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Alternative Market Briefing

RECs (Renewable Energy Credits): An U.S. tool to drive development of new renewables

Wednesday, April 05, 2006

Matthias Knab reports live from the Wallstreet Green Trading Summit in New York: Tim Smith, Principal from Element Markets LLC explained that a renewable generator (e.g. wind generator) produces actually two products when it creates electricity:

  • System energy
  • A “REC” (renewable energy credit)
A REC is a marketing right that allows the owner to virtually overlay it on his system energy to create renewable electricity. One REC is equivalent to one MWhr (mega watt hour) of energy. RECs work on a broader time frame and geography compared to system energy

At this time, the markets are very illiquid and have a wide bid/offer spread, with only few speculators. A REC is basically only a compliance purchase and not a hedged commodity.

Compared to electricity, REC prices are relatively low. The market is illiquid, two or three trades in a week for a market is considered active. Parties generally don’t have the time or resources to give much thought to their positions; purchases are largely viewed as compliance.

Individuals who purchase and sell often manage other commodities that have significantly larger impacts on P/L and VAR. Price discovery is very difficult to achieve and contracts, especially for voluntary REC markets, can be cumbersome and risky.

Types of REC Markets: 1. VOLUNTARY

  • Demand driven by marketing
  • Rules are not clearly defined
  • Little regulation
  • Almost no liquidity
  • Purpose: To drive the development of n......................

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