D-REC is enabling distributed renewable energy developers to access climate financing that previously was only available to large-scale C&I projects.
What is a D-REC?
The D-REC stands for Distributed Renewable Energy Certificate. It is a new market instrument that is helping to extend the existing REC market. Where RECs are typically suited to larger, utility-scale projects, these D-RECs by allowing smaller, harder-to-fund projects to get off the ground, catalyzing further investment and development.
This is partly due to the fact that a D-REC is a fraction of the size of a REC (1/1000th to be exact):
- 1 REC represents 1 megawatt-hour (1MWh) of renewable-generated electricity.
- 1 D-REC represents1 kilowatt-hour (1KWh) or renewable-generated electricity.
Who are the D-REC Buyers:
Companies globally are committing to managing their environmental impacts and carbon emissions. These commitments often include shifting to 100% renewable energy sources (see RE100). This often doesn’t involve changing all of their energy sources but rather changing some and buying D-RECs to reduce the rest.
RECs (or Energy Attribute Certificates, EACs) play an essential role in corporate renewable energy sourcing, making up over 40% of renewable energy procurement by RE100 members. RECs allow the holder of the certificate to claim the use of renewable energy and therefore help them achieve their renewable energy targets.
According to the US EPA, when assessing greenhouse gas emissions, Scope 2 specifies the indirect consumption of an energy commodity e.g. electricity from a coal plant.
Addressing these emissions is essential to the global climate transition if companies are to become truly climate neutral. Carbon credits cannot address these Scope 2 emissions, meaning corporations have to rely on other solutions, such as RECs, to reduce these emissions. The need to purchase RECs essentially acts like a tax on using sourcing energy from fossil fuels and diverts the funds into building out more renewables worldwide.
Projects like this in Haiti can be made possible
by the D-REC.
However, over 80% of renewable energy procurement is currently limited to North America and Europe. Through the D-REC, these corporations are able to extend their renewable energy commitments outside of North America and Europe to developing economies where new renewable energy assets result in much higher social, environmental, and economic benefits compared to developed markets.
The problem with existing RECs and mesh-grids
In order to generate RECs, a developer needs to have the ability to prove the amount of power that was generated by a given renewable energy source. In a centralized system like a mini-grid, this is fairly easy to do. You have 1 or 2 sources of generation, DC power gets converted by a handful of inverters and sent out to the network to be consumed by end-users.
The system owners can then generate reports from these 1 or 2 sources on the amount of power that was generated, submit them to the standard of their choosing and get a certified credit in return – simple, right?
However, in the case of distributed systems like the Okra mesh grid, this becomes more complex. Without a system like D-REC, developers would have to monitor the generation of each household and create a report on the generation of each one. These can number in the hundreds or thousands. All of the reports would need to then be submitted to a standard, get evaluated, and have certificates issued individually. In other words: it would be way too much work to be feasible.
Additionally, as each node of a Mesh-Grid is sized to serve the energy needs of individual households, they only generate a fraction of a full REC or in the best case one or 2 RECs a year, for example, the Okra M Kit generates 0.40 RECs (or MWh) per year.
Going through the certification process for each of these individual systems would simply not be viable for such small numbers.
The need for D-RECs
Investment has been challenging to mobilise in the off-grid electrification sector. You need the right regulatory environment and a thriving ecosystem of project developers and equipment providers. Simply put, energising the hardest to reach communities in the world, is a hard challenge. At Okra, we’ve innovated with our technology to reduce the cost and increase the flexibility of reaching last-mile communities with productive power but the challenges are plenty:
- Projects rely on revenues from end users in the world’s poorest communities.
- Often the lowest income households are skipped for their inability to pay
- Security risks and a lack of access infrastructure increases costs
Let’s look at an example project and see how the effects of D-RECs on the Capex Costs of decentralized networks:
Sample simulation of Elesum. Link to Simulation.
Typically the average cost per connection ranges from about $400 in Haiti, to almost $1,000 for some of the highest consuming communities, here is an example of a high consumption community simulated in Nigeria.
