The Sunny Future of RECs

Welcome to the second article on Renewable Energy Credits (also known as RECs and SRECs.) Previously, we discussed what RECs are, how clean energy producers generate them, and how they’re traded among organizations and individuals for a profit.

A Quick Intro to RECs

If you didn’t read the first article, know that Renewable Energy Credits (RECs) are a way for energy producers to demonstrate their clean energy involvement. Electricity is measurable, but it’s not identifiable once pumped into the grid. RECs allow organizations to purchase and trade renewable energy once it’s in the grid, and many companies need that ability to be compliant with state requirements, particularly in California.

This is especially important at the beginning of 2021 because President Joe Biden plans to make clean energy a key point in his presidency.

Today, we’ll take a closer look at how solar panel sales and installation companies — like Sunnova — are making a lot of money using RECs.

  • Their business model involves selling, installing, servicing, and financing solar panels for residential homeowners in a nutshell.
  • Once solar arrays are installed, they pump excess electricity into the local grid and collect RECs for doing it.
  • Businesses can sell RECs to underachieving energy producers for high profits on minimal investments. (It’s the residential consumers who pay for the solar panels.)
  • It’s a win-win-win for Sunnova.

Let’s dig deeper!

The Sunnova Way

Sunnova’s Business Model

As of late March 2021, Sunnova is offering solar panels to homeowners in 24 states and territories. Per their 2019 Investor Presentation, Sunnova claims to be a leading residential solar energy and storage provider. But the company is up to much more:

  • At a glance, their business model is based on local solar panel dealerships or installers building long-term relationships with area residents.
  • Like a franchise, local dealers must obey Sunnova’s terms regarding underwriting criteria, financing schemes, technology, branding in advertising, and solar panel installation framework.
  • However, Sunnova owns long-term service contracts, which may be as long as 25 years.
  • That means customers will make all future battery and inverter purchases or updates through Sunnova.

And that’s their first win: long-term service contracts with homeowners that require very little corporate legwork to achieve. It’s the local dealers and installers that deal with customers face-to-face.

Put another way, Sunnova Energy International (NYSE: NOVA) has minimal liabilities in terms of commercial real estate requirements, workers compensation insurance, and the like. Those expenses belong to the individual dealerships.

So, Sunnova’s residential customers are paying for financed solar arrays. Once their solar panels are up and running, Sunnova’s residential customers then have the option of storing extra solar power in batteries or pumping it back into the grid.

The Residential Solar Power Marketing Machine

The internet is chock-full of the benefits of clean energy. Everyone wants cleaner air and renewable energy. With the new focus of the Biden presidency placing so much importance on climate change, clean energy markets itself at this point. There’s no need to explain the benefits of clean energy to anyone in an advanced nation. So Sunnova has very little work to do in the realms of marketing.

  • Whatever marketing needs to be done, it’s purchased mostly by local dealers (we assume there are co-op advertising funds involved).

Consumers want clean energy. The demand is already there. The federal government wants it, too. So many businesses are eager to meet those demands or market themselves as meeting those demands.

If you happen to have a solar setup at home — at least two million Americans do — you already know batteries for solar power storage are expensive, considering their shelf-life. Homeowners must maintain batteries (it’s easy) and replace them completely every five to fifteen years.

This means the average Sunnova customer will either put their excess power into the grid or purchase (finance) new batteries anywhere from once to five times throughout the 25-year contract.

How Expensive Are Batteries for Solar Power?

The initial and ongoing costs of batteries can be as much as $12,000 over 25 years (at the high end). That and the indirect social pressure for homeowners to make the “greener” and more socially responsible choice as well as live “off-the-grid” leads many homeowners to send excess electricity back into the grid, rather than store it.

After all, it feels good to help your neighbors, boost your local power plant and save the planet, right? But the residents dealing with Sunnova use solar arrays that Sunnova technically owns until they’re paid for (again, these are 25-year contracts). So Sunnova has a network of thousands of homes that generate RECs.

