The Urgent Need for More Renewable Energy & Use of Incentives to Accelerate Development

‍The Existential Necessity of Renewable Energy

The world urgently needs to transition from reliance on energy from emissions-heavy fossil fuels to clean, renewable sources. It is broadly recognized that greenhouse gas emissions (e.g., carbon dioxide) from the burning of fossil fuels comprise a primary driver of climate change. According to the United Nations (UN), coal, oil, gas, and other fossil fuels account for 75% of global greenhouse emissions. Also of major concern are the ecological, air pollution, and toxic waste implications of fossil fuel extraction and usage. Scientific consensus and consequent international accords indicate that global emissions need to reach net zero by 2050 to avoid the most disastrous consequences of climate change.

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Significance of Emissions Reduction Compounded by Growth in Energy Demand

Consider this widely agreed upon need to reduce carbon emissions, in the context that energy is a fundamental input factor to production. To produce goods, build homes, run the data centers that power the internet, or for essentially any other form of economic production, a massive amount of energy is required. And growth of global energy demand is set to materially accelerate to satisfy the continued development and proliferation of generative artificial intelligence (AI). AllianceBernstein simply outlines the two primary areas of this machine learning; training and inference. Training involves gathering increasingly large amounts of information to ‘teach’ AI models. Inference is subsequently the process of using what has been learned to generate content, analyze new data, and produce usable insights. The already energy-intensive nature of these activities is growing.

Semiconductor manufacturer Nvidia, which produces GPUs (graphics processing units) and other chips currently relied on for sophisticated AI use cases, noted that energy requirements for certain AI training models have been increasing by over 27000% every two years. If indeed a sustainable future for humanity depends on drastically reducing carbon emissions, the accelerating growth rate of energy demand and consumption must be accounted for in the speed and scale of the transition to renewables.

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Enabling a Clean Energy Future

How can renewables overtake fossil fuel dependence faster? This transition is dependent on both technological capabilities, such as battery storage capacity, as well as economic competitiveness. Renewables have been trending toward competitiveness as costs have come down in accordance with technological advancements and economies of scale. While costs of developing and deploying renewables have generally trended downward through these factors, the higher cost of capital (effectively higher costs associated with debt and other means of financing) in the current high-interest macro environment impedes the continued growth of renewable power generation. This environment magnifies the need for more efficient and scalable financial incentives to bolster the economic competitiveness of renewables. Such incentives include tax deductions, net metering, grants, rebates, ‘green’ loans, and renewable energy certificates (RECs).

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The Power of RECs to Incentivize Renewables

RECs are likely the most scalable form of incentive for renewables. A REC is a digital instrument representing one megawatt-hour (MWh) of electricity generated from a renewable energy source. It consists of the environmental attributes of clean energy as distinct from physical electricity.

RECs can be traded on various renewable energy markets. These markets allow buyers, namely businesses, governments, and even individuals, to purchase RECs to offset their non-renewable energy consumption. The various regulations  driving this purchasing will be explored separately.

These instruments serve as a lever to be pulled in aligning incentives toward preferential development of renewable capacity over additional fossil fuel capacity in satisfying energy demand; even more critically so amid rising capital costs. As RECs can be sold separately from the energy they are derived from, they serve as an additional source of income for renewable developers and operators. Additional revenue from the production of renewables reduces the net cost of developing new renewable power generation capacity.

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RECs: Challenges to Overcome

It must be recognized that while the price of RECs can vary based on factors like the renewable energy source, location, and market demand, the current market regime is riddled with a lack of pricing transparency. The market is overly reliant on intermediary brokers between producers and purchasers. This leaves producers with uncertainty around how much to sell RECs for, and purchasers without the means to know if they are overpaying. Similarly, While tracking and certification systems exist to prevent double-counting and ensure a purchased REC genuinely represents renewable energy generation, these existing structures largely rely on accuracy of reporting and auditors.

Innovo Markets solves these issues with its end-to-end REC lifecycle management platform. Leveraging the power of blockchain to track REC details and retirement, as well as to enable direct trading of RECs between sellers and buyers, Innovo Markets brings the transparency and trust that REC market participants need.

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Sources:

United Nations. Renewable energy – powering a safer future.

International Renewable Energy Agency. Renewable Energy and Jobs Annual Review 2020.

AllianceBernstein. Energy Addiction: AI’s Next Big Challenge.

Renewable Energy RECs

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