The Role of Energy Attribute Markets in Powering the Energy Transition

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An electrical current, or the movement of electrons through a material, does not carry information on the source used to generate that current. This means that once energy is added to an electrical grid, there is no way to distinguish whether it was generated by a pollutive source, e.g. through the combustion of fossil fuels, or by a clean source, e.g. by capturing energy from the wind or sun. While we cannot distinguish according to source at the point of consumption, we still need to be able to identify clean energy within the grid.

Energy attribute markets use energy attribute certificates (EACs) that identify the source and other characteristics of electricity that are otherwise indistinguishable once that energy is in circulation. Attribute characteristics can include associated greenhouse gas (GHG) emissions, local air pollutants, etc. EACs are issued to energy producers depending on how much energy they add to the grid.

EAC markets exist globally and have some distinguishing characteristics based on the jurisdiction. The term ‘REC’ (renewable energy certificate) is generally used in the US and Canada to refer to EACs; in most European countries, they are known as Guarantees of Origin (GOs), and in the UK they are called Renewable Energy Guarantees of Origin (REGOs), with other terms used around the world. Regardless of the name used, all EACs are tradable instruments that represent certified proof that one MWh of renewable power was produced. In this article, we use the term ‘EAC’ as what follows applies to all renewables-related certificates regardless of their geographic origin. 

Several key moments paved the way for EACs to function as tradable instruments. The concept of certificate trading first emerged in California policy discussions in 1995. In 1997, some European countries introduced their tradable guarantee of origin certificates to denote renewables, foreshadowing EACs. The first actual REC sale occurred in 1998 in Massachusetts by AllEnergy Marketing Company. By 1999, Texas had adopted America's first renewable portfolio standard with REC trading for compliance, and the US saw a unifying REC certification and verification standard introduced at the federal level in 2002. Further key developments came with the first REC tracking system in Texas in 2001 and the Greenhouse Gas Protocol's Scope 2 emissions guidance in 2015, which codified how EAC retirements enable renewable energy usage claims in carbon inventories. 

EAC markets today are well established and expected to grow rapidly over the next decade. According to S&P Global Commodity Insights, in 2021 the US REC market was valued at $11.45 billion, but it is forecast to more than double to $26.5 billion by 2030. The GO market valued EUR 17 billion in 2023, and will likely increase to more than EUR 130 billion by 2030, according to CERQLAR.

How EACs work

EACs are created by electricity producers that register renewable power plants or other qualifying generation facilities within a specified tracking system. These tracking administrators maintain protocols for conveyance rules and verification methods. To create EACs, generators of renewable energy first set up an account and provide details on source factors like fuel type, location, and capacity. Once an asset is registered, its owner can log generation meter readings documenting energy output. Administrators analyze submitted data based on program measurement and verification standards. If these compliance criteria are met, the tracking body then formally issues EACs in quantities matching reported production volumes. For example, a 100 MW wind farm providing 500 MWh of hourly figures would receive 500 EACs. Each EAC is assigned a unique ID and set of attributes mirroring the source asset.

Once generated, EACs can be separated from the underlying electricity delivery and sold to other parties as purely attribute conveyances. This unbundled model allows buyers to make renewable usage or emissions reduction claims related to their energy consumption by matching EACs with grid power purchases. Alternatively, attributes can remain bundled with electricity delivered from the same generating source. Either delivery method provides credible claims aligned with international standards such as the GHG Protocol. 

When EACs are retired or canceled, to prevent double counting the underlying electricity no longer carries attributes. The underlying electricity then becomes ‘null power’ in the absence of attribute identity information. This means that consumers cannot claim the usage of renewable or low-emissions energy without owning an EAC that offers certified proof of renewable origin. Essentially, the tight pairing of EACs with energy delivery enables attribute tracking and claims that can always be tied to generation sources.

How EACs are used

EACs are used in the context of compliance as well as voluntary markets. Compliance markets operate within a legal framework where there are obligations for entities to purchase or produce a certain amount of renewable energy or EACs to meet renewable energy standards or renewable portfolio standards set by regulatory authorities. Participation in those markets is often mandatory for entities falling under the regulatory purview, and failure to comply can result in penalties or fines. In the US compliance is mandated through 

On the other hand, voluntary markets are characterized by the voluntary purchase and sale of EACs by individuals or organizations who are not legally obligated to do so. Participants in voluntary markets are motivated by factors such as corporate social responsibility, environmental stewardship, or personal preference to support renewable energy. The infrastructure for trading EACs, including registries, certification mechanisms, and market platforms, is often shared between compliance and voluntary markets.

