Green energy projects are often said to be cost-effective, but one of the financial aids that makes them viable has lost significant value, and appears to be on the verge of collapsing.
Over the past year, renewable energy credits, or RECs, have lost more than half their value. Prior to the downswing, these financial instruments accounted for nearly half of returns from renewable investments.
“That’s why RECs exist — they needed to find a way to pay more money to incent renewables to be built,” said Lisa Linowes, executive director of the New Hampshire-based Wind Action Group. “It’s a market-based subsidy.”
RECs are certificates that show a certain amount of electricity was generated from a renewable energy resource. RECs can be sold or traded, and the holder of a REC owns the right to claim to have purchased renewable energy.
Like tax credits, RECs help fund otherwise cost-prohibitive renewable energy applications like wind turbines and solar panels. The buyer of a REC gets credit for the energy, and RECs in turn can count toward a state’s renewable portfolio standard (RPS) — the target for renewable energy use.
Vermont’s Comprehensive Energy Plan sets an aspirational goal of meeting 90 percent of state energy needs from renewable sources by 2050. However, the goal put forth in statute is to reach 25 percent renewable by 2025, up from 16 percent in 2015.
The 2025 renewable energy targets by sector include 67 percent electric power, 30 percent renewable buildings, and 10 percent renewable transportation.
As states get closer to meeting RPS standards, the demand for RECs will drop. Linowes said this is one reason for the current decline in REC prices.
“The reason this happened is there’s so much renewable energy built, particularly in the state of Massachusetts, which has built a lot of behind-the-meter solar,” she said.
She explained that all this new solar power generates the same Class 1 RECs that the big turbine projects in Vermont are getting. Due to changes in supply and demand, REC prices have dropped from about 5 or 6 cents per kilowatt hour a year ago to just 2.2 cents — and that spells trouble for utilities and developers, which rely on REC sales to keep power rates low for ratepayers.
“It’s surpassed the demand, (and) owners of projects can’t sell them [the RECs],” Linowes said.
According to Linowes, Green Mountain Power didn’t forecast a drop in REC prices until well into the future, and she added that there’s “no floor for this baby,” meaning prices may continue to plummet.
“The only thing that’s going to stop it from dropping is if one of the states changes their RPS law and increases the mandate,” she said.
Another wrinkle is many utilities are locked into contracts with renewable energy providers, so they are forced to buy power for a set price regardless of declining REC prices. For example, in 2014 GMP signed a 25-year contract with Deerfield Wind to purchase power at 8.8 cents per kilowatt-hour. That was a good deal when all the revenue projections seemed firm.
“They were sitting pretty with a 4-cent energy project, a 4.5-cent REC product, and a 2.3-cent PTC [production tax credit],” she said.
The production tax credit also has an uncertain future, as it is set to phase out in 2020.
Linowes said she warned the scenario was coming, but utilities signed deals anyway, and now their ratepayers may be called upon to foot the bill for the higher cost of renewable power.
Some Vermont utilities have already announced rates are going up. In November, Washington Electric Cooperative, which serves 41 towns in north-central Vermont, said it is filing a request with the Public Service Board to increase rates by about 6 percent.
Bill Stewart, a New York City-based consultant for the renewable energy industry, agreed that Vermont utilities put themselves in a bad spot. Specifically, he named GMP, Burlington Electric, and Vermont Public Power Supply Authority (VPPSA).
“If these prices stay low, electricity prices in the state of Vermont are going to have to go up to essentially have the ratepayers pay for this mistake,” Stewart said.
Steward predicted the Donald Trump presidency would only further accelerate the demise of the PTC, and he added that other possible incentives for renewable investment, such as carbon taxes, are becoming “as dead as a door nail.”
“Vermont utilities may wish they could forget the day they entered long term contracts,” Stewart said. “And those contracts are for tens of millions of REC purchases for which they may only get millions of dollars in REC revenues. Remember, Vermont’s a small state, and $50 million goes a long way in that state.”