More and more businesses are searching for options to support sustainability goals and initiatives, and one viable solution is through a company’s purchase of renewable energy credits (RECs). RECs give developers of renewable energy a market-based, financial incentive to build wind, solar and other forms of renewable energy, and provide businesses with the opportunity to support greener practices. However, many businesses don’t realize that these opportunities exist and don’t necessarily understand how to capitalize on them.

NREI talked about how RECs work and how businesses can take advantage of these credits with Warren Kirshenbaum, founder of The Cherrytree Group, a Needham, Mass.-based consultant, tax credit broker and syndicator that specializes in brownfields tax credits, solar energy credits, low-income tax credits and historic rehabilitation credits.

An edited transcript of that interview follows.

NREI: How do renewable energy credits, or RECs, work?

Warren Kirshenbaum: Renewable energy credits are a corporate tax credit provided by 26 U.S.C. Section 45, and are a per-kilowatt-hour (KWH) tax credit for electricity generated by a qualified producer and sold to an unrelated person in a given tax year. The credit was originally enacted in 1992 and has been renewed and expanded numerous times, most recently in 2009. RECs are available to specific renewable technologies, such as biomass, hydroelectric and wind, to name a few. The credit allows a certain payment per KWH for a number of years based upon the particular technology, such as 2.2 cents per KWH for wind, geothermal and closed loop biomass and 1.1 cent per KWH for other technologies.

The credits are for either a five-year period (such as open-loop biomass) or a 10-year period (such as wind or closed-loop biomass). Usually a producer of the renewable energy can sell the RECs after they have been issued. Buyers will pay less than face value for them, using the credit against taxes for the full value of the credit. It is also possible to pre-sell the credits by calculating a credit flow stream based upon the output of the facility, the nature of the renewable energy and the amount of the credit, and by selling the RECs not yet received at a further discount with the obligation that they will be delivered to the buyer once earned and received.

NREI: How does purchasing RECs affect taxes?

Warren Kirshenbaum:The idea behind RECs is that they are transferable to buyers in a stable marketplace, and the buyers who will pay less than the face value of the REC will be able to use the face value of the REC to offset a portion of their tax obligation using the RECs. The purchased RECs can be used all in a single tax year, if that is possible, based upon the taxpayer’s tax situation, or unused credits may be carried forward for up to 20 years or carried back one year if the taxpayer files an amended return.

NREI: How does a business go about purchasing renewable energy credits?

Warren Kirshenbaum: Businesses can purchase RECs from power companies, brokers or syndicators. When buying a REC, the purchaser should be sure that they will receive the full value of the REC. Also, the REC is a federal credit. There are state credits as well, but these differ from state to state.

Are renewable energy credits growing in popularity since they first came into use?

Warren Kirshenbaum: I think they are growing in popularity due to more people and companies being educated about their use. … I would think that the popularity of RECs would be tempered because, as with most tax credit programs there is a sunset date by which the facilities must be placed in service (currently 12/31/2016), after which time there will not be the ability to earn new RECs (i.e. for new facilities).

What forms of renewable energy are most popular?

Warren Kirshenbaum: I would say that solar is the most popular because the cost of panels has been decreasing due to Chinese manufacturing. Also, there are no real permitting issues—they can be installed on residential or commercial rooftops, there are mobile systems, etc. There are also many companies that offer lease-back deals, or deals that involve very little owner cash needed so long as the RECs are assigned to the installer and a long-term power purchase agreement is signed. The regions in which solar energy is most active are the obvious ones where there is the most sun, such as California, Arizona and Hawaii. States like Massachusetts are active despite less sun because our subsidy programs are well advanced and lucrative.

How else can a company benefit from RECs, besides becoming more sustainable and saving on taxes?

Warren Kirshenbaum: In addition to supporting and meeting sustainability goals and initiatives within the company, there is certainly value in the external community understanding that a company is supporting efforts toward greener practices in this way. And the company that sells the RECs is able to attain additional funding without having to take out more loans.