Essential key terms
Renewable sources of energy, along with the emerging technologies that support it, are a growing area of focus for many. From traditional utilities and developers to private equity firms and major corporations, more and more entities are interested or actively getting in the game.
As the industry continues to grow, there’s an increasing amount of terms and concepts that may become increasingly important to your business. To ensure you’re up to date, we’ve compiled a list of key terms that might be applicable to you.
AC – Alternating current
Electricity that periodically reverses direction. In the United States, power generation facilities deliver energy to the grid in alternating current (AC). For a solar facility, its operating capacity is quoted in AC, where power is converted from DC (panel) to AC (delivery to the grid), through an inverter.
ACP – Alternative compliance payment
An alternative compliance payment (ACP) is the amount that an entity subject to renewable energy standards (generally a load serving entity) must pay if they are unable to generate or buy renewable energy credits (RECs) to meet the requirements under the standard.
ARO – Asset Retirement Obligation
An Asset Retirement Obligation (ARO) is an accounting rule and legal obligation involving the retirement of a tangible asset (e.g., renewable power facility) that represents the current accounting value of the future retirement obligation. AROs are typical in the renewable sector: provided land is frequently leased for wind and solar projects, in which the owner operator is obligated to remove / dismantle the renewable property at the end of the lease period.
Bundled contract
A contract in which multiple products are procured under one price. This is often seen in contracts for renewable energy where the energy, capacity and renewable energy credits (RECs) are all procured under one price.
Bus / Node
A node represents the location on the transmission system where the generation is put into the system. Nodal pricing is often referred to as locational marginal pricing (LMP) and is the price at the specific node. The nodal price will account for transmission congestion and prices at nodes within a single zone can vary due to transmission constraints.
Capacity
The maximum output that a power generating facility can produce.
Capacity factor
Capacity factor represents the ratio of actual electricity generated to the total potential amount of electricity that could have been generated during a specified time period. For renewable power facilities, capacity factors are dependent upon the resource (e.g., wind, sun, etc.) used to generate power, the capability of renewable equipment and other factors (e.g., interconnection limits, congestion, etc.).
CO2 – Carbon dioxide
Carbon dioxide (CO2) is a greenhouse gas that enters the atmosphere through burning fossil fuels (coal, natural gas, oil) and other materials, and through certain chemical reactions. CO2 emissions from fossil fuel generation facilities are currently regulated in California and in states that participate in the Regional Greenhouse Gas Initiative (RGGI) in the Northeast US. These programs cap the amount of CO2 emissions allowed to be emitted and result in a CO2 allowance price which fossil fuel generators pay for each short ton of CO2 emitted. There is a federal rule to regulate CO2 emissions called the Affordable Clean Energy (ACE) rule, although it will not result in CO2 allowance prices.
Congestion
Congestion is a condition that arises on the transmission or distribution system when one or more restrictions prevents the economic dispatch of electric energy from serving load or demand.
CONE – Cost of New Entry
Cost of New Entry (CONE) is the levelized revenue required by a new generator to make it economically viable to build the specific asset within an ISO / RTO and within the specified economic life. CONE or levelized cost of entry (LCOE) is frequently utilized by renewable developers to help determine their required contract price to earn a fair return on and of their investment.
Demand charge
A demand charge is a fixed rate that is applied to the consumer's maximum electric capacity usage (often in kilowatts (kW)) for a given time interval, rather than their total amount of energy consumed—often in kilowatt hours (kWh). Some utilities have tried to implement demand charges for consumers with solar rooftop systems that consume very little energy, meaning the consumer pays very little for energy, while the utility still bears a fixed cost to serve.
DER - Distributed energy resource
The term commonly used to refer to small-scale generations, or any resource that provides electricity on-site or at key locations on the transmission or distribution system. Examples of these types of resources include, solar, wind and fuel cells.
DSM – Demand-side management
Demand-side management (DSM) programs provide financial incentives to customers to encourage lower electricity usage. It can also be used as a replacement for traditional capacity resources to serve demand.
DC – Direct current
Electricity that flows uninterrupted in the same direction. Solar panel capacity is often quoted in DC. For solar, power is converted from DC (panel) to AC (delivery to the grid), through an inverter.
DG – Distributed generation
This refers to different technologies that generate electricity at (or within proximity to) where the power will be consumed, such as rooftop solar panels. Distributed generation can provide power to a single structure, such as a home, or it can be part of a microgrid.
EE – Energy efficiency
Energy efficiency is a decrease in energy consumption resulting from consuming less energy to create the same output or functionality. For example, using a light-emitting diode (LED) light bulb that requires less energy than an incandescent light bulb to produce the same amount of light.
