Reckoning with renewables: Appetite for I-RECs grows amid tightening of carbon credit rules

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As traditional carbon project certifiers like Verified Carbon Standard and Gold Standard have exited the Renewable Energy carbon credit market in middle-income countries, many renewable energy project owners have been looking outside of voluntary carbon markets entirely and towards the Renewable Energy Certificates market.

Renewable Energy Certificates, or I-RECs, are digital labels grounded on the generation of 1 MWh of renewable electricity, coming from hydro, wind, solar, biomass and minor geothermal sources.

"The I-REC market is developing much faster than the carbon market, despite carbon prices being higher at the moment, I see an increasing value for the I-REC too," a Chilean source said.

"One of the advantages of I-REC is publicly available fees (the cost of registering, I-REC issuance and redemption are published on the I-REC website). Carbon credits are very expensive to issue so producers need to have a sizeable amount before they can issue a carbon credit."

I-RECs explained

Primarily, I-RECs provide an extra revenue income to renewable energy producers that can issue and trade certificates to the open market. Trading activity indirectly signals demand for low-carbon electricity, supports renewables production growth, and attracts investments. I-RECs enable asset owners across the world to monetize their renewable energy generation attributes, allowing complementary sources of revenue.

Beyond existing energy tracking schemes in Europe and in the US, the I-REC Standard is expanding rapidly across the globe with a presence in more than 30 countries, signaling rising demand for sustainable products in emerging markets. The I-REC Standard system gives all market participants the ability to track attributes of renewable electricity production from its location of generation to its place of consumption.

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Many renewable energy producing countries like Brazil, China, Turkey, Russia and India rely on I-REC standards to verify and certify certain attributes of renewable energy produced by local power plants.

The leading country in the I-REC market is China, with almost 18 million certificates issued in 2021, followed by Brazil. These countries have a huge installed capacity of hydro and wind power, with the potential to expand I-REC certification even further. In Brazil, for instance, only around 5% of renewable energy plants are registered in the I-REC scheme.

Other countries like Turkey, Russia and India are also active in the market, listed among the five most active I-REC issuers and redeemers across the world.

Demand drivers

While the market is at a nascent stage, demand comes mainly from the voluntary commitments of corporations to 100% renewables consumption accounted for in Scope 2 emissions as provided by the GHG Protocol. Most common schemes driving demand are the CDP for climate disclosure and the RE100 for renewable energy usage.

Some Fortune 500 companies have taken a pledge to switch completely to renewable energy sources for power dependence. Those companies, which find it difficult to procure power through renewable energy sources for several reasons, are also looking at I-RECs as an alternative.

Leading countries consuming I-REC certificates are China, with almost 12 million certificates redeemed in 2021, followed by Brazil, Turkey, Russia, Mexico and India. Multinationals with operations in those countries are the main players involved in redeeming certificates.

Most of the I-REC markets across the world are oversupplied, according to the I-REC Standard Foundation statistics published in January, meaning that average prices are very low at around 30-50 cent/MWh in China and Brazil, especially compared with existing established energy certification markets in Europe. For instance, S&P Global Commodity Insights data shows the benchmark contract Nordic Hydro GO 2022 pegged at Eur2.30/MWh on Feb. 25.

For end-users, I-RECs provide support for meeting compliance with regulatory renewable energy targets and enables voluntary end-users to track, verify and ground their environmental claims toward climate goals. Furthermore, there is a growing interest from the private sector on how to make renewable energy consumption claims grounded on robust schemes and mechanisms to track its electricity consumption.

Apart from these factors, one of the main drivers pushing the uptake of the I-REC market worldwide is the apparent integrity and robustness and relative simplicity for asset owners to register their energy devices, trace their electricity production and trade such attribute certificates with market players.

"I-REC can take less than a month to have a plant registered/able to issue certificates and the cost of registration is Eur1,000 for five years subscription, so Eur200 per year," an I-REC market participant said. "Very cheap."

The road ahead

Rules tightening in the competing voluntary carbon market saw many renewable energy producers migrating to the I-REC space as an option for generating revenues and profit.

An I-REC originator based in India said demand is rising gradually for RECs, which is visible in the prices of these certificates. Prices of RECs in India are currently over $1/MWh compared with 50-60 cents/MWh seen last year, he said.

Turkey saw something similar, after producers lost the ability to issue renewable carbon credits in 2019 and 192 new renewable energy plants registered their assets in the I-REC Standard in 2020 alone.

"Gold Standard and Verra have announced they are not accepting any new renewable projects from Turkey from 2019; however, the Global Carbon Council announced last year that they will accept Turkish renewable power plants to issue carbon credits," a Turkish source said. "It is likely some plants will migrate from the I-REC back to the carbon markets. I believe around 150 MWh of capacity has been moved to the voluntary carbon space, but it is more expensive to register on the Global Carbon Council than to issue I-RECs.".

However, the vast difference in prices of renewable energy credits and renewable energy certificates may pose a challenge to the popularity of the latter.

"Renewable carbon credits are traded at around $3-$4/mtCO2e in Turkey, much higher than I-RECs at around 25-40 cent/MWh depending on the technology," another source said.

In 2021, prices of renewable energy credits surged, with trades seen at $8.00-$8.50/mtCO2e. While demand for I-RECs is expected to rise going forward, it may not be as sharp as seen in the voluntary carbon credits markets.

"But I expect I-REC demand to increase in the upcoming years and combined with shorter supply considering plants migrating to the new GCC scheme, prices are expected to rise," the source said.

Yash Lakhotiya, carbon credits and RECs originator at Enking, said I-RECs "will reach the price levels of carbon credits, but it will take some time."