# Understanding Renewable Energy Certificates (RECs): Definition and Examples

![Renewable Energy Certificate (REC): Proof that one megawatt-hour (MWh) of electricity was generated and delivered to the electricity grid from a renewable energy resource.](https://www.investopedia.com/thmb/T20Ra-Xh0QmAtnu9T0-6Me6iOB8=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Rec_final-94b7e3125c8547d982bfb4f196a361d4.png)

*— Investopedia / Michela Buttignol*

> **Definition**
>
> Renewable energy certificates (RECs) are issued when electricity is generated from renewable energy sources. They are sold separately from the actual electricity produced.

## What Is a Renewable Energy Certificate (REC)?

Renewable Energy Certificates (RECs) are crucial tools in the shift toward sustainable energy, providing marketable proof that one megawatt-hour (MWh) of electricity was produced from renewable resources.

As green energy initiatives gain momentum, understanding RECs and their role in reducing carbon footprints and supporting renewable projects becomes vital. This article outlines how RECs work, the benefits they offer, and their importance in both regulatory compliance and private sector sustainability efforts.

### Key Takeaways

*   Renewable Energy Certificates (RECs) represent proof that one megawatt-hour (MWh) of electricity was generated from a renewable source and fed into the power grid.  
    
*   RECs can be sold by renewable energy producers, like homeowners with solar panels, to utilities and businesses for financial gain and carbon offsetting.  
    
*   States implement Renewable Portfolio Standards (RPS), which mandate that a certain percentage of electricity must come from renewable sources, driving the demand for RECs.  
    
*   Critics argue that RECs may not lead to significant increases in renewable energy projects but rather provide a means for companies to claim support for renewable initiatives.  
    
*   The new Granular Certificate Trading Alliance aims to introduce more detailed REC trading, enhancing transparency and aiding renewable project planning.  
    

When companies buy RECs, they provide financial support for the [renewable energy](https://www.investopedia.com/terms/r/renewable_resource.asp) projects that produce them, making those systems more economically sustainable and [producing even more green energy](https://www.investopedia.com/terms/e/energy-return-on-investment.asp). This, in turn, is meant to reduce reliance on fossil fuels and decrease greenhouse gas emissions.

However, critics argue that RECs haven't led to as many new renewable energy projects as promised. They simply provide a way for businesses to claim they support efforts to transition to green energy without making meaningful changes in their operations. For example, a 2024 study reviewing almost 40 years of data argues that RECs tend to discourage companies from innovating to produce cleaner energy compared with other policies like environmental taxes and feed-in tariffs for solar energy. Other studies have argued that RECs have contributed significantly to building out a greater supply of renewable energy.

## Understanding How Renewable Energy Certificates Function

RECs track solar, wind, and other green energy as they flow into the grid. Tracking is needed because renewable energy is indistinguishable from electricity from other sources. Companies use them to offset their carbon emissions.

Batteries for storing electricity generated from solar and other renewable sources are still quite costly, especially for homeowners and small businesses. So, much renewable-generated power, such as from a home's solar system, is fed back into the power grid for use by the utility for other customers since it has nowhere else to go if there's no battery on site. The renewable electricity provider, such as a homeowner with rooftop solar panels, might receive a payment for each REC. These certificates can be sold but are typically used as a credit toward their power usage later on, for example, when the solar panels on the roof don't produce enough power for the home, and the house has to draw power from the electricity grid.

> **Important**
>
> RECs expire at the end of the fifth calendar year following the year they were generated.

## Regulatory Requirements for Renewable Energy Certificates

Many states require utilities to buy or generate renewable solar power, known as solar carve-outs. In addition, 30 U.S. states plus the District of Columbia have renewable portfolio standards (RPS) that require power utilities to use a certain amount of renewable power. These RPS requirements drive the trading of RECs. A power company can purchase these certificates from homeowners and others to meet the state's renewable requirements.

While state laws vary on the use and sale of RECs, the certificates are recognized by many state and local governments, regional electricity transmission authorities, nongovernment organizations, and trade groups as a measure of a company's commitment to sustainability. Besides solar and wind-generated power, RECs are issued for energy produced from geothermal, hydropower without dams, [biofuels](https://www.investopedia.com/terms/b/biofuel.asp), and hydrogen fuel cells.  

## Navigating the Market for Buying and Selling RECs

Utilities and other businesses buy RECs for a few reasons. One is to meet legal requirements. Many states require utility companies to produce a minimum amount of renewable energy. Buying RECs allows companies to get credit for renewable production to meet these standards. For example, in 2020, Massachusetts began requiring all electricity suppliers to produce or purchase RECs amounting to 15% of the electricity they provided to the state.