Using Okra Technology we assigned the following to produce the simulation:
Including Balance of Systems, Mounts, Distribution and Shipping to energize this community with Okra Kits in the above distribution the total Capex requirement will be: $421,557.47
If we take the average amount of sun hours in Nigeria as 3.5 per day, then we can use the following calculation to estimate the total amount of D-RECs generated per year:
*The price for a D-REC usually ranges between $20 – $30 per MWh, depending on the project specifics, thus for the purposes of this example I used $25 as the average price mark.
RECs can be sold in one of the following ways:
- Upfront sale: a company pays for X number of years of D-RECs upfront. In this instance, the REC buyer is taking on some of the risks that these RECs may not be generated by the project.
- Ongoing sales: a company buys the D-RECs generated from a project on an ongoing basis at the end of a predetermined period (“payment on delivery”, e.g. quarterly, annually).
- In Future: a mix of the two varieties above: A company commits to a 3y D-REC purchase and pays on ongoing delivery, but a financial facility “frontloads” this contract and makes the D-REC revenues available to the project developer upfront and thus maximising its economic value.
Depending on the sales strategy you choose to employ, this will have an impact on either your CAPEX, OPEX or both. To use the example above, let’s say we are going to opt for Option 1, with a 4 year upfront deal.
This will mean we are going to sell 904 D-RECS at a rate of $25 per rec for a total of $22,665.40. This does not sound like a lot compared to $421,557, but it still represents 5.3% of the project CAPEX.
However, this is just the start of the journey. As most electrification projects run over a 10 to the 20-year period, the ongoing sale of D-RECs can generate an additional income equal to 12 – 20% of the original project CAPEX.
Additionally, subsidy programs like the UEF Subsidy recently introduced by SE4ALL can cover another 40% of the project CAPEX cost. Working together, D-REC sales and subsidies can de-risk the investment in energy access projects substantially (over 45% in our example). This will help open the doors for the investment needed to get power to the last 760 million people still in the dark.
How D-RECs change the REC game
D-RECs change this by leveraging the power of IoT and the API. Technology companies like BBOXX and Okra can expose their generation data to the D-REC API. Data is then shared with the D-REC system on a predefined cadence. The use of a Distributed Ledger (See D-REC Code) creates a reliable and traceable “paper trail” on each kWh submitted to be traced back to a specific device.
The data from different sources can then be aggregated and, using a similar ledger-based system, attributed to a specific company that bought the D-RECs.
D-RECs in Action
In July of 2022, Alina Eneji scaled up their Okra mesh-grid deployments from 35 households to 335 households in Dulagon, Haiti. Alina Eneji installed ten households per day at the cost of <$500 per connection (less than half the typical mini-grid cost in Haiti). Alina Eneji, funded by OGEF Haiti , recently committed to connecting of an additional 700 households – bringing the total to 1,035 households to be energized.
Financing off-grid electrification projects have always been a complex task, and this 700-household project in Haiti was no different. A blended finance solution consisting of grants, debt and equity was required to support the project.
A sale of the project’s D-RECs on the D-REC platform, while a relatively small proportion of the overall CAPEX requirement, was what made the difference. It helped Alina manage cash flow and meet the requirements to unlock additional project finance.
Thanks to the REC sales, the project has just been formally announced (link) and will be kicking off procurement at the end of this month.
This is a clear example of how the use of the REC market by distributed energy projects in off-grid communities can change lives. The needs of a large corporation overseas that has a local carbon footprint can be channelled to benefit a remote community, providing them with electricity for the first time. This unlocks countless opportunities in the community while reducing greenhouse gas emissions and health risks associated with burning dirty fuels from traditional cooking methods.
How can D-RECs help you?
As an energy developer, using a technology integrated with the D-REC system can provide an additional source of income, which can help you subsidize your upfront or operational costs.
Improve the economics of your business model for energizing off-grid communities
Reduce the tariffs required to attract investors to invest in off-grid projects.
If you’re a company looking to reduce your Scope 2 emissions, the D-REC platform allows you to buy Renewable Energy Credits from projects making the most impact: the ones bringing power to the people in some of the toughest environments in the world. It allows you to undoubtedly say your carbon strategy is not just smoke and mirrors, but can be traced back to individual households you helped energize.
For more information, feel free to reach out to:
Harry Demetriou at South-Pole and the D-REC Initiative via: firstname.lastname@example.org
Written in Collaboration with South-Pole and D-Rec.