How Supplier REC Arbitrage Affects SSS Reporting

This FAQ addresses the implications of Renewable Energy Certificate (REC) arbitrage for Standard Supply Service (SSS) reporting under the GHG Protocol's Scope 2 Guidance. It draws on established methodologies, including EPA guidance on REC practices and GHG Protocol requirements for market-based accounting. SSS reporting ensures traceable allocation of mandated clean energy attributes to default customers, preventing resource shuffling and double-counting. REC arbitrage, while a common cost-minimization strategy, can disrupt this framework by decoupling claims from actual SSS resources.

What is REC Arbitrage?

REC arbitrage is a procurement strategy where electricity consumers or suppliers sell high-value RECs from renewable projects (e.g., premium solar or in-state resources) into voluntary markets and purchase lower-cost replacement RECs to meet compliance obligations or substantiate environmental claims. This exploits price differences arising from regional supply-demand imbalances, resource types, or policy incentives, allowing entities to reduce costs while maintaining renewable electricity use and carbon reduction assertions. For suppliers, it often involves unbundling RECs from owned or contracted generation, monetizing them separately, and sourcing substitutes that may not originate from the same projects serving customer load.

How Does REC Arbitrage Work in RPS Compliance?

In Renewable Portfolio Standard (RPS) programs, utilities must retire RECs to demonstrate compliance with mandated renewable energy quotas. Arbitrage occurs when a supplier sells RECs from RPS-eligible projects (e.g., those qualifying for higher prices due to scarcity or location) and buys cheaper, often out-of-state or different-technology RECs for retirement. This is permitted in many U.S. tracking systems and aligns with GHG protocols like those from the World Resources Institute (WRI), as it minimizes compliance costs without violating legal requirements. However, replacement RECs must still meet RPS eligibility criteria, such as technology tiers or geographic boundaries, to avoid penalties.

Does REC Arbitrage Affect SSS Reporting?

Yes, REC arbitrage can materially impact SSS reporting by severing the link between claimed attributes and the actual generation resources tied to SSS customers through regulated cost recovery, non-bypassable charges, or customer funding. SSS relies on a "meaningful, traceable financial relationship" to allocate pro-rata shares of mandated clean energy (e.g., RPS RECs) to default customers, ensuring claims reflect what they involuntarily purchase. When arbitrage replaces original RECs with unrelated ones, the attributes no longer originate from SSS-specific projects, potentially invalidating claims under Scope 2 Quality Criteria for ownership, exclusivity, and deliverability.

What Are the Key Risks to SSS Claims from REC Arbitrage?

The primary risks include:

• Resource Shuffling and Misallocation: Arbitrage can enable shuffling of high-value attributes to voluntary markets, leaving SSS customers with lower-quality substitutes, contradicting SSS goals to prevent such practices and avoid cost-shifting to non-participants.

• Double-Counting: Without robust tracking, replacement RECs might be double-claimed (e.g., if originals are resold voluntarily), violating Scope 2 criteria requiring unique, exclusive attributes.

• Policy Misalignment: Arbitraged RECs may not satisfy SSS exclusions (e.g., for subsidized or publicly owned resources), leading to over- or under-allocation of CFE shares.

• Transparency Issues: EPA notes that arbitrage affects the types of renewable use claims consumers can make, potentially limiting SSS reporters to residual mix factors if traceability fails.

How Does REC Arbitrage Impact Traceability and Financial Relationships in SSS?

Traceability is compromised because arbitraged RECs often lack direct ties to the original projects funded by SSS mechanisms (e.g., rate-base recovery or RPS charges). GHG Protocol requires EACs to be sourced from the same market and redeemed near consumption periods, with supplier attestations or registries substantiating ownership. Arbitrage disrupts the mandated financial relationship, as customers pay for specific resources but claim attributes from unrelated ones, risking non-compliance with SSS hierarchy (e.g., preferring supplier allocation over proxies).

What Are the Implications for Hourly Matching and Granular Certificates?

Under GHG Protocol updates emphasizing hourly matching, arbitrage exacerbates challenges by yielding non-time-stamped RECs, limiting claims to annual proxies with higher uncertainty and double-counting risks. SSS rules apply uniformly to annual and hourly accounting, but without meter-linked data from original projects, suppliers may default to grid-average or fossil-only factors, preventing zero market-based inventories. This could restrict SSS CFE use for 24/7 carbon-free claims, as noted in recent discussions on hourly limitations.

How Should Suppliers Handle REC Arbitrage in Granular Registry Submissions?

Suppliers must disclose arbitrage fully, providing chain-of-custody documentation (e.g., sale proofs, purchase contracts, retirement attestations) to verify ties to SSS resources. Use preferred formats like API or CSV for verification, flagging non-original attributes for reduced confidence scores. If untraceable, default to residual mix, excluding CFE benefits. EPA case studies recommend prioritizing bundled RECs from actual SSS projects to maintain integrity.

What Recommendations Exist to Mitigate Issues?

• Prioritize retaining original RECs from SSS-mandated projects for compliance to preserve traceability.

• Enhance tracking via registries (e.g., PJM-GATS for timestamps) and third-party audits to meet Scope 2 criteria.

• Disclose arbitrage in supplier-specific emission factors and attestations, aligning with EPA best practices for claims.

• Monitor GHG Protocol updates, as uncertainties in arbitraged compliance REC treatment may evolve.

For further guidance, consult the Granular Registry methodology or contact [email protected].