Renewable energy certificates experienced a turbulent but buoyant year, writes Annabelle Palmer

Despite volatile economic headwinds and supply constraints, the demand for renewable energy certificates (RECs) continued its path of increased momentum in 2022, say this year's winners.

RECs are a market-based instrument that certifies the bearer owns one megawatt-hour (MWh) of electricity generated from a renewable energy resource.

Once the power provider has fed the energy into the grid, the REC can then be sold on the open market as an energy commodity. Many regions implement both compliance and voluntary REC schemes.

Austin Wentworth, vice president for environmental commodities in North America at STX, saw global demand for RECs increase significantly this year compared with other years. STX won Best trading company, RECs – North America, Europe, Australia, and Best trading company, Renewable Identification Numbers (RINs).

In voluntary markets, he says a greater understanding of sustainability targets among corporates pushed voluntary demand to "new levels", causing prices to rise throughout the year as supply was constrained.

Project development was disrupted by both Covid-19 related supply chain issues and building inflationary pressures.

US President Joe Biden's tariffs on solar panels from Asia also caused further project delays.

Peter Zaborowsky, managing director of Evolution Markets, which won Best broker, RECs – Europe, observed difficulties in procuring solar panels and equipment, and delays in getting project approval, with one system operator temporarily pausing applications for new solar projects earlier in the year, he says.

For Jonathan Burnston, managing partner at Karbone, there was significant concern at the beginning of 2022 around what could be built in such conditions.

However, a positive sea change came with more favourable economic conditions in the second half of the year. The announcement of President Biden's Inflation Reduction Act (IRA) in August further bolstered markets in the country.

"The IRA is game changer for project development and project finance [in the US]. It is a massive support complex for all things related to renewable energy, renewable fuels, and decarbonisation," he said.

Karbone won Best broker, RECs – North America, Best advisory, RECs – Australia, and Best broker, RINS.

The IRA also extends the production tax credits for wind, which should encourage more supply in an already oversupplied market for the short term.

Voluntary markets

In the US, the Green-e programme, the most widely accepted voluntary standard in the US, had a markedly different year, compared with 2021.

In 2021, prices spiked to more than $7 per MWh and averaged around $4 per MWh until the end of the year, according to Caroline Gentry, senior director, wholesale and trading for Anew. Anew won Best advisory, RECs – North America and Best advisory, RINS.

Global voluntary demand and pricing then rapidly slumped following the onset of Russia's invasion of Ukraine and interest rate hikes as governments tried to rein in the impact of rising inflation.

Voluntary markets are broadly sensitive to macroeconomic factors and the overall risk appetite in the economy. This fed through to demand and pricing in 2022. Green-e prices remained volatile in a range of $1 per MWh to $4 per MWh at the start of the year, before stabilising to around $3 per MWh as economic headwinds retreated slightly.

"US mid-term congressional results were more of a stalemate than predicted, inflation [in the US] seems to be cooling, financial markets are still shaky, but the macro-cycle has improved from where we were earlier in the year," says Burnston.

Looking down the curve at two years and above, prices seem to be hovering in the $4 price range, notes Zaborowsky, adding this is also indicative of an emerging trend as corporates are increasingly buying "significant volume of these certificates, several years out".

He puts it down to an evolution of corporate strategies: "Corporates only used to buy for the past year's Scope 2 emissions. Now they are getting proactive as their voluntary commitments grow and they seek long-term certainty with a price hedge in a volatile market."

Scope 2 emissions are those that a company causes indirectly when the energy it purchases and uses is emitted.

While the tech industry has been the main driver of corporate demand in voluntary markets, Burnston says there is a "rising tide" of demand from all sectors as the importance of voluntary markets grows.

Zaborowsky expects oil and gas to be a big buyer going forward.

In fact, any publicly traded company that will be subject to the disclosure standards developed and implemented by regulatory bodies such as the US and Canadian Securities Exchange Commissions, or any members of the International Organisation of Securities Commissions (IOSCO), could be compelled to enter the market, he says.

Compliance markets

Burnston at Karbone says the trends for voluntary and compliance markets bifurcated in 2022, with the latter experiencing more resilience in pricing.

"Compliance markets are siloed," he says. "They are programmatically bound and therefore largely protected from macroeconomic factors. Since the start of 2022, we have been on an upwards trend for REC markets – not gangbusters but meaningful gains on the year."

In the US, the year saw prices start roughly in the low $20 range rising steadily to roughly $26 now, he says.

In Europe, Guarantees of Origin (GOs) provide proof of the environmental attributes of the generation of one MWh of electricity by a renewable source.

GO prices reached an all-time high in 2022 due to the drought in Europe, which resulted in a significant decrease in hydro production. This combined with an increase in corporate demand, says Wentworth at STX.

