RECs Aren’t “New”: Should Corporates Buy China’s New Green Power Certificates

As corporate social responsibility drives multinationals to support renewable energy development, many found themselves confined to on-site renewable projects that are too small to create significant fuel switching or financial return. Until now.

This month, China’s central government announced a new green power certificate program, similar to the U.S. renewable energy certificates (RECs), set to start in July. This mechanism allows corporates to purchase renewable energy “attributes” from off-site projects, introducing a faster and scalable procurement option that is not limited to companies’ building sizes. Companies in pursuit of more significant environmental impact and financial benefits, however, have in recent years moved beyond RECs in developed markets, and rely on Power Purchase Agreements (PPAs) to finance concrete new projects. We recommend corporates taking a combined approach to meet their renewable energy commitments.

The Mechanism

 Electricity on our power grids come from all sorts of sources: coal, nuclear, natural gas, and renewables. Once the electrons are on the grid, they are all blended together. So, an end user cannot tell where that exact electron comes from. The Green Power Certificates are a mechanism to separate the electrons and their renewable attributes, and make the latter tradable. By purchasing the certificates and “combining” them with the non-attributed electrons, companies can claim that they are using renewable energy or are supporting renewable development.

In China’s upcoming mechanism:

• The certificates will be verified and issued by China’s Renewable Energy Information Management Center, a government body that can ensure the authenticity and accountability of each certificate.
• The energy sources that can generate green power certificates include: inland wind and utility-scale solar projects. Distributed solar and other forms of renewable energy are so far excluded from this mechanism.
• Earmarking 1MWh of wind or solar energy, each certificate is unique. It can only be purchased once and cannot be resold.
• The subscription price of a certificate is determined upon buyer-seller negotiation or via bidding. The price cannot be any higher than the subsidies the government would normally pay for that clean energy source. Wind or solar generators that sell the certificates will no longer receive subsidies for the corresponding electricity.
• Trading of the certificates will be voluntary starting from 1 July and will become mandatory “at an appropriate time” in 2018.

 

The Motivation

The Chinese government is introducing the trial primarily to help reduce its subsidy burden. The current renewable energy subsidies are financed through an additional charge included in electricity fees. The funding pool, however, is facing an estimated RMB 60 billion ($9 billion) gap at the end of 2016. The green power certificate is a mechanism to allow other sources of capital to fill that gap. Once the government makes it mandatory for power generators or utilities to provide a portion of their electricity from renewable sources, green power certificates are expected to replace government subsides as the only source for renewable generators to receive additional revenue.

On the surface, green power certificates are priced at or below the level of the subsidy that a generator can receive. But as some of China’s renewable energy generators are currently facing a subsidy payment delay stretching over two or three years, they might be willing to sell certificates for faster cash flow, provided that the prices are not too low.

 The Drawbacks

 Since the early 2000s, corporates have been using RECs in the U.S. and several European countries to show their commitment to renewable energy and carbon reduction. However, these early markets have moved beyond RECs in recent years, some even calls RECs as “the lowest bar,” for two major reasons:

• Many corporations seek to demonstrate a more significant environmental impact – often by bringing new projects online, a process also known as “additionality.” With this view, purchasing unbundled RECs (i.e., the environmental attributes but not the energy) generally will not have any additionality value. Companies like Walmart even go so far to explicitly mention that “under normal circumstances, we prefer not to simply offset our non-renewable power by purchasing standalone renewable energy credits (RECs) or other certificates.” These markets and companies have since favored purchases of renewable energy through PPAs or virtual PPAs.
• Corporations interested in purchasing renewable energy want to see a financial benefit. Purchasing unbundled RECs is a cost – albeit a modest one – without direct financial return. However, solar and wind costs are at historically low levels, allowing for very competitive PPA pricing and offering an intriguing economic opportunity. PPAs promise to reduce costs, as well as to provide a long-term hedge against rising and volatile energy prices, future REC prices, and any eventual price on carbon. 

The Impact on Corporate Procurement Strategy

The certificates are a flexible tool to help achieve clean energy goals and support the renewable energy market. With lower cost, wider selection of suppliers, and simplified transactions, the certificates are an important mechanism for corporates in China to meet renewable energy goals.

However, because the certificates do not include the underlying electricity, the customers cannot access the fixed-price benefits of renewable energy with them. Such unbundled purchases are falling out of favor with some corporations seeking additionality in their investment in renewable energy, i.e., that seek to promote development of new renewable energy sources to displace non-renewable energy in the energy marketplace.

For companies with urgent renewable targets to meet, Seeder recommends a combined approach of both on-site projects and off-site certificate purchase. As virtual PPAs are not yet a matured product in China, on-site projects, whether financed through a PPA or corporate investment, are still the most concrete way to build new renewable energy sources. Meanwhile, companies can purchase certificates fulfill the rest of their commitments to renewable energy.

Seeder helps our clients to structure on-site solar projects through PPAs or direct investment. And will be able to help them purchase green power certificates. To quickly see your solar capacity and potential savings, start with our solar calculator to get real-time results.