How much are California TRECs worth?

By: Adam Gerza, 2/9/2011

There has been increased speculation on the potential value of Tradable Renewable Energy Credits (TRECs) now that the California Public Utilities Commission (CPUC) has officially reauthorized their use.  In their January 13, 2011 ruling the CPUC lifted the moratorium, once again allowing utilities to purchase TRECs to satisfy a portion of their Renewable Portfolio Standard (RPS).  This now begs the question, how much are TRECs going to be worth?


Which framework?
To assess the value of TRECs we need to distinguish which RPS and REC framework we are talking about.  The CPUC framework is specific to the 20% by 2010 RPS, which mandates the 3 large Investor Owned Utilities (IOUs) in California: PG&E, SoCal Edison, and SDG&E.  The final CPUC rules allow IOUs to procure TRECs to satisfy up to 25% percent of their RPS, with a $50/REC price cap.  Both of these provisions expire at the end of 2013, when the CPUC “will consider modifying or removing those limitations all together.”  Under the CPUC framework IOUs would be able to procure TRECs from a variety of eligible renewable technology categories (including solar, wind, geothermal, biomass, and small hydro) and from anywhere within the Western Renewable Energy Generation Information System (WREGIS) territory (includes all or part of 13 western states, 2 Canadian Provinces, and parts of Baja California).

Another framework altogether is the California Air Resources Board (CARB) 33% by 2020 RES (Renewable Energy Standard), which would require utilities to procure 33% of their total generation portfolio from renewable resources.  The most recently proposed CARB framework has a completely different set of rules: (1) utilities could use TRECs to satisfy up to 100% of their RPS requirement, (2) there would be no price cap, and (3) CARB would also mandate over 20 public and municipal utilities in the state of California to comply with their RES, in addition to the big 3 IOUs.  TRECs would likely have more value under a CARB program versus the CPUC framework, as there would be significantly larger end-use demand and no price cap.  However with all of that being said, CARB has most recently stated that they will seek to harmonize their program rules with the CPUC framework in order to build on that foundation and create a long-term sustainable TREC market in California.

In yet another possible framework there is a bill in the California state legislature, SB 23 that would legislatively create a 33% by 2020 Renewable Portfolio Standard.  Industry legal experts say that if this bill passes, it would preempt and supersede the CARB framework.  With all of these programs, rules, and what if’s, it is difficult to predict what a TREC value could be.  It seem as though the CPUC program will lay the initial groundwork, and then the 33% by 2020 CARB or SB 23 framework will provide the runway for future TREC valuations in California.


Are TRECs already being traded?
Yes, a number of bilateral deals for TRECs have already been consummated.  However there is little transparency into this market for outsiders.  TREC buyers in particular are not eager to show what they are willing to pay or how they value these certificates.  Interestingly we have even seen Distributed Generation (DG) facilities as sellers in some of these transactions, even though they have not yet been certified by the California Energy Commission (CEC) as being RPS eligible.  These particular deals are contingent upon the CEC eligibility ruling and TREC trading actually taking place.  Without stating specific terms, we have seen bilateral deals in a variety of durations (between 1 and 5 year terms) being executed anywhere from the $10 to low-$20/REC range.  The buyers in these transactions are asset managers or financial institutions with REC market expertise, and could be considered ‘smart money buyers’.  Presumably they see value in owning TRECs at the price they are currently paying.

In a recently publicized TREC transaction, PG&E contracted with a large wind farm in Alberta, Canada for a 20-year certificate stream.  Greengate Power Corporation, the wind project developer agreed to sell their TRECs from the combined 450MW facility direct to PG&E.  The negotiated price was listed as confidential in the CPUC filing and has not been released.  To the best of our knowledge, this was the first publicly announced unbundled TREC transaction where an IOU acted directly as buyer, since the CPUC reauthorized the use of TRECs in January.


