What is a REC? – The Basics

•1 MWH of electricity = 1 REC (there are exceptions)

•Tracked/traded separate from physical electricity, generally via:

oElectronic tracking systems (ex.PJM Generator Attributes Tracking System)

•Dual Purpose:

• Ease tracking of environmental attributes and AERS Compliance

Provide incremental revenue stream to renewables to make them

economical

New vs. Existing Power Projects•To incentivize investment in new projects, expected revenues must cover:

•Fixed capital costs •Fuel Costs (if any)•Operating and maintenance costs (O&M)•Return on investment

•To keep existing projects operational, actual revenues must only cover: •Fuel costs (if any)•Operating and maintenance costs

Key Point: For most existing power plants, fixed capital costs have been recovered directly from rate-payers through government guaranteed rates of return for investor owned utilities.

Project Finance Fundamentals

RECs & Project Finance

$ $

$ In an efficient market the value of a REC should be the difference between the value of wholesale market energy and the value a new projects needs to recover its fixed capital costs and variable fuel and operation and maintenance costs, plus a reasonable rate of return.

Role of RECs•RECs are necessary to support economics of new projects because:

•Wholesale power prices now set competitively by existing projects•Projects financed by rate-payers (unlike renewables)

•RECs fill funding gap between new project cost and wholesale power price

REC Market Economic Fundamentals

1. REC market demand is fixed

Y axis: REC demand

X axis: Years 2024

6.25%

×

×

×

2. Supply < Demand = REC prices, rising towards ACP

3. Supply = Demand; REC prices = incremental costs; ideal

4. Supply > Demand; REC prices fall towards zero

Efficient REC markets rely on supply and demand equilibrium. SB 315 immediately upsets that equilibrium and produces scenario 4. Because of unanticipated oversupply REC revenues fall towards zero. This creates a “lose-lose” situation in which neither new renewable energy or co-gen and CHP projects are encouraged.

5

2012 2013 2014

13,000

12,000

10,000

5,000

GWh

0

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Gorsuch

Permitted In-State

Additional Steel Mills

AK Steel

Existing In-State

Potential Hydro

11,000

9,000

8,000

7,000

6,000

4,000

3,000

2,000

1,000

Additional Cogen COY 1980

Cogen General

Waste HeatIn-state Non-Solar Demand

Demand will not be high enough to encourage additional supply

•Stable, reliable REC revenues required to facilitate investment in renewables

•In balanced market, REC price SHOULD be difference between power price & project cost

•However, rule of supply and demand applies to REC markets

•Supply surpluses, ANTICIPATED or REALIZED, will depress prices and, thus, investment

•Fixed AERS demand means that additional REC supply would result in (additional) surplus

•However, oversupplied AERS market will not support investment in renewables or COGEN

REC Market Takeaways