An interesting thing happened in the evolution of the solar energy market the other day. The Intercontinental Exchange (ICE) launched several new futures and options contracts for New Jersey Solar Renewable Energy Certificates (SREC), along with contracts for Connecticut, Massachusetts and Texas compliance Renewable Energy Certificates (REC).
The RECs and SRECs are part of a slate of 64 new energy and environmental futures and options products introduced by ICE that also include power, crude oil and refined products in the U.S., Europe and Asia. The tradable RECs and SRECs are a way that allows energy suppliers to achieve their renewable portfolio standards requirements.
In SREC states, the renewable portfolio standard (RPS) requires electricity suppliers to secure a portion of their electricity from solar generators. An SREC is created for every megawatt-hour of solar-generated electricity. The certificates are sold separately from the power, and their value is determined by the supply and demand in the market.
For REC states, the credit represents generation from any renewable resource such as wind, biomass and solar.
The introduction of state-specific RECs and SRECs is significant in that it demonstrates how valuable the markets for tradable renewable credits has grown in a few short years since RPS requirements were enacted by states.
“Until a couple years ago, the amount of energy produced by renewable resources was negligible, and now these commodities are being traded on the largest electronic trading platform in the world,” said Tim Mason, Senior Consultant in Black & Veatch’s energy business.
How big could these markets become? To keep the development in perspective, they are not likely to develop significant trading volume since they are so location-specific and hence not widely fungible, such as fuel oil, grains or precious metals. On the other hand, the point of these markets is the same as any other commodity market, which is to provide a hedging mechanism for mitigating market risk, Mason said. “But as more REC and SREC programs grow in other markets, we can expect these will similarly become exchange-traded commodities,” he said.
In addition to the REC and SREC products, 12 electricity futures were introduced, mostly covering New York Independent System Operator (NYISO) markets. Electricity futures have traded since 1996 for major regional trading points, but market participants keep slicing them into ever-more narrow pieces in an effort to manage risk with greater precision.
Also part of the new slate of contracts is a futures contract for North Dakota Bakken crude. As of September, North Dakota was producing more than 932,000 barrels of oil per day, most of it from the Bakken shale.
This article first appeared in Black & Veatch’s Energy Strategies Report, December 2013 issue, at http://bv.com/energy-strategies-report/december-2013-issue.