GW – Gigawatt
A unit of power used to describe the capacity or size of a power generation facility. A gigawatt is equal to 1 billion watts.
GWh – Gigawatt hour
A unit of measurement used to describe the volume of electricity produced or consumed. A gigawatt-hour (GWh) is 1 billion watts of power used for one hour.
Grid
A grid is a synchronized system of electricity generation and electricity consumers connected by transmission and distribution lines and operated by one or more control centers. In the continental US, the electric power grid consists of three main interconnection systems; the Eastern Interconnect, the Western Interconnect and the Texas Interconnect. There is very little transmission interconnection between the three systems.
HLBV – Hypothetical liquidation at book value
Hypothetical liquidation at book value (HLBV) is an accounting mechanism for allocating pre-tax GAAP income or loss to an investor. It is common in renewable energy partnerships in which there is a tax equity partner. HLBV calculates the hypothetical amount each partner would receive at the end of a measurement period (monthly, quarterly, annually), assuming the partnership is liquidated at its book value.
ISO – Independent system operator
An independent system operator (ISO) is a Federal Energy Regulatory Commission (FERC)-approved organization that coordinates, controls and monitors the operation of a regional electrical power system. The primary difference between an ISO and RTO is that RTO has a more defined minimum requirement to become one. However, the terms RTO and ISO are often used interchangeably. There are currently 10 RTO/ISOs in North America.
Interconnection
Interconnections describe the distribution and transmission systems of the power grid. Power plants are interconnected to the local electricity grid, which is interconnected through transmission to form a larger network. In the US, there are three main interconnections, which have limited connection among them. The Eastern Interconnection is the area east of the Rocky Mountains and parts of North Texas, the Western Interconnection is the area west of the Rocky Mountains and the Texas Interconnection covers most of Texas.
ITC – Investment tax credit
An investment tax credit (ITC) is a federal policy which provides project owners or investors a tax credit for installing eligible renewable energy property (generally utilized by solar facilities). The tax credit is 30% of the eligible costs for projects that begin construction as of 2019 and are placed in service by 2024. The credit then phases down to 26% in 2020, 22% in 2021 and 10% thereafter.
IOU – Investor owned utility
An investor owned utility (IOU) is a for-profit, privately-owned electric or gas utility. The rates they charge consumers and their allowed rate of return are regulated. IOUs often serve as off-takers for renewable power purchase agreements (PPAs) and are often obligated to procure renewable energy credits (RECs) in states with renewable portfolio standards (RPS).
kW – Kilowatt
A unit of power used to describe the capacity or size of a power generation facility. A kilowatt (kW) is 1,000 watts.
kWh – Kilowatt Hour
A unit of power used to describe the volume of electricity produced or consumed in an hour. A kilowatt-hour (KWh) is 1,000 watts of power used for 1 hour.
Load / Demand
Load, often referred to as demand, is the total consumption of electricity and is usually expressed in kilowatt-hours (kWh) or megawatt-hours (MWh). It can also be measured in megawatts (MW) or kilowatts (kW) if it is measured at a point in time.
Load pocket
A load pocket is a location in which there is not enough transmission capability to import capacity from outside of the location. Meaning, the area demand must be met with local generation.
MW – Megawatt
A unit of power used to describe the capacity or size of a power generation facility. A megawatt (MW) is 1 million watts of power. Electricity generators are typically measured in MWs of generation capacity.
MWh – Megawatt hour
A unit of power used to describe the volume of electricity produced or consumed in an hour. A megawatt-hour (MWh) is 1 million watts of power used for one hour.
P50
P50 is a statistical level of confidence that is often used in wind studies as a measure of the expected generation for a particular facility. A P50 case is the level of annual wind generation that is forecasted to be exceeded 50% of the time and is considered the expected average level of generation.
P90
P90 is a statistical level of confidence that is often used in wind studies as a measure of the expected generation for a particular facility. A P90 case is the level of annual wind generation that is forecasted to be exceeded 90% of the time. The P90 case is viewed as a more conservative forecast of expected generation.
P99
P99 is a statistical level of confidence that is often used in wind studies as a measure of the expected generation for a particular facility. A P99 case is the level of annual wind generation that is forecasted to be exceeded 99% of the time. The P99 case is viewed as a more conservative forecast of expected generation.
PBI – Performance-based incentive
Performance-based incentives (PBI) are incentives that are paid based on the amount of energy produced by a renewable energy system. The incentives typically provide cash payments on an energy produced basis (e.g., $/kWh). An example is when a utility offers a PBI for each kWh generated to owners of rooftop solar systems.
PV – Photovoltaic
The photovoltaic effect is the process of converting energy from the sun into usable electricity.
