What it means
When a wind farm feeds power into the grid, two things are created. One is the electricity itself, which mixes with all other power on the grid and is sold at the market price.
The other is the environmental attribute, the fact that it was produced without burning fossil fuels, and that attribute is packaged as a REC. Each certificate normally represents one MWh, which is enough electricity to run an average office for a few days.
A generator can sell its power and its RECs together or separately. A company that wants to cut its reported emissions can buy RECs from the market and retire them, meaning they are cancelled so no one else can claim them.
For finance teams, RECs are a cost line that can be budgeted and compared against other ways of meeting sustainability targets. Prices vary with supply, demand, the type of project and the location.
Some certificates come from new projects and others from older ones, and buyers often pay more for newer, more clearly additional supply. Accounting and reporting need care.
A company usually records the purchase as an expense or as an intangible asset until retired, depending on its accounting rules, and it reports the claim under recognised greenhouse gas standards. Buying a REC does not change the electricity delivered, so auditors look for proof that the certificates were genuinely retired and not sold twice.
The term has more than one use in finance and property, so context matters. In this glossary it refers to the renewable energy certificate, which is the most common use in corporate reporting.
In other fields the same letters can stand for other expressions, so confirm the meaning when you see it in a document.
In practice
Real-world examples.
Example
A software company with offices that use 3,000 MWh a year buys 3,000 RECs at $4 each, spending $12,000. It reports that all of its electricity is matched with renewable certificates. The sustainability report lists the retirement records as evidence.
Example
A manufacturer signs a long-term agreement to buy RECs from a new solar farm at $8 each. The higher price helps finance the project, and the manufacturer can point to a clear link between its spending and new clean capacity. The finance director builds the cost into the annual budget.
Example
A hotel chain compares buying RECs with installing solar panels on its roofs. Certificates cost about $20,000 a year for the whole group, while the panels would cost $600,000 up front. It chooses to buy RECs now and to review the panels when the roofs need replacing.
Formula
Calculation
Cost of matching electricity use = Electricity used (MWh) x Price per REC
Suppose a company uses 12,000 MWh of electricity in a year and wants to match 100% of it with certificates. At a price of $5 per REC, the cost is 12,000 x 5 = $60,000. If the company matches only 75% of its use, it needs 12,000 x 0.75 = 9,000 RECs, which costs 9,000 x 5 = $45,000. The cost per MWh covered stays at $5, but the total changes with the share matched.Case study
Seen in the real world.
Meadowgate Foods is an illustrative, fictional food distributor that has promised customers it will cover all its electricity use with renewable sources. Its warehouses use 8,000 MWh a year, and the grid in its region has no way to guarantee green supply.
The sustainability manager buys 8,000 RECs at $6 each, a cost of $48,000. The finance director records the cost as an operating expense and asks the supplier for retirement documents so the claim can be checked.
During the audit, the team finds that 500 certificates had been sold twice by an intermediary. Meadowgate buys replacements for 500 x 6 = $3,000 and moves to a supplier that uses a registry. In this illustrative case, the lesson is that a REC is only worth what its paper trail can prove.
Watch out
Common mistakes.
- Assuming that buying RECs changes the physical electricity delivered to the building.
- Counting a certificate twice, or failing to retire it, which can lead to a double claim.
- Treating every REC as equal, when price and quality differ by project age, location and source.
Questions
People also ask.
How much electricity does one REC represent?
One REC normally represents one megawatt hour, which is 1,000 kilowatt hours.
Are RECs the same as carbon offsets?
No, a REC certifies the generation of renewable power, while a carbon offset represents a reduction or removal of emissions elsewhere.
Can the letters REC mean something else?
Yes, in other fields the same letters can stand for other expressions, so check the context before assuming.
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