February 18, 2021

RECs get their own exchanges

TraceX Product owner and crypto economist Anya Nova examines the evolution of RECs.

As products mature, the options for acquiring them generally become more and more sophisticated.

In 1906 if you wanted an airplane, you had to build it yourself. One hundred years later if you wanted an airplane, you could buy the hull, lease the engines and do a deal where you only pay for the engines for the hours they are in the air.

The same is true for almost every high-value product. Which is why it's interesting to see how Renewable Energy Certificates (RECs) are starting to be bought and sold via exchanges.

An exchange market, as opposed to a broker market, is generally regarded as a more sophisticated way of transacting.

For those not au fait with market categories, it’s the difference between buying on the FTSE 100 or Nasdaq and buying from an estate agent. It’s about many-to-many rather than one-to-one.

What that also means is that there’s now a much greater level of transparency and commoditization about the transaction. And that’s good for many reasons.

First of all, if you’re interested in saving the planet, it indicates a milestone in how RECs are being taken seriously. Commoditization is part of the growth of capitalism, and we trade shares on an exchange market, not a broker market.

Like all things capitalistic, it’s about increasing volume, speed and ease and reducing friction and effort.

The way an exchange does this is by standardizing the product and streamlining the process.

On a stock exchange, you never have to negotiate the price because it’s listed. You don’t have to know your buyer or seller. All you have to know is that when you show up to the market there will be someone definitely selling the commodity you want, or whatever it is you need to buy. There’s also no drawn out debate on terms and conditions, because that’s all pre-agreed.

It goes without saying that corporations love exchanges. They embody all the same values of streamlined capitalism. In particular, it allows them to save on three separate types of embedded cost.

Stripping out the cost

The first of these overheads is drafting all the bilateral legal documents that must go with a brokered deal. For a company with a high number of REC purchases every year, this can add up to a lot of extra work for the in-house legal team.

Secondly, because an exchange model is effectively a club with pre-vetted members, and a bouncer to throw any rule breakers out, companies can save on counterparty risks. Doing due diligence on counterparties is another cost that is stripped out with exchanges.

And thirdly, for all the same reasons, companies also save on account recovery costs, which usually involves chasing people down if something has gone wrong and there’s a payment to be made.

Keeping it high touch

But while the exchange route opens up all sorts of savings, there is no doubt some companies still prefer to buy their RECs in the more old fashioned, high-touch way.

That is, they don’t mind doing all the extra legal work and prefer using a broker. You might ask why? Is it inertia? Is it because that’s the way things have always been done, and always will be done?

One analogy that comes to mind is that of buying a suit. A suit from a good high street supplier could be less than $1,000, but if you wanted the traditional way of buying a suit, you can go to a very bespoke tailor. For this exclusive experience, the increased cost can be tenfold.

Price may be one thing, but the sense of personal service and doing things in a more traditional way might be another.

Perhaps brokers, anxious not to lose their market, have created an extra layer of consultancy and service that justifies them holding on to their business.

If there are any buyers of RECs out there, especially corporates who have tried both, it would be interesting to hear their reasons for staying with the broker route. Answers to

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