September 2017

Renewable Energy Certificate (REC) Arbitrage

REC arbitrage (also referred to as a REC swap) is a procurement
strategy used by electricity consumers to simultaneously meet two
What is a REC?
objectives: 1) decrease the cost of their renewable electricity use and 2) A REC is a tradeable, market-based
substantiate renewable electricity use and carbon footprint reduction instrument that represents the legal
claims. The strategy is used by consumers installing self-financed property rights to the “renewable-
ness”— or all non-power attributes—
renewable electricity projects or consumers who purchase renewable of renewable electricity generation.
electricity directly from a renewable electricity project, such as through a
A REC is issued for every megawatt-
power purchase agreement (PPA). hour (MWh) of electricity generated
and delivered to the electric grid from
What is REC Arbitrage? a renewable energy resource.

The REC owner has exclusive rights

Arbitrage is the near-simultaneous buying and selling of commodities in to make claims about “using” or “being
powered with” the renewable
different markets in order to take advantage of differing prices for the
electricity associated with that REC
same or similar assets. REC arbitrage occurs when RECs from one and thus avoid the double counting of
renewable electricity project are sold and replaced by less expensive the same generation attributes by
RECs from another renewable electricity project. another party.

RECs are the instrument used to

A prerequisite of REC arbitrage is that there are differences in REC substantiate the use of renewable
prices. In the United States, RECs vary in price because while all RECs electricity for both voluntary and
compliance purposes. For voluntary
represent one megawatt-hour (MWh) of renewable electricity, each REC purposes, consumers such as
embodies the specific characteristics as to where, when, and what residential households and
renewable resource produced that particular REC. The specific businesses use RECs to demonstrate
claims of using renewable electricity.
characteristics embodied in each REC lead to uneven market supply and For compliance purposes, RECs are
demand for differing RECs, which in turn results in differences in prices. used to track that utilities are meeting
For example, if consumers prefer wind RECs over landfill gas RECs, then their state-imposed mandates.
the additional demand for wind RECs will lead to higher prices compared
to landfill gas RECs, all else equal.

State renewable portfolio standard (RPS) policies are a major demand driver for RECs and consequently
impact REC prices. In general, state RPS policies create demand for RECs by requiring utilities to generate
or purchase an increasing number of RECs annually to demonstrate increasing delivery of renewable
electricity to their customers. RPS policies also define which RECs are eligible to meet that demand by
defining the project types and geographic locations from which utilities must source RECs to use towards
compliance. States’ distinct RPS eligibility and compliance requirements create distinct state compliance
markets with different REC prices (see Figure 1). RPSs may also have special provisions targeting specific
resources that further magnify the price differences between RECs meeting the provision’s eligibility
requirement and those that do not. One common special provision of state RPSs are “solar carveout”
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policies that require utilities to generate or purchase RECs from in-state or in-region solar facilities. Solar
carveouts are the main mechanism that drives up the price of solar RECs (SRECs) and create significant
price differentials between various types of RECs. Since RECs are also used to demonstrate voluntary
delivery and use of renewable energy in the United States, demand by state compliance can affect REC
prices in the voluntary market, albeit for RECs from specific resources and locations.

The larger the price differences between RECs, the more opportunities exist for consumers to engage in
REC arbitrage. Renewable electricity project owners in states with RECs that are higher-priced due to high
RPS demand and low supply have an incentive to sell their project RECs and buy lower-priced replacement
RECs to cover their renewable electricity claims. REC arbitrage, consequently, is most frequently
undertaken when projects are located in states with RPS policies. As of February 2017, 29 states and the
District of Columbia have an RPS and 22 states have an RPS that has provisions targeting specific
renewable energy resources, most commonly solar carveouts.

Why REC Arbitrage?

REC arbitrage offers consumers in markets with high REC prices a means to simultaneously achieve two
competing objectives: (1) improve the economics of their renewable electricity procurement, and (2)
substantiate renewable electricity use and carbon footprint reduction claims.

The consumer improves the economics of their renewable electricity procurement by replacing the higher
cost project RECs with lower cost replacement RECs from another source. REC arbitrage allows the
monetization of the attributes of the renewable electricity generated (which is often necessary to make the
project financially feasible) while still enabling the consumer to claim to be using renewable electricity based
on the less expensive replacement RECs. A procurement with a third-party can be structured to have the
project RECs contractually retained by the project developer and thereby reduce the cost to the consumer
for their electricity, since the developer is able to use the project RECs as another source of revenue. By
purchasing replacement RECs, consumers can characterize their power as renewable or make renewable
electricity use claims based on the renewable electricity attributes of the replacement RECs. Being able to
arbitrage RECs enables consumers in markets with high REC prices to improve project economics and
make renewable electricity claims, which is outlined in Table 1 below.

