REC prices: How are they set?

One REC ("renewable energy credit" or "renewable energy certificate") represents the generation of one megawatt-hour (MWh) of electricity from a renewable energy source. REC prices vary from state to state and depend on various factors, including where you purchase your RECs.

States can be divided into "voluntary" and "compliance" REC markets. The price of RECs changes depending on your state's market structure. States with compliance markets have standards that require electrical utilities to generate a certain percentage of their power from renewable resources, known as the Renewable Portfolio Standard (RPS).

Utilities in states with an RPS have to buy RECs if they don't generate enough renewable energy, which increases REC prices in the state. States with voluntary markets typically have less expensive RECs since there is less demand for them from utilities.

RECs are not necessarily tied to the actual delivery of electricity, and you can purchase them from anywhere in the United States. Outside suppliers sell RECs from new energy projects built within the past 12 years, so you know you're supporting the construction of new renewable energy facilities.

You can also often buy RECs through your electrical utility as part of green power programs. Most green pricing premiums cost around 1 to 2 additional cents per kWh.

States with compliance markets typically have to buy RECs within their region. The price of these RECs can vary significantly from state to state and year to year. According to the National Renewable Energy Laboratory (NREL), in 2011, the price of one REC in Ohio was a little under $35, and it fell to $8 by 2015. By comparison, prices in New England were below $20 in 2011 and climbed to between $45 and $50 in 2015.

RECs can be sold as a bundle paired with electricity. Bundled RECs must be purchased locally since the consumer needs to be able to buy the electricity from their local utility. Other RECs can be sold unbundled, which means they're separate from the renewable electricity they represent. Anyone can buy these RECs, and since there's often an oversupply of unbundled RECs, they're very inexpensive. In 2014, unbundled RECs cost less than $1 each.

Unbundled and bundled RECs offer a great deal of flexibility to a buyer. If price is the most important factor to you,  unbundled RECs from anywhere in the country can be as cheap as $1 or less. If you want to support local energy, bundled RECs offer a way to buy electricity locally along with RECs.

RECs always represent the renewable energy attributes of one MWh of electricity generated, but some positively impact the renewable energy market more than others.

"Future RECs" will be generated in the future, bought as an up-front purchase. New renewable energy facilities or facilities that have not yet been built sell these RECs. Buying future RECs helps to encourage new renewable energy generation, as they provide financial support to the builders of new facilities. The disadvantage to this approach is that the buyer cannot claim the renewable energy attributes of the RECs until they are generated. If a facility is not built or is destroyed after construction, consumers cannot claim those RECs—if you're looking into buying future RECs, consult with the seller first.

Additionally, some states rank RECs into different levels, or "tiers," depending on their generation source and environmental impact. This is typically done in states with Renewable Portfolio Standards (RPS), such as Maryland, Pennsylvania, and Massachusetts. Tier 1 RECs refer to RECs that have been newly generated and come from the cleanest renewable resources. Renewable resources such as biomass and hydropower generally fall into the two lower tiers—Tier 2 and Tier 3—although these classifications change from state to state.