One way to fix the broken RECs market: Test for additionality

There’s long been skepticism about the effectiveness of trading renewable energy certificates, or RECs, to drive decarbonization. 

Consensus on how to fix the flawed but entrenched practice, however, remains elusive. For most small- and mid-sized companies, buying RECs is still one of their primary avenues to lower their scope 2 emissions. 

• The top line: The clean energy tax credit and RECs marketplace Ever.green laid out its case for introducing additionality to how RECs are valued in a white paper published today. The start-up, which launched in 2021 but raised seed funding in the wake of the Inflation Reduction Act’s passage, argues that it’s necessary to test certificates to ensure they have a material contribution to the development of a new clean energy project. 
• Nuts and bolts: For RECs to be effective, Ever.green said, they need to provide contracted revenue to pre-financing or pre-completion projects that haven’t come on the grid yet — and, crucially, that wouldn’t achieve completion without it. The paper argues that RECs contracts need to be long-term (defined as five to 10 years) and create at least a 10% increase in the project’s revenue, internal rate of return, or financial leverage, or else a 10% decrease in its debt-service coverage ratio, cost of capital, or cost of energy. 

As of 2024, the majority of RECs are in the voluntary spot market, and those are sold annually. This creates revenue that is uncontracted, therefore not meaningful for the financing or development of new projects, Ever.green said. Furthermore, they’re pretty cheap at between $1 and $3 apiece, which generates just around 2% of a project’s typical revenue. 

Michael Leggett, Ever.green chief product officer and co-founder, compared relying on RECs to build a new renewable energy project to relying on a tip jar to buy a car. 

“If I give you a few bucks, does that help you buy a car?” he said. “We’re talking about as little as 1% to 2% of revenue. It’s not going to move the needle.” 

PPAs, meanwhile, lie on the opposite side of the spectrum in terms of impact, but are inaccessible to most companies. 

“Some of our customers are large companies,” Leggett said. “They came to us after spending years trying to do a virtual PPA and being told over and over that they’re not big enough — despite being a $50 billion tech company.” 

Ever.green aims to achieve a Goldilocks-like middleground. It offers its customers RECs only from developers that have projects at the pre-financing or pre-completion stages. And it binds them to five to 10 years contracts, giving the developer a contracted revenue stream that it can use to secure financing from banks and other investors. 

This results in a relatively small pool of eligible projects — at present, the fourth and fifth projects advanced through Ever.green’s approach to RECs are underway. And the implied promise of impact means that the company sells RECs at prices that are “an order of magnitude higher” than average. The goal: a material impact on the project’s economics.

In March 2024, Ever.green announced a partnership with Clearway Energy Group to repower a 55-megawatt merchant wind project in Texas, where eight companies bought RECs from the project through long-term contracts. Those contracts, at least in theory, will offset some of the risk associated with its lack of PPAs. 

While Ever.green’s approach is relatively singular, the Danish company Reel identified the same problems, but is taking an opposite approach to solving them. By having smaller companies band together to get an offtake agreement, Reel is angling to make PPAs more accessible — and enabling smaller companies to skip the RECs market entirely.

Corporate context

As the industry prepares for the revisions to the Greenhouse Gas Protocol expected in 2025, players of all sizes are weighing how to guarantee the impact of clean energy purchases — both in the RECs market and in the world of corporate power procurement. 

Earlier this year, researchers at Princeton published a paper stating that the only way for corporate clean energy to have a relevant emissions impact in the coming decade is through matching purchases to hourly demand.

Meanwhile, a divide of sorts has emerged among Big Tech companies as to the best approach to 24/7 carbon-free energy. One “emissions-first” camp pledges to target purchases with maximum carbon reductions globally regardless of “grid or market boundaries”; another has begun advocating for more granular certificates that capture the hour and location where clean energy is produced.

One of the issues with both approaches, according to Leggett, is that revenue remains uncontracted. That means it won’t incentivize the development of new projects that wouldn’t otherwise be built. 

One of the reviewers of the Ever.green white paper was Matthew Brander, senior lecturer in carbon accounting at the University of Edinburgh. In discussing these wider philosophical approaches to clean energy purchases, he dismissed the emissions-first approach as not going far enough.

“Additionality is definitely one of the requirements for ensuring accurate greenhouse gas information,” said Brander. “But I think 24/7 and spatial matching deliverability is needed alongside the additionality requirement. If you put those two things together, then you have a good solution for greenhouse gas inventory accounting.”