States and jurisdictions with renewable portfolio standards require retail electricity suppliers, such as regulated utilities and direct access suppliers, to source a specified amount of their retail load from renewable resources. Although programs vary, the retail provider typically demonstrates compliance by submitting qualifying RECs to the relevant program administrator. In general, the compliance obligation is determined based on retail load (i.e., the number of RECs to be submitted are a specified percentage of megawatt-hours sold to retail customers) and the obligation to submit RECs is incurred and increases as power is delivered to retail customers. The retail provider may be subject to fines and penalties for failure to comply with RPS requirements.

Based on the nature of the compliance obligation, if the RPS requirement is based on a percentage of retail customer load, we believe reporting entities should accrue the RPS liability as a period expense as power is delivered to retail customers.

There is diversity in practice as to the measurement of the RPS liability. We believe different approaches may be acceptable, including:

A reporting entity could also consider accounting for the RPS compliance obligation in a manner similar to the accounting discussed in UP 6.6 for compliance with emission allowance programs. In some cases, a combination of these approaches or another method of measurement may be appropriate, depending on the RPS settlement mechanism. A reporting entity should evaluate its facts and circumstances, be able to support its recognition policy under U.S. GAAP, and apply it consistently. In addition, it should recognize any potential penalties or fines when probable and estimable, consistent with the guidance in ASC 450, Contingencies (ASC 450).

Generally, no. As discussed above, the RPS liability accrues, and should be recorded, as retail deliveries occur. The timing of the purchase or generation of RECs may or may not coincide with the recognition of the liability. The measurement of the liability may include the reporting entity’s actual cost of RECs or may be based on a market measure (note that generated RECs not deemed output will have a zero cost basis because all costs will be allocated to output from the facility).

RECs purchased or generated should be capitalized as inventory or intangibles, depending on the reporting entity’s policy. A compliance liability is recognized based on the reporting entity’s measurement methodology. RECs held and recorded as inventory or intangible assets are offset against the compliance liability when the RECs are surrendered to the RPS program administrator to demonstrate compliance. Any difference between the liability and the carrying value of the RECs would be recognized as a gain or loss when the obligation is settled.