The Problem With Green Power

IF YOU'VE EVER received an offer from your electric company to buy "green power," then you know the pitch: Pay "just pennies more a day" to not only help reduce the utility's dependence on fossil fuels like coal and oil, but also to support electricity generated from more environmentally-friendly power sources like the sun, wind and water.

Strip away the "green power" label and what's really being offered to you is something called a renewable energy certificate, or REC (also known as green tags). Think of a REC as a commodity, with each certificate representing 1,000 kilowatt-hours (kWh), or one megawatt-hour (MWh), of electricity generated from renewable energy. (For comparison's sake, an average family uses about 750 kWh of electricity each month). So when a person buys a REC, they are, in theory, helping to fund a renewable-electricity venture. This way, consumers can help promote the use of more earth-friendly electricity, while feeling a little less guilty about using gas-guzzling SUVs or incandescent light bulbs in their living rooms.

While RECs have undoubtedly helped promote the use of renewable energies, much work needs to be done regarding the oversight and regulation of them. A laissez-faire attitude by the federal government has rendered the markets for RECs a patchwork quilt of programs operated by state governments, utility companies and so-called green tag brokers. In these markets, prices for RECs span a wide range (anywhere from pennies to over $55 a REC depending on the market they're trading on), oversight is minimal and standards, if existent, vary from state to state.

RECs have been around since the late 1990s, but didn't gain much attention until a few years ago when companies starting buying them in bulk, says Lori Bird, a senior analyst at the Department of Energy's National Renewable Energy Laboratory, or NREL. The growth has been dramatic ever since. Sales of RECs to consumers and businesses have grown by about 50% annually for the last two years — and that rate isn't expected to abate anytime soon, says Bird.

However, along with all of the money flowing into this market, there's also plenty of confusion, much of it stemming from the complex manner in which RECs are bought and sold. RECs trade hands in two ways. First, there's the compliance market. Currently, 25 states (plus Washington, D.C.) have what's called a renewable portfolio standard, or RPS, that requires the state's utilities to purchase a certain percentage of their power from renewable energies. So a wind farm in Texas, which uses wind to generate electricity, would earn certificates for every MWh of electricity it produces. It can then sell those certificates to the utilities, which are striving to meet their annual quotas.

Then there's the voluntary market. In this market, utilities or green tag marketers sell RECs under the name of "green power" to consumers and businesses. Last year, roughly $65 million to $85 million in RECs were sold on the voluntary market, estimates NREL.

Whether for altruistic or public relations reasons, Corporate America has embraced RECs with open arms. At first, eco-friendly companies like Whole Foods (WFMI: 42.58, +0.82, +1.96%) were buying RECs by the bucket loads, but now larger companies are getting in on the act. PepsiCo (PEP: 77.35, +0.86, +1.12%), for example, purchased one billion kilowatt-hours worth of green power in April, making it the largest buyer of RECs in the U.S. (The Environmental Protection Agency estimated that Pepsi's purchase was equivalent to the amount of electricity needed to power nearly 90,000 average American homes each year).

RECs are not without critics. One of the biggest arguments against them is that RECs make it too easy for big corporate polluters to keep on polluting; that they just shell out some money to buy the certificates, call themselves "green," and then do nothing to reduce their own carbon emissions. Questions also remain about where the money is flowing and whether RECs actually support new renewable energy ventures or just subsidize existing ones that would have been producing the energy anyway.

Another problem is that certification of the claims made by renewable-energy producers and green-tag marketers is left up to independent organizations such as San Francisco-based nonprofit Green-e. "The marketer has to meet certain ethical standards: They can't overstate, they can't make claims that aren't true," explains Ed Holt, president of consulting firm Ed Holt & Associates, which advises government agencies and private clients on environmental policy. That's a start, but Green-e has no real power to stop or even punish those who do mislead buyers like a government regulatory agency would.

The matter hasn't gone completely unnoticed at the federal level, however. Last summer, Rep. Edward J. Markey (D., Mass.), who chairs the House Select Committee on Energy Independence and Global Warming, implored the Federal Trade Commission to speed up its review of its decade-old green-marketing guidelines. "As the opportunity to profit in this sector attracts more players, the potential for marketing claims to misleadingly portray the offset products in question also grows," he wrote in a letter to the FTC.

The FTC has since said it would begin reviewing its guidelines in early January. Still, additional national standards are needed. Current definitions of what qualifies as renewable energy differ from state to state, says Marc Chupka, a principal and senior advisor at The Brattle Group, a consulting firm that deals in regulatory issues. For example, Pennsylvania's renewable portfolio standard can be partially met using electricity produced from coal mine methane and coal waste, while other states steer clear of the coal industry (a major fossil fuel culprit) altogether. A national standard would not only provide uniform definition of what constitutes a renewable-energy product, but it would also require all 50 states to set and meet a national quota, thereby promoting the use of RECs even further.

As for the business of trading RECs, it's pretty much the Wild West of investing. Right now, trading is left to smaller, voluntary exchanges such as the Chicago Climate Exchange. But in the first quarter of 2008, the New York Mercantile Exchange (more commonly known as NYMEX), will jump into the game with the launch of its "Green Exchange," which among other things will trade RECs. Even so, the market will remain opaque. "It's not like trading stocks on the New York Stock Exchange where at the end of the day you know the price of every stock," says Holt. "That sort of thing doesn't really exist for RECs."