Table 1. Economic and Claim-based Tradeoffs of Non-arbitrage and Arbitrage Scenarios

Enables electricity consumer to
Improves economics of electricity
substantiate renewable electricity
procurement
“use” claims
Project REC retained by developer
Yes (by the amount of the REC price) No
(No arbitrage)
Project REC retained by electricity
No Yes (using the project RECs)
consumer (No arbitrage)
Yes (by the difference between the
REC arbitrage project REC price and the replacement Yes (using the replacement RECs)
REC price)

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REC Arbitrage Impact on Claims
REC arbitrage affects the types of renewable electricity use and environmental claims a consumer can
make. A REC conveys to its owner the rights to the specific environmental attributes of that REC and all
associated claims regarding the delivery and “use” of that specific renewable electricity. Consequently,
under a REC arbitrage scenario a consumer’s claims about renewable electricity use must align with the
attributes of the replacement REC it owns, and not with the RECs associated with their project. Any claim or
public statement by a consumer engaged in REC arbitrage about their use of renewable electricity should
avoid giving the impression that they are using the renewable electricity associated with the project. The
claim should be specific to the replacement RECs. For example, if a consumer is arbitraging solar RECs
from their onsite solar system with replacement wind RECs, any claim should clearly convey that the
renewables the consumer is using are sourced from wind or more generally a renewable resource.

To illustrate, let’s examine the following example: “Our facility is home to an onsite solar array. We are using
renewable electricity.” Both sentences are technically correct, however, the overall claim by is deceptive
since it gives the impression that the consumer is using solar electricity, when they are in fact using wind
electricity as a result of REC arbitrage. As a best practice, consumers should clearly qualify any statement
about their renewable electricity use to ensure stakeholders fully understand their renewable electricity
arrangement. For more information on how to make accurate claims regarding your renewable electricity
use refer to Green Power Partnership’s Guide to Making Claims about Your Solar Power Use document.

Arbitrage Impacts on GHG Emissions Accounting

Organizational consumers undertaking a greenhouse gas (GHG) inventory that have engaged in a REC
arbitrage should calculate their emissions using the replacement RECs, not the original project RECs. For
more information on GHG emissions accounting, please visit World Resource Institute’s GHG Protocol
Scope 2 Guidance.

Who Should Consider REC Arbitrage?

REC arbitrage is a good option for electricity consumers in markets with high REC prices interested in
installing self-financed renewable energy generation systems as well as electricity consumers who purchase
directly from a renewable energy project, such as through a power purchase agreement (PPA). An electricity
consumer considering these electricity procurement options should also consider REC arbitrage:
• Anytime the economics of the renewable energy project or procurement requires that the associated
RECs be sold to achieve an acceptable return on investment or cost of electricity to the consumer.

• Anytime the electricity consumer wants to make renewable electricity use or carbon footprint
reduction claims.

How Are REC Arbitrage Arrangements Structured?

There are a number of variations on how REC arbitrage arrangements can be implemented and structured.
An arbitrage can be contractually specified in a procurement contract, such as a PPA, between an
electricity consumer and a renewable energy developer. For example, under contract with a third-party the
electricity consumer may negotiate in the PPA to have replacement RECs provided in place of the project

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RECs when the parties involved in the contract decide that selling the project RECs obtains a better
delivered cost of electricity to the consumer. These replacement RECs may be subject to additional
conditions and terms negotiated between the parties, such as the replacement RECs are sourced from
another of the developer’s renewable energy projects, similar vintage, third-party certified, or meet EPA’s
definition of green power. By monetizing the project RECs and instead providing the consumer replacement
RECs, the project developer is able to reduce the cost of the consumer’s delivered renewable electricity.

REC arbitrages can also take the form of a separate transaction by a consumer that owns a renewable
generation facility but is monetizing the project RECs or engaged in a PPA where the project RECs are
contractually retained by the project developer. In these cases, the consumer can execute REC arbitrage by
proactively engaging in a separate transaction with a renewable energy provider, such as a REC marketer,
to purchase replacement RECs for their self-financed renewable energy project or the RECs associated with
their PPA.

Consumers investigating REC arbitrage may want to consider these possible variations in how the
arrangement is structured:

Ratio of Energy Equivalency

Arbitrage arrangements for RECs are often executed on a one-to-one energy equivalency ratio, with one
REC (equivalent to one MWh) being replaced with one replacement REC (equivalent to one MWh).
However, consumers can structure their arbitrage at different exchange ratios to fit their needs and
objectives.