PPA – Power purchase agreement
A Power purchase agreement (PPA) is a legal contract between two parties where the seller agrees to provide a combination of either electric energy, capacity or renewable energy credits (REC) to a buyer for a fixed and / or variable payment. PPAs generally are long-term contracts (e.g., 15+ years).
PTC – Production tax credit
The federal renewable electricity production tax credit (PTC) is a tax credit for each kWh of electricity generated by qualified renewable energy resources (typically utilized by wind). The 2019 PTC is $2.4 cents/kWh, inflation adjusted. The duration of the credit is 10 years after the date the facility is placed in service. Wind facilities that started construction by 2016 receive 100% of the eligible tax credits. It phases down to 80% in 2017, 60% in 2018, 40% in 2019 and 0% thereafter.
REC – Renewable energy credit
Renewable energy credits, also known as a renewable energy certificates or RECs, are marketable instruments for the green attributes of renewable generation. RECs are issued when one MWh of electricity is generated and delivered to the electricity grid from a renewable energy resource. RECs typically provide a source of revenue for renewable generation facilities, either through inclusion in a PPA or through market sales.
RES – Renewable energy standard
A renewable energy standard (RES), often referred to as a renewable portfolio standard (RPS), is a state policy which designates how much energy electricity suppliers must generate or procure from designated renewable resources or eligible technologies.
Reserve margin
A reserve margin represents the measure of available capacity that goes beyond the total capacity needed to meet normal peak demand levels. For example, a reserve margin of 15% means that the RTO or ISO has 15% more capacity than is required to meet expected normal peak demand. The excess reserves are utilized in times when peak demand exceeds normal peak demand, to maintain reliability on the grid.
RPS – Renewable portfolio standard
A renewable portfolio standard, which is also known as a renewable energy standard or RES, is a state policy which designates how much energy electricity suppliers must generate or procure from designated renewable resources or eligible technologies.
RTO – Regional transmission organization
A regional transmission organization (RTO) is a Federal Energy Regulatory Commission (FERC)-approved organization that coordinates, controls, and monitors the operation of a regional electrical power system through administration of the transmission grid. The primary difference between an ISO and RTO is that an RTO has a more defined minimum requirement to become one. However, the terms RTO and ISO are often used interchangeably. There are currently 10 RTO / ISOs in North America. RTOs are independent, membership-based, non-profit organizations. Most RTOs act as a marketplace for wholesale power.
SREC – Solar renewable energy certificate
Solar renewable energy certificates, also known as solar renewable energy credits or SRECs, are a form of RECs that are specific to solar-generated energy. They only exist in states that have renewable energy standards (also called renewable portfolio standards) with specific solar carve-outs or requirements. In certain locations, SRECs provide a source of revenue for solar generation facilities.
System losses
The total amount of lost energy during the process of generating, transmitting and distributing electricity.
Tax equity
Tax equity describes passive ownership interest in an asset (usually a renewable asset with available tax credits), in which the tax equity investor receives returns based on a combination of cash flow and federal or state tax benefits (accelerated depreciation and tax credits). For developers, it is a form of project finance and source of capital.
Tax equity flip date
The tax equity flip date is the date at which the allocation of income or cash to the tax equity investor flips to a typically lower allocation percentage than prior to the flip date. In a yield flip date, the flip occurs once the tax equity investor has earned its agreed upon rate of return or yield. In a time-based flip date, the flip occurs on an agreed date, irrespective of the tax equity investor’s return at the flip date.
Tax equity - Flip internal rate of return (IRR)
The flip internal rate of return (IRR) is an agreed upon return that the tax equity investor will receive through allocation of the income or cash and tax benefits from the project prior to flipping most of the cash or income back to the project owner (i.e. the cash equity investor). For example, a tax equity investor may be allocated 99% of the tax benefits and income of the project until it reaches an agreed upon IRR. Once the investor earns the IRR, the cash flows are flipped, and the tax equity investor will receive a typically small or residual amount of cash flow and tax attributes.
TOU rates: Time of use rates
Time of use (TOU) rates are different electricity rates for different time periods in the day. The customer is charged based on the rate at the time of the actual energy consumption.
Watts
A unit of power used to measure the rate of energy transfer.
Zone / Hub
A group of multiple buses or nodes in a regional pricing zone or hub. In a market with locational marginal pricing (LMP), the zonal price will be the weighted average of the nodes in that zone.
Sources
The definitions in this document were compiled using a variety of industry sources for reference, including Energy Information Administration (EIA), North American Electric Reliability Corporation (NERC), Solar Energy Industries Association (SEIA) and the U.S. Department of Energy, Environmental Protection Agency (EPA).
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