Coming into 2022, the price of a GO was around €2 ($2.1) to €3. By the end of November 2022, that number had risen to €9, according to Redshaw Advisors, which won Best advisory, RECs – Europe.

Anil Akalin, head of renewable energy at Redshaw Advisors, says the GO market continues to keep a close eye on Nordic Hydro reservoir levels since they are one of the main European exporters of GO.

"Considering predicted dry weather in the short term, Nordic hydro production, and their associated GO supply might be lower than expected. Prices may keep rising as a result of this.

"The Norwegian government is also looking to prioritise hydropower reservoir storage levels which may also limit power exports," she adds.

Asia-Pacific region

In China, Haley Shewfelt, portfolio manager at 3Degrees, which won Best Advisory, RECs – China, says demand and pricing for Tradable Instruments for Global Renewables (TIGRs) & International RECs (I-RECs) has also grown this year, with issuance for IRECs doubling from 2021 to 2022.

In China, the voluntary market has much stronger demand than the compliance market, adds Shewfelt.

"China's compliance market – Green Energy Certificates – is just beginning to take off, though, so that dynamic could change," she says.

In Australia, previous years have been characterised by a surplus of large-scale generation certificates (LGCs).

A more recent trend has seen prices rise as an era of oversupply of certificates has come to an end and companies look to longer-term agreements.

A national, annual renewable energy target (RET) of 33,000GWh of additional renewable energy generated each year between 2020 and 2030 was achieved in 2021, but the Clean Energy Regulator has indicated that it will not be raised.

With uncertainty around what will happen after 2030, the price of LGCs flattened in 2021, with some market participants predicting prices could move downwards to 2030.

In June 2022, a newly elected Australian government increased its 2030 emissions reduction target to a 43% reduction from 2005 levels by 2030.

While it is likely renewable generation beyond the current RET will be required to meet these new targets, the government's recent support for new gas projects and ongoing backing of fossil fuel projects indicates a discrepancy with its new emissions reduction target, according to Climate Action Tracker (CAT).

2023 and beyond

Ambitious regional decarbonisation goals and related policy will continue to be a key driver of demand for RECs.

In the US, Gentry at Anew says the Manchin permitting bill is one to watch as it could encourage more large-scale renewable projects by addressing the issue of transmission constraints.

Gentry will also be watching the link between RECs and carbon markets, particularly in those voluntary markets where RECs claim a carbon benefit in their carbon accounting.

"In states that cap carbon emissions from the power sector, new renewable generation does not necessarily reduce emissions as fossil fuel units can still emit up to the cap unless equivalent allowances are retired from a set-aside fund," says Gentry.

"This makes it important for buyers to understand exactly what they can claim with a REC. Standards such as Green-e are important in clarifying these issues and preventing potential damage to the reputation of market-based carbon accounting."

Zaborowsky is interested to see what happens at the state level in Pennsylvania, which swung from 'red' to 'blue' with the election of a Democratic governor and senator in the November mid-term elections.

"Compliance markets in the region may be able to advance further than they have in the past," he says.

In voluntary markets, Zaborowsky will also watch for possible signs of pent-up corporate demand emerging at the start of 2023.

"Often corporates who have newly made commitments will come in at the first quarter of the year to cover their previous year's footprint in Scope 2 emissions.

"We will be watching to see if a recent slowdown in demand has been because buyers were more distracted with more pressing matters and will undertake their ESG acquisition at the beginning of next year instead or there has been a pullback in voluntary buying."

The development of time-stamped RECs is another trend that many of this year's winners are keeping a close eye on.

Some large tech-sector corporations, such as Microsoft, are buying hourly or time-stamped or 24/7 RECs, which show the time of day of power generation, not just the monthly average.

Lisa DeMarco, a senior partner and CEO of Resilient, which won Best law firm, RECs – North America, says there has been a widespread call for greater transparency on the emissions when power generation occurs.

"Current estimates of Scope 2 emissions worldwide are grossly underestimated because they are predominantly measured on the basis of monthly or annual electricity generation; demand peaks are averaged out," she says.

"If you have emissions data based on hourly electricity dispatch sources, it's much more accurate. The Clean Air Task Force and others are aligned in that thinking."

As climate-related financial disclosure standards are implemented, she expects the need for greater accuracy to be heightened.

If time-stamped RECs are widely adopted, Gentry at Anew expects RECs to be traded much more like power in a closer to real-time basis.

Another trend to watch will be hydrogen, which will create a new opportunity for RECs to prove the origin of the renewable power for green hydrogen claims, says Gentry, adding: "This is an exciting time for environmental markets, which are finally fulfilling their potential as a vital tool for decarbonisation of the power and gas grids.

"Certificates will increasingly be necessary to track the origin of power as the percentage of renewable energy grows," says Gentry.