Like the 1990s folk-singer Alanis Morissette once sang: it’s a little too ironic.

The Irony

The purpose of RECs is to encourage energy producers to convert to greener technologies and push “cleaner” electricity into the power grid. But rather than switching to greener power sources or investing much in cleantech, producers can purchase compliance instead.

Still, you say, Sunnova’s homeowners get the upfront benefit of reduced energy bills. Well, they’re only somewhat reduced. Significant resources that consumers once spent on grid power have been moved to battery replacement, interest, and finance charges. So the costs aren’t that much lower, in reality. But it just feels good to be environmentally friendly, so we suppose there is an emotional win for customers, as well.

Meanwhile, Sunnova sits in the middle and makes BANK!

But it’s not all bad.

With Sunnova’s business model and the growing demand for clean energy, it’s smooth sailing for RECs.

This arrangement isn’t hurting anyone. Cleaner electricity is finding its way into the community. And homeowners feel good about their investment, which does save them a few shillings. One major win for homeowners is that solar arrays might increase a home’s value, depending on the local market.

But it doesn’t always encourage big energy producers to make meaningful steps towards cleaner energy production. As long as there are enough RECs available on the market, they can avoid an expensive penalty (read: fine).

You might be wondering how you can get in on the RECs market. So let’s see if smaller organizations and individual consumers can make money with RECs.

Making Money With RECs

Think of RECs as a birth certificate for renewable energy. Each REC has a unique certificate number and a description of how the producer made that clean power. They’re created when a renewable energy source — it can be solar, wind, etc. — generates one megawatt-hour (MWh) of electricity and delivers it to the grid. So, if a wind power facility produces 10 MWh of electricity, they have ten credits to keep or sell.

  • When your organization buys those credits, you are purchasing the “renewable” aspect of the electricity.
  • In the above example, you could buy those 10 RECs, and then you can say that 10 MWh of your whole electricity use came from a renewable source.
  • This can be vital for manufacturing organizations that want to be known as environmentally friendly or demonstrate that willingness to preserve their federal contracts, like Boeing.
  • Tech giants with massive server farms that consume a lot of energy, like Google, buy RECs to demonstrate their commitment to clean energy while powering their operations.
  • Once RECs have been sold, they cannot be purchased again.

Can Single-Family Homes Make Money?

Now, a single solar-powered home won’t put a great deal of excess energy back in the grid. So a single individual hoping to generate RECs with their home solar isn’t going to make money.

That’s why many homeowners choose to accept local credits and discounts on their traditional power bills from their power company. One MWh or one REC worth of electricity is a lot of energy, respectively. (To put a finer point on that, says one MWh is enough power to run 330 homes for an hour.)

So the big money comes from mass-producing clean energy and selling the RECs. Think wind farms, solar farms, or in the case of Sunnova, a nation-wide network of residential homes.

There could be room for large apartment complex chains to earn some RECs, though. We can imagine hotel chains getting involved or any large university campus that installs solar paneling on their parking lots. We imagine covered sports stadiums could get in on RECs.

And, once they’ve generated some RECs, it’s time to sell them.

Blockchain for RECs

Owners of wind and solar farms can make deals that involve third-party brokers (this is the method we’d recommend) or list RECs for sale on the blockchain. Organizations can then purchase those energy rights.

The blockchain — think of it like a ledger, the same way cryptocurrency is monitored — ensures the ownership rights are transferred and counted only once.

In sum, for private homeowners, the RECs market is a tough market to enter. If you’re interested in investing in renewable energy, your first call should be to your local power provider. Shop around, though, because you might find a better market in another state. If you’re interested in investing in renewable energy on a larger scale, we should talk.

And for big businesses, RECs is a billion-dollar market with nothing but sunshine in its future.

This article was originally published on KirkCoburn.

Kirk Coburn

I am an active investor into entrepreneurs solving the world's climate & energy problems, energy entrepreneur, start-up advocate, outside(r), surfer, and ordinary athlete.

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