utilize a variety of research sources in preparing Research Reports. The key component of Pike Research s analysis is primary research gained from phone and in-person interviews with industry leaders including executives, engineers, and marketing professionals. Analysts are diligent in ensuring that they speak with representatives from every part of the value chain, including but not limited to technology companies, utilities and other service providers, industry associations, government agencies, and the investment community. Additional analysis includes secondary research conducted by Pike Research s analysts and the firm s staff of research assistants. Where applicable, all secondary research sources are appropriately cited within this report. These primary and secondary research sources, combined with the analyst s industry expertise, are synthesized into the qualitative and quantitative analysis presented in Pike Research s reports. Great care is taken in making sure that all analysis is well-supported by facts, but where the facts are unknown and assumptions must be made, analysts document their assumptions and are prepared to explain their methodology, both within the body of a report and in direct conversations with clients. Pike Research is an independent market research firm whose goal is to present an objective, unbiased view of market opportunities within its coverage areas. The firm is not beholden to any special interests and is thus able to offer clear, actionable advice to help clients succeed in the industry, unfettered by technology hype, political agendas, or emotional factors that are inherent in cleantech markets. 70
NOTES CAGR refers to compound average annual growth rate, using the formula: CAGR = (End Year Value Start Year Value)(1/steps) 1. CAGRs presented in the tables are for the entire timeframe in the title. Where data for fewer years are given, the CAGR is for the range presented. Where relevant, CAGRs for shorter timeframes may be given as well. Figures are based on the best estimates available at the time of calculation. Annual revenues, shipments, and sales are based on end-of-year figures unless otherwise noted. All values are expressed in year 2010 U.S. dollars unless otherwise noted. Percentages may not add up to 100 due to rounding. 71
Published 2Q 2010 2010 Pike Research LLC 1320 Pearl Street, Suite 300 Boulder, CO 80302 USA Tel: +1 303.997.7609 http://www.pikeresearch.com This publication is provided by Pike Research LLC ( Pike ). This publication may be used only as expressly permitted by license from Pike and may not otherwise be reproduced, recorded, photocopied, distributed, displayed, modified, extracted, accessed or used without the express written permission of Pike. Notwithstanding the foregoing, Pike makes no claim to any Government data and other data obtained from public sources found in this publication (whether or not the owners of such data are noted in this publication). If you do not have a license from Pike covering this publication, please refrain from accessing or using this publication. Please contact Pike to obtain a license to this publication. 72