What Effect Will 24/7 CFE Have on Renewable Energy Markets?
The renewable energy procurement strategy, known by some as 24/7 carbon-free energy (24/7 CFE), remains out of reach of most businesses pursuing voluntary decarbonization pledges today. But many renewable energy analysts and experts believe it will disrupt energy markets.
This is the second installment of two covering why companies have decided to implement 24/7 CFE and how the trend could impact the global market for renewable energy credits (RECs). A REC is a market instrument that represents the environmental attributes of one megawatt hour of electricity generated by a renewable source. Read part one.
In a recent policy paper sponsored by the Clean Air Task Force, Northbridge Group Partner Neil Fisher and his co-authors described time- and location-linked strategies as part of the “next generation” of renewable power procurement. A market analyst wishing to remain anonymous said it was the next evolutionary step in renewable energy markets. Leland Snook, managing director of rate design and regulatory solutions at Duke Energy, called it “the cutting edge.”
Others believe it will remain prohibitively expensive to most businesses or that it will never achieve deep penetration unless mandated by state legislation.
24/7 CFE is a Scope 2 decarbonization strategy by which organizations match renewable purchases with their own electricity uses on an hourly and/or location-specific basis. To claim emissions offsets from Renewable Energy Certificates, currently, per the guidance of the Greenhouse Gas Protocol, businesses need to match purchases on an annual basis and can source them from other grids. Businesses that match all their Scope 2 emissions with RECs on an annual basis, therefore, may still leave emissions from their own electricity use unaccounted for.
Current State of Renewable Energy Markets
Renewable energy markets, which are dominated by the exchange of RECs, are highly polarized today.
At one end of the pole are utilities that operate in states with renewable portfolio standards. These utilities, as mandated by state legislation, must purchase RECs to offset a percentage of power they deliver each year. RECs are relatively expensive in these compliance markets.
On Jan. 27, OPIS assessed PJM Tri Qualified V23, an REC that can be retired by utilities in New Jersey, Maryland or Pennsylvania, at $31/MWh. They’re even more expensive in New England states. On the same day, NEPOOL Dual Qualified V23, which can be retired in Connecticut or Massachusetts, was assessed by OPIS at $37.80/MWh.
Voluntary markets that see participation from businesses purchasing RECs to offset Scope 2 emissions sit at the other end of the pole. At this end, RECs are cheap. Through the 2010s, unbundled RECs, or those sold separately from the electricity they represent, could be purchased on the secondary market for less than $1/MWh. In recent years, however, prices have increased significantly.
During the week of Jan. 23 to Jan. 27, Texas Front Half V23 contracts traded on the Nodal Exchange between $2.80/MWh and $3.15/MWh.
Buying unbundled RECs is generally considered the least impactful of the renewable energy purchasing strategies. These credits derive from renewable sources that have already been built and, as such, are not considered additional. Some argue that they do send a positive signal to markets and, collectively, lead to more and more renewable power development over time. No one has managed to convincingly prove that such a knock-on effect exists, but no one has disproved it either.
One might conclude that a time- and location-stamped REC market, which would help businesses approach 24/7 CFE, could serve as a stratifying third option in this polarized renewable energy landscape. Solar RECs sourced during daylight hours when production exceeds load demand, for example, would become less expensive. Those deriving from geothermal or wind when the sun has set and the grid is at peak demand would carry higher values.
Some experts reached believe that is the natural next phase of renewable energy markets. But that potential future may be years in the offing. Before it occurs, significant barriers need to be cleared. And if it does one day materialize, it may look different than some expect.
Selling Time-Stamped RECs
Some businesses have begun to track the times and locations from which the renewable power they purchase — typically in the form of RECs — originates.
But it remains very difficult and expensive for a business to commence its own 24/7 CFE journey.
Toby Ferenczi, co-founder of Granular Energy, believes utilities need to take the lead for a broader market to form. “Almost everyone relies on their utility to buy energy,” Ferenczi said. But for a utility to offer granular RECs, it needs to be able to understand where its renewable power is coming from on an hourly basis.”
Granular Energy is developing a portfolio management system to do just that.