Typically, these laws allow an "alternative compliance payment" if companies don't buy enough RECs. The price of these payments, along with supply and demand, help set the market value of RECs.

RECs are typically traded by power companies and people who own residential energy systems such as solar panels. They can be bought or sold directly, but some third-party companies have created marketplaces to aid these transactions.

For example, SRECTrade helps residential solar owners track their RECs and sell them to utility companies and other buyers.

In late 2023, AES Corporation ([AES](https://www.investopedia.com/markets/quote?tvwidgetsymbol=AES)), Constellation Energy Corporation ([CEG](https://www.investopedia.com/markets/quote?tvwidgetsymbol=CEG)), and tech giants Google and Microsoft ([MSFT](https://www.investopedia.com/markets/quote?tvwidgetsymbol=MSFT)) partnered with energy marketplace administrator LevelTen Energy to form the Granular Certificate Trading Alliance. The alliance is set to form a new REC trading marketplace that would include detailed information on the time and location of renewable energy generation. This would be far more detailed than what's available now, and also be on a far wider scale than REC marketplaces now.

These "granular certificates" would also be a step forward for RECs since they have typically lacked any specificity about the actual origins of renewable energy. This information could be quite attractive to corporate and utility energy buyers looking to meet their clean energy goals day and night while also being able to be far more specific with the public and customers about how they are sourcing their energy needs.

The new trading platform, slated to go live in 2024, could thus increase transparency and accessibility in the REC market. This, in turn, could provide clearer signals to renewable energy developers about where new projects are most needed, potentially influencing the location and development of future renewable energy installations.

## Detailed Insight Into Solar Renewable Energy Certificates (SRECs)

Solar renewable energy certificates (SRECs) are for electricity produced by solar panels. These are found in these states, which differentiate them from other energy sources:

*   Connecticut
*   Delaware
*   Illinois  
    
*   Maryland
*   New Jersey  
    
*   Ohio
*   Pennsylvania
*   Washington D.C.  
    

## REC Arbitrage Examples and Opportunities

REC [arbitrage](https://www.investopedia.com/terms/a/arbitrage.asp) is also called a REC swap. These trades involve the near-simultaneous buying and selling of RECs with differing prices. Traders try to profit from the disparity in prices to sell them for more than they bought them.

For example, suppose State A has higher RPS requirements and solar carve-outs than State B. The higher requirement drives demand for the price of RECs in State A. 

The state A provider, who must meet the higher requirements, would have a reason to buy less expensive state B certificates. The provider can then use these credits to meet their requirements.

RECs all represent 1 MWh of electricity, wherever it's produced. However, the price may vary because of supply and demand. In practice, [brokers](https://www.investopedia.com/terms/b/broker.asp) are used to make REC arbitrage possible.

## How Much Electricity Does One REC Represent?

One REC is 1 MWh of electricity generated and delivered to the grid. This is about a month's worth of electricity for the typical American home.

## Why Do Some States Differentiate Between RECs and SRECs?

States differentiate between RECs and SRECs for different reasons. Some states may require that a specific amount of an electric company's power come from [solar](https://www.investopedia.com/articles/investing/053015/pros-and-cons-solar-energy.asp) rather than other forms of renewable energy. They hope to encourage the adoption of solar energy, especially among homeowners and businesses.

## Can I Keep the Electricity My Solar Panels Produce If I Sell RECs?

If your home generates onsite renewable electricity from a solar panel, you can use  
the renewable electricity the system generates _only_ if you retain the REC. If you sell  
the REC, you lose the right to say you are using renewable electricity.  

## The Bottom Line: The Role of RECs in Renewable Energy

Renewable Energy Certificates (RECs) play a crucial role in promoting clean energy by certifying that electricity is derived from renewable sources. These certificates support the expansion of green energy projects by offering financial incentives to producers and enabling companies to meet legal renewable energy requirements.

While RECs help decrease reliance on fossil fuels and reduce carbon emissions, critics argue that they may not always lead to new renewable energy developments. Nonetheless, as states enforce renewable portfolio standards, RECs create a market that adds value to renewable electricity, incentivizing further adoption of clean energy technologies.

**_Correction—Dec. 25, 2024:_** This article has been corrected to state that in order to use the renewable electricity generated on your property by a solar panel, you must retain the REC. If sold, you lose that right.  

> **Article Sources**
>
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>     
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>     
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>     
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>      
> 11.  SRECTrade "[About](https://www.srectrade.com/about)."
>      
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