Those who subscribe to View A believe that output has a broader scope than simply physical production from a specified property. Rather, the concept of output extends to any utility or benefit directly attributable to the use of the asset. Supporters of View A believe the following factors contribute to the conclusion that RECs are output from a facility.
Definition of output
The definition of output included in
ASC 805 provides relevant guidance.
ASC 805-10-55-4(c)
Output. The results of inputs and processes applied to those inputs that provide or have the ability to provide a return in the form of dividends, lower costs, or other economic benefits directly to investors or other owners, members, or participants.
RECs are an economic benefit obtained through the operation of a specified renewable energy facility. RECs are created by the production output of the facility (i.e., if the generation facility does not produce power, RECs are not created). The generation of renewable energy by a qualifying plant produces the right to a credit, which directly identifies with output of that specified asset. Once a generation unit is certified under a renewable energy program, the owner (operator) may sell the RECs generated through production, and those RECs are viewed as part of the utility of that plant. The sale of the RECs may be to the offtaker of the power generated or to another third party, depending on the terms of the power purchase agreement.
Economic considerations
Historically, the cost of constructing a renewable energy facility was recovered through an above-market price for power sold from the facility (effectively, the renewable energy premium was embedded in the contract price). However, the growth of RPS requirements and the need for a mechanism to track compliance led to the creation of RECs. It also divided pricing among all products from a facility, including energy, capacity, and RECs. Today, power from a renewable facility may be sold as “brown” or “dirty” power without the RECs attached; the brown power price is based on market prices of power in general and no premium is paid for the power itself. The RECs may be sold with the power (green power) or separately, and are separately priced. Green power sells for a premium, representing the value of the RECs.
As a result of these changes, the economics of a renewable energy facility are now based on the sale of capacity, energy, and RECs as individual units. The sale of brown power and capacity alone does not typically cover the cost of construction and fixed carrying costs of a renewable facility. The ability to realize income from the sale of RECs—which may be substantial—is a significant contributor to the economics of a renewable facility. RECs are usually the primary motivator for building specified renewable property (other forms of generation are typically more efficient and economic for the production of energy alone).
Therefore, because RECs represent a substantial portion of the economics of a renewable plant, View A proponents believe it is inconsistent to exclude their economic value from the determination of the accounting for contractual arrangements. That is, they believe that the economics of RECs are integral to the plant itself and thus to exclude them from an evaluation as output would be to ignore their economics.
The lease literature similarly provides useful guidance on the concept of output in the context of a discussion on economic control. Specifically, the criteria in
ASC 840-10-15-6 are based on a concept that
the right to use the property is conveyed through
control of the property. Proponents of View A believe that control may be obtained through physical, operational, or economic control of the specified property.
ASC 840-10-55-34 suggests that an arrangement whereby one party covers the fixed carrying costs of the plant provides evidence that it is remote that another entity will take more than a minor amount of the output, indicating that the arrangement is a lease (i.e., that economic control is conveyed).
ASC 840-10-55-34
All evidence should be considered when making the assessment as to the possibility that other parties will take more than a minor amount of the output, including evidence provided by the arrangement’s pricing. For example, if an arrangement’s pricing provides for a fixed capacity charge designed to recover the supplier’s capital investment in the subject property, plant, or equipment, the pricing may be persuasive evidence that it is remote that parties other than the purchaser will take more than a minor amount of the output or other utility that will be produced or generated by the property, plant, or equipment.
Considering this excerpt in the context of a renewable plant, the fact that energy and capacity payments are not sufficient to cover the fixed costs suggests that another party (the REC off-taker) is taking more than a minor amount of the utility of the property. The “utility” taken by the REC purchaser is in the form of an intangible produced by the specified property and represents an economic output of the facility.
Specified property
RECs are specific to a qualifying facility, and in a typical plant-specific arrangement the owner of the property has no obligation to deliver RECs other than those produced by the property (i.e., no replacement right or obligation) unless there is a performance guarantee. The REC off-taker is exposed to the risk of weather or other variables that may impact production; therefore, the off-taker is not economically indifferent to the source of the RECs. Instead, those RECs represent an economic benefit provided by a specific property and would be considered output of that property.
The concept of specified property is further addressed in the lease literature and is also relevant to the evaluation of whether RECs are output more broadly.
ASC 840-10-15-8 states that agreements that transfer the right to use specified property, plant, or equipment meet the definition of a lease.
ASC 840-10-15-10 through 15-14 provide additional guidance to determine whether an arrangement does not qualify for lease accounting because the property is not specified. Consistent with this guidance, the generation of RECs is not generic but is instead attached to operation of a specific property. As such, proponents of this view believe the RECs are an output of the property.