For example, as depicted in Figure 1, a consumer with a self-financed solar array producing 10,000
kWh/year, or 10 percent of their annual electricity needs, can sell the 10 solar RECs associated with their
array for $50 each into the state’s RPS driven market ($500 revenue generated). That consumer can then
make a replacement REC purchase of 100 nationally-sourced wind RECs that cost $2 each, or $200 total,
equivalent to 100 percent of their total annual electricity needs. In this example, the consumer realizes a
$300 net-gain by selling the 10 solar RECs and purchasing 100 replacement RECs. The ten-to-one ratio of
replacement RECs to project RECs also allows the consumer to claim that they are 100 percent powered by
renewables.

Figure 1. Ratio of Energy Equivalency

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Term of REC Arbitrage

A consumer can shorten the length of the arbitrage arrangement relative to the full term of their purchase
contract or ownership of the renewable energy project in order to fine tune a procurement strategy to meet
economic and environmental objectives. By shortening the length of the arbitrage, the consumer only
receives replacement RECs from another project for the first portion of their electricity purchase term, then
receives the project’s RECs for the second portion, each of which affording the consumer different financial
values and environmental claims.

A consumer may consider this type of adjustment to the timeframe of the arbitrage since renewable energy
project developers in their financial modeling of their projects often significantly depreciate the value of the
project’s RECs after the first few years of project’s operation given the time value of money and uncertainty
of future REC prices. Consequently, a consumer negotiating a PPA with a renewable energy developer may
consider shortening the term of the REC arbitrage in the PPA to coincide with the period when the developer
most values the project’s RECs. In this way, the consumer reduces their cost of procurement by leveraging
the value of the RECs when they are considered most valuable by the developer. Then, during the latter
years of the PPA contract when the RECs are considered less valuable by the developer, the consumer can
contractually receive the project RECs via the PPA and can thus make renewable electricity use claims
specific to the renewable energy project.

For example, as depicted in Figure 2, a consumer could arbitrage the project’s REC with lower cost
replacement RECs for the first 5 years of a PPA. For years 6 through 20, the PPA contractually conveys
REC ownership to them.

Figure 2. Term of REC Arbitrage

Likewise, consumers who own their renewable energy projects may decide to monetize the project’s RECs
when they feel it’s most advantageous, and replace them with RECs through arbitrage in order to
substantiate their renewable energy use claims. For example, a consumer may decide to arbitrage their
project RECs with replacement RECs for the first years of the contract to quickly recoup their capital
investment. Once the cost of the project is recouped by the consumer, they begin to retain the project RECs.

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Summary
REC arbitrage is an accepted strategy and can be economically advantageous for electricity consumers in
markets with high REC prices. However, consumers must make sure their messaging and claims align with
their REC ownership. The advantages as well as the challenges of REC arbitrage are covered below (see
Table 2).

Table 2. Advantages and Challenges of REC Arbitrage

Advantages
• Decreases the relative cost of using renewable electricity.
• Enables consumers a means to legally substantiate renewable electricity use claims.
• Reduces a consumer’s carbon footprint and a universally accepted accounting practice in standard GHG
accounting protocols.
• Can be easily executed through a PPA or separate contract.
• Provides flexibility and optimization of environmental and economic objectives.
• Allows consumers to support a robust national voluntary REC market.
Challenges
• Increases the complexity of an organizations “story” to stakeholders about its renewable electricity use.
• Since renewable electricity use claims must be associated with the replacement RECs, arbitrage creates a
disconnect between the consumer and their renewable electricity project
• For consumers purchasing electricity directly from a renewable energy project, REC arbitrage requires additional
contract language and negotiations with the project developer.
• For consumers who own a renewable energy project, REC arbitrage may require additional transactions to sell
project RECs and then purchase replacement RECs.

Additional Resources
Center for Resource Solutions 2015. The Legal Basis for Renewable Energy Certificates. [Link]
[Link]/wp-content/uploads/2015/07/[Link]

Center for Resource Solutions 2016. Solar Energy on Campus - Part II: Solar Purchasing Options and
Communicating Renewable Energy Use. [Link]
[Link]

U.S. Environmental Protection Agency’s Green Power Partnership. RECs: Making Green Power Possible.
[Link]

U.S. Environmental Protection Agency’s Green Power Partnership. Guide to Making Claims About Your
Solar Power Use. [Link]

World Resources Institute. Greenhouse Gas Protocol Scope 2 Guidance:

[Link]

Green Power Partnership

U.S. Environmental Protection Agency
1200 Pennsylvania Ave., NW
Mail Code 6202A
Washington, DC 20460