District Energy Magazine
Alan I. Robbins
Editor’s Note: “From a Legal Perspective” appears in each edition of District Energy magazine to address legal issues of current importance to the district energy industry. It is intended for educational purposes only and does not constitute legal advice.
Getting credit for the production or purchase of renewable energy is becoming increasingly important as states develop and refine their renewable portfolio standards, as private markets emerge to commodify the benefits of renewable resources, and as our national energy policy moves toward a more organized approach to address greenhouse gas emissions.
For that reason, contracts governing the output of renewable energy resources now commonly address the ‘green’ rights associated with the renewable project that either currently, or in the future, may hold some value – be it in the private marketplace or under a regulatory scheme. These rights are typically referred to as “environmental attributes” or “renewable energy credits” (RECs), though they are also known as “green tags,” “green energy certificates” or “tradable renewable certificates.” Whatever their name, environmental attributes generally include the right to be regarded as the owner or holder of the legal and market rights associated with the green aspects of the facility. They represent the technology and environmental attributes of electricity generated from renewable resources. (See www.epa.gov/greenpower/buygp/types.htm#rec.)
A still-nascent but developing market exists for the trading of environmental attributes, or RECs. In order to facilitate such markets, a number of REC tracking organizations operate in different regions of the country. The owner of the RECs can, and in some states must, register its RECs on a tracking registry. To do so, the REC holder must be able to establish that it is the party legally entitled to claim such RECs. Even in regions where such markets are not operating, it is still important to define the legal ownership of environmental attributes due to the uncertainty and still-evolving nature of the laws and policy surrounding greenhouse gas emissions.
Specific contractual provisions dealing with environmental attributes are necessary because the capacity and energy available from a renewable resource are often sold separately from the environmental attributes associated with that same project. The buyer of electric capacity and energy from a renewable resource may be different from the buyer of the environmental attributes of the project.
CALLOUT: Specific contractual provisions dealing with RECs are necessary because a project’s capacity and energy are often sold separately from the RECs.
Because the sale of a project’s electric capabilities is frequently separated from the sale of its environmental attributes, the contract governing the sale of electric capacity and energy from a renewable resource must make clear whether the buyer is or is not also receiving the environmental attributes. If the electric buyer is not also the REC buyer, then the contract needs only to clearly provide that the sale of capacity and energy does not include the RECs, which the seller will sell or transfer separately.
Defining Environmental Attributes
The first provision that requires attention is the definition of environmental attributes, RECs or whatever term is being employed. State laws requiring or encouraging a renewable resource portfolio will each have a statutory definition. These definitions vary from state to state; thus care must be taken not only to reflect the law of the state that governs the agreement but also to consider the need to satisfy the laws in other states as well. While moving in the direction of uniformity, the five major tracking systems (see sidebar) do not yet use identical definitions either. The definition should also make clear how RECs or environmental attributes are being measured, so that the agreement is clear regarding the amount of credit the buyer is actually receiving. [Typically one REC is created for every 1,000 kWh (1 MWh) generated.]
Major REC Tracking Systems in the United States
- Electric Reliability Council of Texas (ERCOT)
- New England Power Pool/Generation Information System (NEPOOL/GIS)
- PJM Generation Attribute Tracking System (GATS)
- Western Renewable Energy Generation Information System (WREGIS)
- Midwest Renewable Energy Tracking System (M-RETS)
Typically, the wisest course of action is to use a broad definition of environmental attributes, at least where the parties’ intent is for the seller to transfer and the buyer to receive all of the environmental benefits, in whatever form they may be recognized and by whatever name or other criteria. Not only does current usage vary from state to state and tracking system to tracking system, but one must remain mindful that new laws and policies continue to emerge.
What Are Environmental Attributes Worth?
If the electric buyer is also the REC buyer, then the contract must also make the pricing clear. Sometimes the parties will agree that the price being paid by the buyer for the electric output also covers the buyer’s purchase of the RECs. In other cases, the buyer will pay an agreed rate for the electric output and a separate and additional rate for the RECs.
Beyond the provision clearly establishing the initial rate, attention must be given to other provisions in the contract that affect rates, because the parties may or may not intend to treat the electric rates differently from the rates for RECs. For example, if there is an annual rate adjustment provision, does that provision apply to the electric rate, the REC rate or both? Do the parties want and intend for the same rate adjustment mechanism to apply to both the electric rate and the REC rate? If not, separate rate adjusters must be included, with clear delineation of which adjuster applies to which rate.
As a further example, consider the common provision that allows the seller to discontinue deliveries if the buyer is in default and fails to cure that default within the time designated in the contract. In such an event, the seller typically has the right to suspend deliveries of electric capacity and energy while the buyer remains in default. Not only must the parties consider whether the same provisions should apply to effect a suspension of the REC buyer’s rights to the RECs, but they must also consider whether the same provisions can apply as a practical matter. Consider a buyer that remains in an uncured default for all of three days. A seller can easily suspend deliveries of electric power and energy at any time, making it very practical to be able to suspend deliveries and then recommence them three days later. A three-day ‘suspension’ of RECs, in contrast, may mean absolutely nothing. If registered, they likely would not be ‘de-registered’ within three days, much less reregistered on the fourth.
The contract governing the sale of environmental attributes should also commit the seller to provide the buyer with whatever backup the buyer may need from time to time to verify its entitlement to the attributes. The seller should be obligated to provide information confirming that the RECs have not been sold to any other entity except the buyer, and to provide on request whatever technical information the buyer may need. Such technical information might include information to confirm that the generator qualifies as a renewable resource, or the amount of energy it is producing.
The renewable resource industry and the state and federal laws pertaining to it are largely new and still emerging. Renewable portfolio standards are neither universal nor fully standardized. It is thus important when contracting for environmental attributes that the provisions be sufficiently specific to address existing law while sufficiently broad to capture new terminology or rights that may evolve through future laws.
Alan Robbins is a member of Jennings Strouss & Salmon PLC. Based in the firm’s Washington, D.C., office, he is engaged in the firm’s energy and regulatory practice. He has extensive experience representing clients before the Federal Energy Regulatory Commission and other federal and state agencies and commissions. He may be reached by email at email@example.com.