Businesses are increasingly realizing that the “green bandwagon” has officially left the station. If you can’t show the steps you have taken to diminish your environmental impact, you’re at a distinct disadvantage in today’s market. This is particularly true in light of the sea change in attitude towards the environment coming out of Washington, D.C.

Renewable Energy Certificates (RECs) are proving to be one of the quickest and easiest ways for businesses to take their first steps into “green,” though many are confused as to what they are buying, and what good is being done, when they purchase RECs.

Cost Containment Intl. is partnering with Community Green Energy, an organization founded to promote green energy. Among other things, they broker RECs. So we’ll give them some space here to explain what Renewable Energy Certificates are and how they work.

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A lot of industries have a main product that they sell, and a secondary one as well. Corn farmers sell their leftover husks as animal feed. Lumber yards sell the bark they strip off their wood as mulch. Clothes manufacturers sell their rags and scraps to paper mills.

RECs give green energy providers a secondary product they can sell to help make them more competitive. For you, the buyer, RECs provide a way to reduce your impact on the air we breath, and contribute to the growth of clean, green energy.

RECs allow you to green up your electric use by purchasing the environmental attributes of green energy. Click the image to see a larger version.

What do you get when you buy a REC? According to the official definition, you are buying the “environmental attributes” of a certain amount of electricity generated by green energy. These environmental attributes are described as being the equivalent of a certain amount of greenhouse gas NOT being released into the atmosphere.

RECs don’t change your electric bill or your electric service. Most people buy RECs from someone other than their utility. RECs can be considered an add-on that makes your electricity more environmentally responsible. In effect, you’re buying another person’s emissions-free air and using it to cancel out the emissions produced when your electricity was generated.

Does the idea of buying an “environmental attribute” seem a bit abstract? That’s because it is a bit abstract. Renewable energy certificates are best understood by going back about twenty years, to when they were first proposed.

Believe it or not, greenhouse gases and global climate change weren’t involved in the creation of RECs. Acid rain was.

RECs were first proposed in the 1990s. America wasn’t thinking much about global warming in the 1990s. But acid rain, which results from the release of sulfur dioxide (SO2) into the air, was considered a serious enough problem that the Clean Air Act had set strict standards to reduce emissions.

Concern over acid rain led to the legislation that laid the groundwork for RECs.

Green energy from solar, wind and biomass was emerging as a promising new technology. These green sources could have a substantial impact on lowering overall SO2 emissions, since every megawatt generated by one of these clean sources would be a megawatt not generated by a polluting power plant. An electric utility only uses as much electricity as it needs to meet demand, so when one power plant produces more, another must produce less.

To help push utilities to use more clean, green energy, legislation was proposed, called a Renewable Portfolio Standard (RPS). An RPS requires utilities to generate a certain percentage of their electricity using green energy sources.

It was great legislation then, and it remains a vital part of promoting green energy today. Twenty seven states and the District of Columbia have already adopted some kind of renewable portfolio standard since the idea was first proposed, and more are coming on the books every year. But in America in the 1990’s the RPS idea ran afoul of something else that was happening: the deregulation of America’s electric markets.

In 1992, the National Energy Policy Act (NEPA) made it possible for states to open up their electric markets to competition. Thirteen states and Washington, DC elected to do this (originally, there were fourteen, but California would later re-regulate). NEPA marked a fundamental change in the way America produced, and priced, its electricity.

Up until the 1990s, electricity in America was generated, transmitted and distributed by utilities. Utilities are an interesting hybrid in the business world: they are for-profit companies which sell stock and pay dividends; they have a monopoly for electricity in the grid that they oversee; and they are also strongly regulated by the government. Most business decisions require some kind of public review and approval by local politicians. These politicians, as you might guess, are keenly aware of how utility rates and utility oversight can affect their next election. Everyone is happier when energy prices stay low.

Deregulation opened generation of electricity to competition. In this system, the cheapest power source will always be chosen first. This was a problem for green energy, which is expensive relative to fossil fuels. Click the image to see a larger version.

With deregulation, utilities turn the role of generating electricity over to private companies. The utilities are still responsible for transmitting and distributing the electricity in their grid, and they determine how much is needed to meet demand. There might be hundreds or even thousands of plants looking to sell their electricity to the grid.Some go directly to the consumers and sign people up by offering low prices. They get to meet the demand for their customers. The utility runs a continuous auction for the remaining demand; unlike a typical auction, the lowest price wins and gets to sell its electricity. The power plants use a wide variety of fuels: coal, oil, gas, nuclear, hydro…as well as the green technologies of solar, wind, and biomass.

Energy deregulation is an example of free market thinking: the philosophy that free markets can solve problems better than governments can. In America, in the 1990s, free market thinking was very popular. It has lost some luster in 2008, in the wake of the current financial crisis. But in the 1990s, it was what the American people wanted, and it was being applied to new areas. The energy market was one of these new areas.

Free market thinkers believe that when people work to make a profit in an unrestricted market, they will find ways to innovate, to be more efficient, and to bring the best ideas and the best processes into play. This should result in more productivity and lower prices. Everyone will benefit from the results; the best innovators, of course, will benefit the most.

Before deregulation, the public kept energy prices down by voting for officials who opposed utility price increases. After deregulation, the theory went, the public would keep prices down by choosing the power plants that were selling at the best price, and the utilities would keep prices down by picking the lowest bidder in an open auction.

But this was a problem for green energy, because green energy couldn’t compete in these new competitive markets. RECs were designed to fix this problem. We’ll tell you how next week.