Five Percent: Conserve Energy

Climate Change Is Important: Energy Conservation is the First Step

October 21, 2007

Green Markets: Valuing Renewable Energy Credits (RECs)

Category: Big Things,Companies,Economics,News,Policy – Tom Harrison – 3:37 pm

This week’s Business Week ran an article called Little Green Lies, The Bitter Education of a Corporate Environmentalist. One thrust of the article involves renewable energy credits (RECs); they are so cheap, and provide such a small benefit (less than 3% of the total revenue), says the article, that they don’t affect what renewable energy facilities get built. This view seems very short-sighted to me.

The article focuses on the difficult and frustrating experience a well-intended man, Auden Schendler, had in an attempt to make a company “green”. He took a role of “corporate sustainability advocate” at Aspen Skiing Company. The story details how this company could not justify the large or even small real changes proposed by Schendler, not even changing to fluorescent bulbs in the garage. Cost: $20,000; savings: $10,000/year, a mere 2-year ROI. It was nixed, according to the article just because of the opportunity cost — that $20K could be used for something that guests would notice. Clearly, the enlightened business is still a myth.

Yet Aspen Skiing Company and others eagerly jumped on RECs.

What the ski resort has done, and what its competitors and many other companies have done, however, is purchase RECs, the same financial mechanism behind TerraPass. Companies developing (building) renewable energy sources (e.g. wind, solar, geo, hydro, others?) sell these credits to other companies consuming non-renewable (global warming creating) energy, theoretically allowing them to “offset” their carbon emissions, and even claim to be “carbon neutral”.

RECs have always been controversial. Are they effective at promoting development of renewable energy sources? Are they a cheap rationalization for the entities buying them (or worse, one that lets companies feel ok about consuming even more non-renewable energy??).

The BusinessWeek article contends that the economics of RECs “logically can’t have much effect” because developers get $51/MWh of electricity sold, plus another $20/MWh in tax breaks, plus an effective additional $20/MWh in accelerated depreciation of their capital expenses: they effectively earn around $91/MWh. The RECs are sold for $2/MWh, thus represent such a small share of the benefit that it doesn’t cause any new wind power to be built (that wouldn’t be built otherwise).

RECs are, however, very effective marketing tools for the companies that buy them; a cheap way of claiming things like “100% wind powered”. Is this an overblown claim (no pun intended)? Are companies just buying cheap marketing? Perhaps, but our need to see this as a “morally correct” or economically justifiable thing to do is simply flawed.

Until there is a real cost to businesses (and individuals) for using non-renewable, greenhouse gas producing energies, along with a comparable benefit to those using renewables, all we can hope for is that RECs raise awareness, and get some marketing benefit as a result for their purchasers. It will be a good first step, and nothing more.

So even if there isn’t a strong and clear economic benefit, such as “buying 2MWh of RECs causes 2MWh less non-renewable energy to be produced” (which no one claims), it’s still not viable to expect such a benefit to be driven by the market. Yet this is the continuing argument against RECs, and the specious claim of those buying them.

The argument that RECs do not cause the creation of a new facility that wouldn’t otherwise be built is valid, but misses the much larger picture. First, even if RECs represent less than 3% of the return of wind energy, this is entirely incremental — more than the developer would have had otherwise.

Once a renewable energy developer is able to cover its capital costs and expenses, it might make a 10% profit — maybe more, maybe less, but around there. One could argue that 2% to 3% is 20% or 30% of such a profit. It is a voluntary subsidy provided by companies in exchange for a marketing benefit; why would we expect it to provide anything more than an incremental benefit?

Companies live on thin margins like this; more wind and other renewable power will be built when the first round of developers find ways to make the enterprise profitable … less marginal. Historically, technical improvements resulting from optimizations found as new technologies are implemented make them more cost-effective. (Historically, economists argue that economies of scale come into play here, but as I discussed in providing much larger subsidies to oil companies despite what studies by the American Petroleum Institute would have you believe.

Why is our country so afraid to recognize and charge emitters for the true cost of carbon emissions? Countries, unlike companies, can and should take the long view. Countries don’t have quarterly reports, or stockholders looking for a return. Countries have citizens with children, and thus every incentive in the world to develop a plan to start thinking rationally.

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