To recap: we’re stuck in the mid-90s. A move is afoot to promote the use of green energy as a way to combat not global warming but acid rain. The conditions: the solution must involve minimum government intervention and maximum free market forces, because in America in the mid-90s, free markets are how you solve problems. The complication: free markets say green energy is going to lose, because green energy is the priciest option in a very price-sensitive market.

Installation costs for wind turbines are a large part of the reason why wind power has trouble competing.

Why is green energy expensive? High construction and installation costs combined with low, slow payback. While day-to-day generation costs for green energy are small to negligible, and the fuel source itself is free, construction requires a substantial amount of upfront investment. Investors must be paid off in a reasonable timeframe or they will invest elsewhere.

Unfortunately, green energy generators don’t operate at the high level of output that fossil fuel plants do. Fossil fuels are very good at producing high levels of output, which is why they became the dominant fuel source in the first place. Green energy generates at a more moderate pace. So in order to hit a payback level that keeps investors happy, green energy must set a high price to compensate for its moderate pace. In a truly free market, green energy will always be the last chosen.

Renewable Portfolio Standard (RPS) regulation solves this problem by forcing utilities to use a set amount of expensive green energy. But RPS regulation flew in the face of the free market ideals behind deregulation, so RPS by itself was not going to be palatable to the American voting public.

Was there instead, perhaps, a free market solution?

There was, and it involved something called commoditization. This is a another free market idea: that anything with value can be measured, broken up, and turned into a commodity that is bought and sold on the open market, like a stock or an option.

In the case of green energy, the commodity was its environmental benefit: all of the mining or drilling that don’t take place to obtain it, the pipelines and supertankers that aren’t needed to transport it, and the pollutants that aren’t released into the atmosphere when it is used to generate electricity.

Before free market thinking was applied to energy generation, we took that benefit for granted. RECs turned that benefit into something that green energy providers could sell.

RECs give green energy a way to turn its environmental advantage into a competitive advantage. Click the image to see a larger version.

This was a pretty radical idea at the time…it’s still an idea that confuses a lot of people.  But when you think about it, it makes sense. Commoditizing environmental impact is about making the energy market truly fair.

Remember, the utility is only going to accept enough electricity to meet demand, so if one plant doesn’t feed the grid, another one will. And in the language of the free market, each power plants actually produces TWO products: electricity and emissions. If you’re going to pay everyone the same price for their electricity, then a fair market dictates that you have to allow each plant the same amount of emissions as well. This hadn’t been the case before. The assumption had been that green energy produced “no” emissions. Free market thinking challenged that assumption.

Some economists called the pre-REC energy market, which assigned no measurable cost to environmental impact, “the greatest market failure in history.”

In the new plan, every plant was given an emission allowance. For every megawatt of electricity, they were allowed a certain amount of emissions.

When fossil fuels generate a megawatt of electricity, this emission is full of pollution, including greenhouse gases. The emission from natural gas is pretty dirty; the emission from oil is worse; the emission from coal is the worst. Green energy sources gives you the same megawatt of electricity, but their emission is completely clean. Which would you buy?

Under the new plan, green energy providers were allowed to package their clean emission allowance into a commodity called a Renewable Energy Certificate, or REC. Sale of the REC would act as a subsidy for the green electricity, because the green energy provider could now sell their electricity at a lower, competitive price and use the REC sale to make up the difference.

Exact definitions vary from state to state and organization to organization, but a Renewable Energy Certificate (also called a Renewable Energy Credit or Green Tag) is best described as the “environmental attributes” of one megawatt hour of electricity generated by a clean, green energy source. A green energy provider is allowed to sell one REC for every megawatt hour they feed to the local electric grid. The energy sources which are allowed to use RECs are:

• Solar electric
• Wind
• Geothermal
• Low Impact Hydro (facilities that run without requiring dams and other structures that alter water flow)
• Biomass, biofuels and landfill to gas
• Certain hydrogen fuel cells

A REC has a set life span: generally, within the calendar year in which the electricity was generated, plus a few months on either end. After that, it is retired. RECs can be purchased by utilities, or by certified brokers who then resell them. Brokers may break their RECs down into smaller units, as small as 100 kilowatt hours, and sell these REC packages, or REC blocks, at prices that small buyers, like individual people, can afford. Community Green Energy has packaged our RECs at a number of sizes, appropriate for both individuals and businesses.

Clean, green wind is one of the power sources allowed to sell RECs.

When you purchase a REC, you can claim the environmental attributes of one megawatt hour of green electricity (or whatever the size of the package you bought). This is true no matter where you live, and whether or not you are in the same grid or even in the same state as the green energy provider who sold it.

Verification is very important for RECs. Anyone can sell you a certificate and claim it represents clean, green energy. That’s why Community Green Energy brokers our RECs through Green-e® Energy, the number one oversight agency for RECs in America..they certify almost 70% of voluntary REC purchases. They verify that all of our RECs come from certified providers, and that the money you spend helps to actively promote green energy.

While acid rain was the concern when RECs were introduced, most people today are concerned with greenhouse gases. Today’s renewable portfolio standard legislation targets greenhouse gas emissions. But RECs still play the same role, promoting green energy, because green energy is pretty much emission-free. No SO2, creating acid rain. No greenhouse gases, producing global climate change. It’s important to realize that your REC promotes not just a greenhouse-gas-free world, but a cleaner world in every way.

As RECs have become more closely associated with the issue of global warming, people have begun to describe the “cleanliness” of RECs in terms of carbon equivalence. This is an estimate of the amount of greenhouse gas that wasn’t emitted when the electricity was produced. Carbon equivalence is used to represent all the greenhouse gases, because carbon dioxide is the most common, even though some of the other gases are more troublesome. The estimate is based on the average emissions for all the power plants in the area where the REC was generated. Community Green Energy gets our RECs from all over the United States, so we use a national average when estimating the carbon equivalence for our RECs, rather than the average for one particular area. It is important to remember that this is an estimate.

Looking ahead, as more people buy RECs, this will give our government the proof it needs that Americans are willing to accept higher prices for energy in return for cleaner air and a future free of climate fears. They will increase the stringency of RFP legislation. Eventually, they will add a “carbon tax,” or a penalty for the dirty emissions from the fossil fuel plant, which will even out the costs by bringing more users into the mix. Your REC purchase makes you a leader in America’s energy future; others will simply have to catch up with you. Of course, by that point, the cost differences between green energy and fossil fuels may have changed. Green energy will only become cheaper, as improvements in technology and economies of scale increase efficiency and bring down costs. And fossil fuel prices got very high in 2008. Every indication is that these kind of prices will happen again, and will probably get worse.

So, that’s the story, though the story isn’t over yet. To learn more about why people buy RECs, continue on to the next section.