For the voluntary use of EACs, the GHG Protocol sets guidelines for best practices. Electricity use generally falls under scope 2 emissions, which refer to indirect greenhouse gas emissions resulting from the consumption of purchased electricity, heat, or steam by an organization. Calculating scope 2 emissions can be complicated. The GHG Protocol thus sets out two methods of calculation: 1) a location-based method that uses emissions intensity from the grid an entity takes power from, and 2) a market-based method that calculates emissions based on power purchased from a specific supplier. Once emissions are calculated using the second method of emissions accounting, EACs can be used to offset attributes of purchased electricity.

Outside of compliance or voluntary consumption, EACs can be used by governments and policymakers for directing interventions. For policymakers, EACs allow tracking emissions profiles related to regional or utility-level clean power targets. Suppliers must report and surrender applicable EACs to demonstrate renewables mix compliance. EACs can also help determine energy distributions within grids, allowing for more targeted subsidies or interventions.

EAC Additionality 

Unlike carbon credits, EACs do not require proof of additionality to be issued as they’re not meant to fund new renewable energy projects. They can only be issued after a project has already been created and are used to track renewable energy production within a grid. However, some will market EACs as promoting renewable energy production generally or within the locality they’re generated. This generally has some merit as it can act as an additional revenue source for renewable energy producers, making renewable energy production more attractive. In McKinsey’s recent article “Guarantees of origin: Playing a vital role in decarbonization,” they emphasize that:

GoOs are becoming increasingly relevant for both suppliers and customers. Current price levels (€6 per megawatt hour) for renewable players supplying GoOs present a significant share of the business case (equal to approximately 0.7 percent of internal rate of return [IRR]).

Increasing the IRR of a renewable energy project is likely to spur additional projects, but this should be viewed as more of an added benefit of an EAC instrument rather than its core function. The US Department of Energy also supports this stance and the usefulness of EACs in expanding renewables infrastructure:

By separating the environmental attributes from the power, clean power generators are able to sell the electricity they produce to power providers at a competitive market value. The additional revenue generated by the sale of the green certificates covers the above-market costs associated with producing power made from renewable energy sources. This extra revenue also encourages the development of additional renewable energy projects.

There is some debate about the extent to which EACs encourage the development of additional renewable energy. This generally makes sense as the extent to which EACs incentivize additional renewable energy depends on their price, which fluctuates based on supply and demand. The friction comes from having constant claims associated with an instrument whose impact depends on its price. I.e. The price that an entity acquires an EAC doesn’t change the claims an entity can make when retiring it, but it does change the degree to which it incentivizes renewable energy production.

This isn’t an invalidation of the instrument, as additionality is and has never been a requirement, but rather questions the claims that companies can make against the instrument’s retirement. In a recent study, the authors argued that making emission reduction claims using a market-based approach and absent a demonstration of additionality can lead to an overestimate of emissions reductions. They argue that we should either use location-based accounting or only additional RECs should be used in scope II emission reduction claims.

In the second alternative, all companies could be required to use a restrictive version of market-based accounting, involving mandatory demonstration of the additionality of market-based instruments (whether PPAs or RECs), that is, evidence that the renewable energy generation would likely not have occurred without the instrument. The Net Zero Carbon Buildings Framework of the UK Green Buildings Council includes such a requirement.

In response to the paper, the RECs Energy Certificate Association issued a statement emphasizing the uses of EACs, including their importance in “productizing” energy, i.e. its importance in allowing electricity consumers to choose what specific energy product they want; their importance in providing a mechanism to track and claim sustainable activity; and their importance to sellers and renewable energy producers, among other arguments. They argue that:

A location-based only system for trading energy reduces all energy to a commodity, with MWh being indistinguishable from each other and traded only on price. We already see this in the trade of un-certified energy in wholesale power markets. In a market-based system, EACs allow energy attributes to become a product. This allows producers to develop specific energy products and for consumers to indicate their preference for such products through their demand.

To walk the line in this debate, in March of 2023, the GHG Protocol also updated its guidance to include a new reporting requirement that outlines scope II emissions calculated via both location and market-based approaches, called “dual reporting.” GHG Protocol also updated guidance on which credits can be used for the market-based approach to create global criteria. 

The debate on what exactly a company can claim using EACs is still ongoing, but the usefulness of EACs in determining the attributes of energy produced on a mixed grid is not contested. They are crucial instruments for understanding the characteristics of energy grids and an essential pillar in the energy transition.