“We do see a traded market coming eventually,” Ferenczi said. “That will set an hourly price and intraday price for these certificates, and that price signal will drive change in the market.”
Researchers Qingyu Xu and Jesse Jenkins from Princeton University’s ZERO Lab have modeled the macro effects of 24/7 CFE in two papers. Their most recent, “Electricity System and Market Impacts of Time-based Attribute Trading and 24/7 Carbon-free Electricity Procurement,” published in September 2022, explores what a time-stamped REC voluntary market would look like.
Running scenarios through the open-source GenX electricity system planning model, they estimated that the cost premium of 24/7 CFE without a time-based REC market is around $31.90/MWh. Introduce a time-based REC marketplace, and buyers will see costs drop to roughly $24.30/MWh. Procurement will be more accessible for smaller organizations, and larger ones will be able to offset some of their costs with profits made from favorable trading circumstances.
In Xu’s and Jenkin’s scenario, REC prices will also change drastically. Costs from grids that experience oversupply will see daytime solar REC prices drop to near zero, while those deriving from firm sources like geothermal will be much higher.
Are RTOs Opting In?
This study imagines a scenario that is achievable but not yet a reality. For one, regional transmission organizations and independent system operators that verify and track RECs will also need to get onboard to avoid double-counting.
Just one REC tracking system, the Midwest Renewable Energy Tracking System, can currently originate time- and location-stamped RECs. The New England Power Pool (NEPOOL) is currently working to allow utilities to opt-in to hourly tracking.
PJM is weighing such a move. The Electrical Reliability Council of Texas declined to comment on the matter.
Without that overhaul, Clear Energy Vice President Ryan Cook believes it’s a tough sell. “I would imagine the price premium would be enough that it would kill any legitimate interest in [24/7 CFE] absent someone that didn’t have any consideration for the economics,” he said.
Tracking renewable attribute generation is still conducted manually in many instances and occurs monthly. As time frames get more granular, it requires more work. A 24/7 CFE market would require significant automation.
“I don’t see that happening in the near future,” Cook said.
The Prospect of Regulation
Bob Maddox currently serves as the chief sustainability officer of Sterling Planet, one of the first companies that facilitated REC sales on the voluntary market in 2001. He also served as a state representative in Connecticut when it was formulating its RPS.
“Some years ago, I was at a meeting with the Connecticut Public Utility Regulatory Authority, and I brought up the idea of a time- and date-stamped REC. They looked at me like, ‘Why would we do that?'” Maddox said.
In his view, voluntary markets were built off the backs of compliance markets.
For a widespread, accessible 24/7 CFE marketplace to come about, it needs to start with state renewable portfolio standards.
“It’s commendable that a company like Google, with all its money and resources, has decided that it wants to do this,” Maddox said. “It can be the tip of the spear — that’s great. But if we’re going to achieve this on a macro scale, we need regulatory change.”
Some politicians agree. Josh Becker, a Democratic state senator who represents California’s 13th district, introduced the 24/7 Clean Energy bill (SB 67) to the California legislature in 2021. It would have included an hourly component for utilities. But the bill has since stalled.
Should REC Markets Change?
Many viewpoints that are critical of the current state of REC markets have been articulated so far. But some experts are worried that changes could have unintended consequences.
“Let’s say, from a corporate standpoint, REC prices come up to $5/MWh to $10/MWh, and I need 100,000 RECs,” Cook said. “That’s serious money. That’s when I start thinking, ‘What else can I do with that? Can I install LED lighting? Can I do rooftop solar?’ There’s a natural ceiling on REC prices from a corporate procurement point of view.”
Beyond that ceiling, including higher prices for RECs from hard-to-source times and places, voluntary procurement is a harder sell.
“And if we experience a significant economic downturn, that becomes even harder to justify to the board,” Cook said. “You know, why are you spending millions a year on intangibles when you just fired half the accounting department?”
The fact that national unbundled RECs have a low cost, furthermore, can be misconstrued.
“Why should a REC cost more?” Maddox asked. “They were created with the economic logic that traditional electricity costs this, renewable electricity costs this and RECs make up the delta difference. So now RECs are $3.00/MWh or $4.00/MWh. What’s that saying? The market has come along and reduced the delta.”
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