What do solar rebate programs that offer a REC ownership choice tell us?
Under the California Solar Initiative (CSI) state rebate program it is explicitly stated that the system owner maintains the ownership rights to their Renewable Energy Certificates.  In contrast, several municipal owned utilities in California have designed their own solar rebate program, offering customers a REC ownership choice.  Either (1) the utility gets to retain ownership of the RECs, or (2) the customer may choose to retain ownership of their RECs and take a reduced incentive.  This rebate delta may be the clearest indication of TREC values from the perspective of the utilities.  We summarize some of these programs below:

Los Angeles Department of Water and Power (LADWP)
LADWP rebates are paid upfront on a declining scale (similar to CSI).  LADWP pays residential solar rebates by calculating an expected 20-year kWh production and then multiplying that by a $/kWh rate.  The rate is $0.10/kWh if the utility keeps the RECs and $0.05/kWh if the system owner retains the RECs.  The difference of $0.05/kWh effectively values RECs at $50/each over a 20-year term.

Sacramento Municipal Utility District (SMUD)
SMUD offers solar customers the choice of an upfront or 5-year Performance Based Incentive (PBI) rebate.  The upfront rebate is reduced $0.20/watt, and the PBI rebate is reduced $0.03/kWh (or $30/REC) over a 5-year period if the customer chooses to retain the RECs.  As of Dec-2010, SMUD says that 5 out of 51 commercial projects, representing 1.6MW out of a total of 16.4 MW decided to retain their RECs.

Burbank Water & Power (BWP)
BWP also offers solar customers the choice of an upfront or 5-year PBI rebate.  If BWP retains the RECs the upfront rebate is $3.14/watt versus $2.64/watt if the customer retains ownership.  The 5-year PBI rebate is $0.464/kWh versus $0.364/kWh if the customer retains REC ownership.  The upfront delta is $0.50/watt, and the PBI delta is $0.10/kWh or $100/REC for 5-years, which would translate to $25/REC over 20 years.

Two smaller California utilities: Azusa Light & Water and Colton Public Utilities also offer a binary choice.  The Azusa upfront rebate delta is $0.58/watt if the utility keeps RECs versus the customer choosing to retain them.  The Colton upfront rebate delta is $0.73/watt, applicable only to systems smaller than 30kw.


How does California compare to other statewide REC markets?
It is difficult to draw comparisons between the early stages of the California TREC market and other more mature statewide REC markets.  The most liquid and transparent markets to compare against are SREC (Solar REC) markets, where there is a solar specific carve-out within the RPS.  Many of these lucrative SREC programs in states like New Jersey, Ohio and Maryland are undersupplied, meaning there is not enough solar capacity to meet the current year RPS targets.  Hence the SRECs trade just below the Alternative Compliance Payment (ACP), which is the penalty payment that utilities must pay for non-compliance.  Whereas in the CPUC framework the market may in fact be well supplied, considering the multiple eligible technology categories that IOUs can source from.  Also the WREGIS territory is more sizeable, versus some of the SREC markets that are only allowed to source from in-state facilities.  The ACP is the single strongest driver of prices in the under-supplied SREC markets.  Although it is not clear if the $50/TREC price cap that the CPUC set is actually a binding penalty.


In Conclusion
The reapproval of TRECs by the CPUC will enable the market to come out of its embryonic stage.  In a previous article we argued that RECs are a great market-based incentive mechanism for renewable energy.  California policy makers have taken a big first step that hopefully leads to a long term sustainable market.  More questions will need to be answered before a clear trading range is set and pricing may remain opaque for some time.  Realistically it could be a couple of years before a CARB or SB 23 program gets finalized and fully implemented.  And longer term TREC values will largely depend on the 33% by 2020 RPS framework.  Based on actual trades that we have seen, somewhere between the $10 to low-$20/TREC range may be considered fair value for now.  Based on some of the REC optional solar rebate programs, valuations range higher into the $25 to $50/REC range.  Regardless of the initial price we believe that it makes sense for system owners to get registered in WREGIS now, to start officially creating RECs – to potentially sell at a later date.

About Leaf Exchange:
Leaf Exchange is a Renewable Energy Credit brokerage & exchange service for California solar system owners.  The Leaf Exchange provides REC market education, news, certification services, and a venue for solar system owners to monetize their Certificates.  We register systems in WREGIS for no cost, so system owners can start banking their RECs to potentially sell at a later date.  For more information visit www.theleafexchange.com

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