RECs are the environmental or ‘green’ attributes associated with each megawatt hour (MWh) of renewable energy generated. This attribute can be broken off from the ‘brown’ power and sold separately to companies that either need to use it for a retail green power program or to comply with a Renewable Portfolio Standard (RPS), policies mandating a state to generate a percentage of its electricity from renewable sources.
The 2008 New Jersey Class I REC call option, with a strike price of $15, an expiration of May 31, 2008, and contract volume of 10,000 MWh, was agreed at a premium of $2.00. The names of both counterparties involved in the trade are to be kept confidential.
The state of New Jersey has its RPS broken into three different categories: Class I, Class II and Solar RECs. Class I renewable energy sources are wind energy, fuel cells powered by renewable fuels, geothermal technologies, wave or tidal action, and/or methane gas from landfills or a biomass facility, provided that the biomass is cultivated and harvested in a sustainable manner. Eligible Class II resources include electric energy produced at a resource recovery (municipal solid waste) facility or hydro power of 30MW or less.
“We are delighted to have been involved in this landmark deal – there certainly appears to be demand for derivatives trading among OTC REC traders and we hope that we can help stimulate increased interest and liquidity in this new area,” says Mike Ferguson, senior vice-president of US environmental products at Spectron.
REC derivatives appeal to many energy market players. These can be load-serving entities in RPS states that are required to purchase a certain amount of their load from ‘green’ resources, to the renewable generators that sell off their attributes into these markets. “These players in the market can use derivatives such as options to better manage and hedge their needs,” says Ferguson. “Furthermore, speculators such as hedge funds and traders are attracted to REC derivatives. In addition, corporations outside of the energy and financial sectors can utilise REC derivatives as a hedge in managing their green power programs.”
Spectron Energy is active in all US environmental markets including sulphur dioxide, nitrogen oxide, and RECs. “Carbon regulation is on the horizon in the US and we are eager to apply our experience and knowledge gained in the EU emissions trading scheme to this developing market,” says Ferguson. “Furthermore, Spectron is gearing up for brokering mercury,” he adds.
The week on Risk.net, March 10-16 2018Receive this by email