1. What is a REC? – The Basics 1 MWH of electricity = 1 REC (there are exceptions) Tracked/traded separate from physical electricity, generally via: o Electronic tracking systems (ex.PJM Generator Attributes Tracking System) Dual Purpose: Ease tracking of environmental attributes and AERS Compliance  Provide incremental revenue stream to renewables to make them economical

2. New vs. Existing Power Projects To incentivize investment in new projects, expected revenues must cover: Fixed capital costs Fuel Costs (if any) Operating and maintenance costs (O&M) Return on investment To keep existing projects operational, actual revenues must only cover: Fuel costs (if any) Operating and maintenance costs Key Point: For most existing power plants, fixed capital costs have been recovered directly from rate-payers through government guaranteed rates of return for investor owned utilities. Project Finance Fundamentals

3. RECs & Project Finance $ $ $ In an efficient market the value of a REC should be the difference between the value of wholesale market energy and the value a new projects needs to recover its fixed capital costs and variable fuel and operation and maintenance costs, plus a reasonable rate of return. Role of RECs RECs are necessary to support economics of new projects because: Wholesale power prices now set competitively by existing projects Projects financed by rate-payers (unlike renewables) RECs fill funding gap between new project cost and wholesale power price

4. REC Market Economic Fundamentals 1. REC market demand is fixed Y axis: REC demand X axis: Years 2024 6.25% × × × 2. Supply < Demand = REC prices, rising towards ACP 3. Supply = Demand; REC prices = incremental costs; ideal 4. Supply > Demand; REC prices fall towards zero Efficient REC markets rely on supply and demand equilibrium. SB 315 immediately upsets that equilibrium and produces scenario 4. Because of unanticipated oversupply REC revenues fall towards zero. This creates a “lose- lose” situation in which neither new renewable energy or co-gen and CHP projects are encouraged.

5. 5 2012 20132014 13,000 12,000 10,000 5,000 GWh 0 20152016201720182019202020212022202320242025 Gorsuch Permitted In-State Additional Steel Mills AK Steel Existing In-State Potential Hydro 11,000 9,000 8,000 7,000 6,000 4,000 3,000 2,000 1,000 Additional Cogen COY 1980 Cogen General Waste Heat In-state Non-Solar Demand Demand will not be high enough to encourage additional supply

6. Stable, reliable REC revenues required to facilitate investment in renewables In balanced market, REC price SHOULD be difference between power price & project cost However, rule of supply and demand applies to REC markets Supply surpluses, ANTICIPATED or REALIZED, will depress prices and, thus, investment Fixed AERS demand means that additional REC supply would result in (additional) surplus However, oversupplied AERS market will not support investment in renewables or COGEN REC Market Takeaways