America is witnessing a massive acceleration towards a decarbonized world as the energy transition takes shape. This acceleration began only when there was public buy-in both from the capital markets and federal government alike. When the CEO of the world’s largest asset manager, BlackRock, made a 2020 commitment to net-zero emissions and challenged fellow CEOs and clients to hear the call, the world listened. Those resistant to change clung to the hope that a second Trump term would fend off the energy transition. Instead, Biden won the American presidency and promptly released his March 2021 infrastructure bill that fully supports the prompt build-out of a clean energy economy.
Now, the volatile retail energy industry is experiencing both the benefits and drawbacks of this acceleration. At its core, retail energy is a customer acquisition business that measures profitability on a per customer basis, or more specifically, in terms of a residential customer equivalent (RCE). The drive from sales teams and investors to grow RCEs oftentimes comes at the cost of proper energy risk management.
Each RCE is only as profitable as the price paid minus the total of the underlying costs such as wholesale energy, compliance renewable energy credits (RECs) and other wholesale costs (ancillaries) and these costs can be extremely volatile and difficult to properly hedge. Moreover, REC obligations are dictated by the state, not the utility or federal government, within a confusing patchwork of everchanging timelines, obligations, penalty payments and paperwork. In particular, Massachusetts requires retailers to purchase nine different REC products, each with their own renewable energy portfolio standard (RPS) and exemption percentages, which comes out to almost $30/MWh based on current market prices. And it’s not just Massachusetts; most deregulated markets are quickly ramping up their RPS percentages, making RECs an increasingly important number to retailers’ bottom line. Failure to hedge obligations in the open market and file the necessary reports by their deadlines can result in penalty payments that are 10 times the price of the RECs in the open market.
Exposure to the REC markets has historically been viewed in an inconsequential light, both due to the amount of cash at stake and the need to only make purchases once per year. Retailers are now being challenged with higher prices, greater RPS percentages, more frequent deadlines and a growing marketplace. Expert management of this exposure is oftentimes overlooked as scarce, unnecessary and expensive. However, the stakes have never been higher. Regulators are being allocated more resources to scrutinize retailers’ practices and non-compliance could end with the suspension of their license and disastrous fines.
The same skill set needed to buy RECs is required on the sell-side by publicly traded or private equity-backed solar, wind and hydro projects. It’s the same skillset used at banks, hedge funds and other financial firms, yet these positions typically pay double to triple what a retailer is willing to pay to manage their REC exposure. The demand for in-house REC traders with meaningful experience is simply outpacing the talent pool and as the energy transition accelerates, scarcity will persist.
A successful REC trader needs to be tethered to a proactive and commercially minded regulatory team that can clarify how the political headwinds of the times are moving REC prices and ultimately, a retailer’s profitability. Lacking in-house REC expertise is simply a ticking time bomb that threatens the entire business. Our energy management team holds all the skills, data and analytical framework to help retailers stay ahead and make better business decisions. Fill out the form at the top of this page to learn more about our offerings and connect with a member of our team today to ensure you’re setting your business up for success.