Unpacking The Growth of VRECs in the USA

A deep dive into the factors fueling the rise of voluntary renewable energy and charting the progress and potential of voluntary renewable energy certificates.

In recent years, the United States has seen a remarkable uptick in the interest and investment in voluntary renewable energy certificates (VRECs) and unbundled certificates. This surge is driven by an increased corporate focus on sustainability, particularly in the realm of decarbonization and renewable energy adoption. Central to this movement is the strategic use of VRECs, which allow companies to assert that their operations are powered entirely by renewable energy sources, addressing primarily Scope 2 emissions in their sustainability reports.

The voluntary REC market in the United States has experienced exponential growth over the past six years. A significant portion of this growth is attributable to the increased share of RECs used for voluntary purposes, rapidly outpacing those utilized for compliance. This shift is a clear indication of the growing corporate and consumer awareness around decarbonization opportunities. Furthermore, the anticipated data from 2024, which suggests that the supply of voluntary RECs will, for the first time, surpass the RECs used for compliance, marks a pivotal moment for the voluntary market. A testament to the rising demand for VRECs, driven by the recognition of their unique role in enabling companies to meet their renewable energy goals more efficiently and transparently.

Understanding Scope 2 and 3 Emissions

To comprehend the significance of VRECs, it's essential to grasp what Scope 2 and Scope 3 emissions entail. Scope 2 emissions stem from the indirect energy consumption of a company, primarily through the purchase of electricity, heat, or steam. In contrast, Scope 3 emissions are all other indirect emissions that occur in a company’s value chain, including both upstream and downstream activities. Given the growing emphasis on corporate environmental responsibility, organizations are increasingly focusing on reducing these emissions as part of their broader sustainability goals. VRECs emerge as a vital tool in this endeavor, enabling companies to support renewable energy indirectly and lower their Scope 2 emissions footprint. Unlike carbon offsets, which are more suited for Scope 3 emissions mitigation, VRECs provide a direct linkage to renewable energy projects, thus offering a clear path towards Scope 2 emission reduction.

Market Dynamics and Trends

The dynamics of the Voluntary Renewable Energy Certificate (VREC) market are influenced by several key factors, chief among them being the Renewable Portfolio Standards (RPS) set forth by various states. The ambition level of these standards directly impacts the growth rate of the voluntary market; a scenario where compliance markets engage more ambitious RPS could lead to a more moderated growth of VRECs, essentially doubling the supply. Conversely, if RPS standards stagnate, the supply of VRECs could potentially triple, suggesting a direct correlation between policy ambition and market expansion.

Another pivotal factor is the generation capacity of renewable energy itself, which underpins the entire REC market. The Inflation Reduction Act, aimed at bolstering the network of interconnectors and enhancing renewable supply chains, is poised to significantly lower the Levelized Cost of Electricity (LCOE) for new renewable projects. This, in turn, impacts the VREC market by potentially increasing the supply of RECs, as more renewable projects come online.

The format of clean energy attribute distribution, particularly the shift from unbundled RECs to green power purchase agreements (PPAs), represents a significant market trend. Unbundled RECs, while facilitating ease of trade and accessibility for corporates, are gradually losing ground to PPAs. This transition reflects a broader market preference towards direct and longer-term procurement of renewable energy, underscoring the market's evolving nature.

Price Trends and Future Outlook

The VREC market is currently witnessing a steady decline in prices, a trend attributed to a variety of factors including the growing supply outpacing demand, the falling LCOE of new renewable facilities, and a marked preference for PPAs over exchange-traded RECs. This declining price trend, however, mirrors the increasing affordability of renewable energy and the expanding supply of VRECs in the market. Texas, being the largest source of voluntary RECs in the US, has seen a consistent decline in the value of its Solar Center for Resource Solutions (CRS) RECs and Wind CRS RECs since 2021, reflecting broader market dynamics.

The future outlook for the VREC market is cautiously optimistic, with expectations of continued growth driven by federal incentives, a decreasing level of energy (LCOE) from renewable electricity, and more ambitious state RPS. However, this growth trajectory is contingent upon several factors, including policy developments, technological advancements in renewable energy, and shifts in corporate sustainability strategies. The potential for a market expansion or contraction hinges on these dynamics, making the VREC market a critical barometer for the renewable energy landscape in the United States.