Renewable Energy Credits: How Tokenization Can Help

Renewable energy credits, or renewable energy certificates, are an interesting way to track and assign ownership of renewable electricity generation and use. These credits prove that you or your business supports or uses renewable energy, even if you don't have solar panels or wind turbines.

The growing interest in RECs is driving a search for improved ways of buying and tracking them. Some nonprofits and companies are exploring the use of distributed ledger technology and tokenization to enhance RECs.

In this article, we'll look at what RECs represent, how they're made, what problems they seek to solve, and how tokenization can improve them.

What are renewable energy credits?

RECs are tradable assets representing the rights to non-power attributes associated with renewable energy. Each REC represents one megawatt hour (MWh) of electricity generated from a renewable source. The certificate includes data such as:

• Renewable fuel type

• Renewable facility location

• Project build date

• Project name

• Emissions rate of the renewable resource in its certificate

Buying a renewable energy certificate is different from paying your electric bill. When you pay your electric bill, you're compensating an energy company for the electricity used to power your home or business. Purchasing RECs lets you claim that some of the energy you've used is renewable. As we stated, entities that produce renewable energy get one REC for each MWh of electricity. The energy producer can keep the credit or sell it. Many buyers use these energy credits to meet their carbon reduction requirements or goals.

The electricity you use comes from the power grid, which mixes energy from non-renewable and renewable sources. Without RECs, there's no way to know how much of your energy comes from a renewable source. Ideally, buying these credits help reduce greenhouse gas emissions by encouraging more renewable energy production.

Types of RECs

RECs are generated in tandem with electricity production from these five renewable energy resources:

• Wind

• Hydropower

• Solar

• Geothermal

• Repurposed waste material

Solar renewable energy credits (SRECs) are sometimes tracked separately from traditional RECs. SRECs are credits that come from solar energy, representing 1 MWh of electricity. Homeowners can generate SRECs from their solar panels and sell them to electrical utility companies.

RECs are sold as bundled or unbundled certificates. Bundled certificates are purchased along with the renewable electricity created to produce them. They let businesses draw a hard line from their investment to an actual increase in the amount of renewable energy created. This is known as an additionality claim.

Unbundled RECs are sold separately from the energy created to produce them. Businesses and individuals buying unbundled RECs receive a credit, but can't make additionality claims. However, these RECs are much cheaper than bundled certificates. Unbundled certificates are a common way for businesses and people to meet sustainability goals. And this form of renewable energy credit doesn't require the buyers to alter their energy contracts.

RECs vs. carbon offsets

Carbon offsets are created by projects that reduce greenhouse gas emissions or sequester them from the environment. Alternatively, RECs are specific to an entity's electric use, letting them claim that a renewable source generated a portion of it. Carbon offsets are measured in metric tons of CO2, whereas RECs are measured in MWh. The Greenhouse Gas Protocol breaks emissions down into three categories: scope 1, scope 2, and scope 3.

• Scope 1 emissions encompass all direct greenhouse gas emissions, such as those caused by burning fossil fuels.

• Scope 2 emissions are those produced by the consumption of purchased energy.

• Scope 3 emissions encompass all other indirect emissions.

Carbon offsets can be used to account for all three types of emissions, whereas RECs can address only scope 2 emissions. Both carbon offsets and RECs suffer from double-counting problems and a lack of visibility into their history.

Tokenization of Renewable Energy Credits (RECs)

There are 10 REC tracking systems across the United States, and many states haven't formally adopted a tracking system. This centralized process has proven difficult to scale. Additionally, RECs have faced issues with traceability and transparency, leading to double-counting problems and a lack of visibility. A decentralized REC tracking approach could be scaled quickly and with enhanced transparency.

Centralized tracking of RECs is laborious and time-consuming. Many entities are involved, and some information is stored on physical documents. Many of the inherent infrastructure and security issues associated with the current system can be solved with distributed ledger technology. Still, since this process aims to reduce greenhouse gasses, it must be built using a carbon-neutral or carbon-negative blockchain.

Hedera and the HBAR foundation developed a Guardian framework, providing an auditable, traceable record of tokenized RECs and their life cycles. The Hedera Network and Guardian framework are used by numerous projects to create and enhance the visibility of environmentally-friendly assets. For example, BlockScience uses the Guardian framework to develop a pricing mechanism for RECs and carbon offsets.

BlockScience uses an Automated Regression Market Maker (ARMM) mechanism to measure the market state and find mathematical similarities between machine learning models and automated market makers. This data enables BlockScience to price semi-fungible assets like RECs accurately.

RECs and DLTs

RECs can be used to reduce an entity's carbon footprint while incentivizing and supporting the production of renewable power. However, the current methodology used to track the production and trading of RECs isn't efficient. Carbon-negative DLTs can make RECs more secure while enabling purchasers to know where their credit came from, how many times it has been traded, and what energy source was used to create it.

Hedera is an ideal network to support the future of renewable energy credits. Much of the infrastructure needed for reliable REC management already exists on the Hedera network. ServiceNow, which aids in managing data generated by solar panels, sensors, and other IoT devices, can transmit this data to the Guardian framework automatically.

Hedera and ServiceNow make it easier for enterprises to build REC-tracking workflows. Businesses can use no-code, configurable building blocks to handle their REC-tracking needs. Hedera is committed to making environmentally-friendly tokenization a reality for anyone and everyone.