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Tradable Renewable Energy Certificates (TRECs) - 6 November 2008
Tradable Renewable Energy Certificates (also known as RECs, green tags, or green certificates) represent the value of the benefits associated with the supply of Renewable Energy (in addition to the energy itself).
A recent case study involved the GBCSA purchasing fifteen Tradable Renewable Energy Certificates (TRECs) from GreenX Energy - a Cape Town-based company which trades in Renewable Energy Certificates - to supply renewable energy to match the consumption of electricity at the venue for the Convention & Exhibition.
The energy is generated from renewable sources such as wind, solar, small hydro and, in this case, from bagasse in the sugar industry in KwaZulu Natal. The additional costs for the purchase of TRECs enable and encourage production of distributed renewable energy generation in South Africa in line with Government targets.
The White Paper on Renewable Energy for South Africa (2003) established a non-binding target of 10,000 GWh of new renewable energy in the country by 2013. The Department of Minerals and Energy has been developing a regulatory framework for Tradable Renewable Energy Certificates as a mechanism for supporting the development of the RE sector to deliver against the RE target.
The details of the DME’s TREC activities are available here.
What is Green Electricity?
Green Electricity – also called Green Power – is electricity which is derived from renewable energy resources and which is generated in a sustainable manner. The Association of Issuing Bodies (http://www.aib-net.org/) defines green electricity as that generated by wind, solar, water (small hydro, wave, tide), geothermal, biomass. It excludes electricity generated from nuclear energy and landfill waste.
What are TRECs and how do they work?
Tradable Renewable Energy Certificates (TRECs) represent the non-energy value of units of certified green electricity. In essence, a TREC is an auditable financial instrument that reflects the attributes of green energy independently of the actual units of energy – i.e. the ‘greenness’ value is separated from the electrons. TRECs are normally denominated in 1 MWh units.
A green generator (suitably registered as such) produces electricity which is supplied into the national grid for distribution and is consequently ‘mixed up’ with undifferentiated electricity such as from coal, nuclear and diesel generated electricity. However, under a TREC system, the green generator is also issued a certificate (a TREC) at the time of generation which certifies the quantity and type of green electricity produced. This certificate can be marketed and sold separately from the associated electricity which has gone into the grid. Discerning customers are then able to purchase the certificate(s) and, when electricity is consumed from the grid it may be recombined together with the purchase of the green certificate, effectively allowing for green electricity to have been used. The TRECs are redeemed at this point and the customer is able to claim the benefits (environmental and others) of the Green Power at this stage.
The flow diagram below illustrates the process which enables customers to procure green electricity by means of a TREC system.
Why the TREC approach?
The choice by customers to use renewable resources of energy directly avoids climate change emissions and stimulates the development of a more sustainable energy economy. However, many potential RE customers are unable to generate their own renewable energy on (or adjacent to) their premises and consequently TREC’s provide an effective mechanism of transferring the value because the certificates allow the consumption to be physically separated from the generation while maintaining the value – effectively it is not necessary to have a renewable generator on one’s premises in order to realise the benefits of green electricity. The approach is designed to stimulate investment in new renewable energy projects by providing a revenue stream for developers thus stimulating the renewable energy generation industry. Furthermore, the TREC approach directly matches buyers and sellers in the most efficient and cheapest way, and finally enables customers to use any quantity of green electricity up to 100%. The green benefits experienced by the consumers are as real as they would be with direct local supply.
What are the benefits of purchasing TRECs?
TRECs provide internationally accepted proof of an enterprise’s procurement choice in terms of energy. Using green electricity, as reflected in terms of TRECs, makes a significant contribution to a company’s sustainability targets and triple bottom line reporting. TRECs have the additional practical advantage that there is no physical impact on the customer – no additional equipment required. It is the cheapest way to procure renewable energy as it optimises the use of existing transmission and distribution infrastructure. By outsourcing the local carbon and resources issues to achieve economy of scale, the TREC based certificate system allows generation to be at optimal sites and the benefits to accrue at a customer site anywhere. Further, greater system diversity provides protection against future fossil fuel price uncertainty as well as supply security in the economy.
How does a generator get registered in order to produce TRECs?
Renewable energy generation plant may be registered as a Green Power Generator (known as a Renewable Energy Production Device) by completing the Renewable Energy Declaration process and the Registration of a Renewable Energy Production Device. This document is completed on the basis of a technical inspection of the generation system under the auspices of the South African Tradable Renewable Energy Certificate Issuing Body (SATIB). Currently SATIB is in the process of being formed - the Department of Minerals and Energy (DME) in South Africa has commissioned a study to examine the industry and confirm the appropriate governance mechanism and this initiative is being formalised by the SA National TREC Team which is convened by the DME.
How are TRECs priced?
Currently, electricity generation in South Africa is predominantly undertaken by the state utility, Eskom, and is based on low-grade coal and diesel production. Until recently, Eskom electricity has been amongst the cheapest electricity worldwide. Although the differential is reducing, the costs of renewable energy generation are still higher than that supplied by Eskom. Consequently, TRECs are priced at the differential between the cost of new renewable energy generation (say large-scale windpower generation) and the Eskom supplied cost for existing coal-fired plant. This premium provides a revenue stream to stimulate the investment in new RE generation infrastructure.
Normal administration and marketing costs are added to arrive at the final TREC price. The cost of Eskom power will rise significantly in the near future as the costs of investment in new capacity are factored into the pricing structure. This will have the effect of reducing the apparent premium on Green Power.
Is there an independent governance body and, if so, what is its role?
The green electricity certificate industry is in its infancy in South Africa. The first Green Power transactions for venues of the World Summit on Sustainable Development in 2002 were effected through a register provided by the National Electricity Regulator (now NERSA). Since then, the DME commissioned a TREC study to determine the most effective way to stimulate the growth in renewable energy generation. This study made recommendations for the establishment of a TREC Issuing Body and this is currently in the process of formalisation. The Issuing Body and will ultimately be the governance authority for the industry. It will be based on the European Association of Issuing Bodies (AIB). In the meantime, the registration of Production Devices is undertaken by suitably qualified energy consultancies and the central certificate register is maintained by Nano Energy.