The basic concept underlying RECs is straightforward: a renewable generator produces two outputs simultaneously, electricity and environmental benefit. RECs are certificates that represent the environmental attributes or ‘greenness’ of renewable production. Thus, for every unit of electricity produced by a renewable generator, a corresponding unit of REC is also produced.

These RECs can potentially be separated from the associated electricity and sold, either to a voluntary market comprised of purchasers who seek to buy green bragging rights, or to an RPS compliance market comprised primarily of utilities under a legal compulsion to procure a growing percentage of electricity from renewable sources.

A renewable generator can benefit from tradable RECs by realizing a source of revenue from the sale of the environmental attributes resulting from their renewable generation—effectively monetizing what had previously been an external benefit. Purchasers of RECs can also benefit from tradable RECs by having increased flexibility—being able to claim they use or sell renewable electricity via the purchase of RECs coupled with conventionally generated electricity.

For example, utilities could more easily comply with RPS obligations if they can supplement local renewable generation with conventionally generated electricity plus the purchase of RECs from elsewhere. California Senate Bill 107 (S.B. 107), passed in 2006 and effective January 1, 2007, has for the first time defined and authorized in legislation a system of tradable RECs for use in the RPS compliance market in California (though the primary purpose of the statute was to accelerated the state’s RPS goals to reach 20% renewables by 2010). Adoption of an RPS compliance market of tradable RECs, however, is still awaiting action by the California Public Utilities Commission (CPUC).