Key takeaways

• An electricity provider in California can either generate REC or LCFS credit.
• The REC prices and LCFS electricity credit prices are inversely correlated.
• The LCFS credits remain lucrative to electricity providers owing to their ability to earn four times more than RECs per kWh, on average.

Introduction

The California Renewable Portfolio Standard (RPS) was enacted in 2002, it required the sellers of electricity to procure at least 20% of the electricity from renewable energy sources by 2017. Effective from January 2012, the requirement to procure electricity from renewable sources increased to 33% of the total energy supply by 2020. In 2015, this requirement mandate increased further to 50% by 2030. Most recently, in 2018, SB 100 bill was passed which increased the mandate of minimum electricity procurement to 60% by 2030 and an additional mandate was introduced which requires the entire state’s electricity to come from carbon free resources by 2045. RPS compliance rules in California are implemented and administered by California Public Utilities Commission (CPUC). The California Energy Commission (CEC) is responsible for certification of electrical generation facilities.

Under the Low Carbon Fuel Standard (LCFS) in California, section 95489 of sub- article 7 of California Code of Regulations, it is specified that renewable or low-CI energy sources that are used to generate LCFS credit cannot also claim renewable energy certificates. Hence, an electricity producer or supplier in California can either claim LCFS credits or RECs. This implies some degree of competition for supply between the two instruments. Owing to this competitive attribute, if a higher price is prevailing in one market, it becomes more attractive to electricity providers thus, reducing the supply in the lower- priced market. Eventually, the price in the lower- supply market begins to rise. To reach an equilibrium, the prices in two competitive markets will be inversely related. As can be seen below, the prices of both the standards are negatively and strongly correlated with the correlation coefficient of 0.80.

Revenue Comparison

In 2017, the average price of REC was 4.7 cents per kwh which decreased to 3.8 cents per kwh in 2018. The average REC price in 2019 declined further to 2.8 cents per kwh which then rose by 25% in 2020 to 3.5 cents per kwh. LCFS credit price for electricity, on the other hand, was 4.1 cents per kwh in 2017, slightly below REC price. However, it increased significantly to 16.7 cents per kwh in 2020. The electricity providers claiming LCFS credits have an opportunity to sell these credits to buyers belonging to several fuel categories. However, RECs are only purchased by electricity providers to meet their minimum volume requirement under RPS. This leads to LCFS credits being priced higher than the RECs and thus, electricity generators or providers earn higher per kWh of electricity. LCFS credits There is an inverse correlation between the prices of RECs and LCFS electricity credits from 2017 to 2020. The trend seems to break in 2021 when the price in both the standards have fallen down simultaneously.

Conclusion

The LCFS electricity price remains higher than REC prices because of the scope of LCFS credits. The LCFS credits are generated and consumed by a wide range of fuel providers. Whereas, the demand for RECs only comes from the electricity suppliers thereby, limiting the REC’s scope of utility in the market. Additionally, LCFS credits can be generated from electricity produced and supplied from any approved pathway. However, RECs can only be generated by supply of renewable-source based electricity. Therefore, LCFS credits are priced higher than RECs. Due to this trend, LCFS electricity credits are more profitable than the RECs when compared on a scale of 1 kWh of energy produced from the electricity.