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What is a REC? – The Basics

What is a REC? – The Basics. 1 MWH of electricity = 1 REC (there are exceptions) Tracked/traded separate from physical electricity, generally via: Electronic tracking systems (ex.PJM Generator Attributes Tracking System) Dual Purpose:

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What is a REC? – The Basics

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  1. What is a REC? – The Basics • 1 MWH of electricity = 1 REC (there are exceptions) • Tracked/traded separate from physical electricity, generally via: • Electronic tracking systems (ex.PJM Generator Attributes Tracking System) • Dual Purpose: • Ease tracking of environmental attributes and AERS Compliance • Provide incremental revenue stream to renewables to make them economical

  2. Project Finance Fundamentals • New vs. Existing Power Projects • To incentivize investment in new projects, expected revenues must cover: • Fixed capital costs • Fuel Costs (if any) • Operating and maintenance costs (O&M) • Return on investment • To keep existing projects operational, actual revenues must only cover: • Fuel costs (if any) • Operating and maintenance costs • Key Point: For most existing power plants, fixed capital costs have been recovered directly from rate-payers through government guaranteed rates of return for investor owned utilities.

  3. RECs & Project Finance • Role of RECs • RECs are necessary to support economics of new projects because: • Wholesale power prices now set competitively by existing projects • Projects financed by rate-payers (unlike renewables) • RECs fill funding gap between new project cost and wholesale power price $ REC In an efficient market the value of a REC should be the difference between the value of wholesale market energy and the value a new projects needs to recover its fixed capital costs and variable fuel and operation and maintenance costs, plus a reasonable rate of return. $ $ WholesaleEnergy Old Project New Project

  4. REC Market Economic Fundamentals 6.25% Efficient REC markets rely on supply and demand equilibrium. SB 315 immediately upsets that equilibrium and produces scenario 4. Because of unanticipated oversupply REC revenues fall towards zero. This creates a “lose-lose” situation in which neither new renewable energy or co-gen and CHP projects are encouraged. 1. REC market demand is fixed 4. Supply > Demand; REC prices fall towards zero Y axis: REC demand × 3. Supply = Demand; REC prices = incremental costs; ideal × × 2. Supply < Demand = REC prices, rising towards ACP 2024 X axis: Years

  5. Demand will not be high enough to encourage additional supply GWh 13,000 Potential Hydro 12,000 Waste Heat In-state Non-Solar Demand 11,000 Gorsuch Additional Cogen COY 1980 10,000 9,000 Cogen General 8,000 7,000 Additional Steel Mills 6,000 AK Steel 5,000 4,000 Permitted In-State 3,000 2,000 Existing In-State 1,000 0 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

  6. REC Market Takeaways • Stable, reliable REC revenues required to facilitate investment in renewables • In balanced market, REC price SHOULD be difference between power price & project cost • However, rule of supply and demand applies to REC markets • Supply surpluses, ANTICIPATED or REALIZED, will depress prices and, thus, investment • Fixed AERS demand means that additional REC supply would result in (additional) surplus • However, oversupplied AERS market will not support investment in renewables or COGEN

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