The Renewable Energy Certificate (REC) mechanism is a market-based policy instrument which has been used effectively to promote Renewable Energy (RE) in Australia, Sweden, Italy, Germany and UK. (Narula, 2012). RECs are alternatively known as green energy certificates/tradable renewable certificates/renewable energy credit and is an economic instrument of energy policy.
The cost of electricity generation from RE sources is generally higher than conventional energy sources like coal as the environmental externalities from use of fossil fuels are not priced. The cost of electricity generated from RE sources can be conceptually split into cost of electricity generation equivalent to that from conventional energy sources and the cost for environmental attributes. Each REC represents the environmental benefits associated with the generation of 1MWh of electricity from a RE resource such as solar or wind power.
RECs are traded (sold and bought) on an energy exchange (similar to a financial exchange) and the buyer of the REC is deemed to buy RE for his use (even though he may be sourcing electricity from a non RE source). RECs incentivize the production of RE by providing a source of revenue to RE generators and hence promote low carbon green growth.