How Solar Generators Earn Revenue from Carbon Credits

There is a 4 step process to buy and sell in a carbon market

Written by Ernest Yap
commercial solar on skyscraper

Solar generators can earn revenue from carbon markets by selling their carbon credits. In fact, utility-scale energy producers know all about carbon credits and build their power agreements to include them. However, it’s the homeowners and commercial property owners that don’t know. We call this segment, “microgenerators”.

In general, carbon markets and credits are new to most people. There’s no tangible thing to look at, and it can be pretty boring stuff. After all, a carbon credit is a financial instrument that represents the right to emit one metric ton of CO2e equivalent. It is generated through any method that avoids or removes one metric ton of CO2e emissions. Clean energy generation like solar, wind, and geothermal are methods that avoid emissions and can generate carbon credits.

 There are 4 steps in the buying and selling process of carbon credits. This is how a solar producer generates revenue from them.

Before you Start: Solar site is registered in a carbon market

Generally, a solar generator registers their energy plant to participate in their regional carbon market. They can choose compliance or voluntary markets. Compliance markets are more lucrative because the regional government wants to reduce emissions, and they are usually in areas that have a high concentration of fossil fuel plants. They make the regulations that emitters must participate in the market. Then, the site should be in the same grid as the fossil fuel plants to be “offsetting” the grid emissions. There are strict requirements, but the credit price is pushed to be high.

In a voluntary market, your price is dependent on the will of a buyer’s ESG and branding needs. There’s no regulation or set carbon price. For principle, you should follow the same requirements as in a compliance/regulated market.

For those who live in a region with majority clean energy, then credits are worth very little.

For microgenerators, you probably wouldn’t enter any carbon market by yourself, especially a compliance market. What you would do is find an “aggregator” like Rewatt to handle registration. We make you a member of a “collective power plant” to take advantage of cost sharing. 

Step 1: Generate solar carbon credits

A renewable energy producer generates carbon credits through their clean energy produced. At this point, you just sit back and produce. Your solar energy is causing the avoidance of emissions. 

You will generate more credits if your total grid is dependent on fossil fuel electricity plants like coal and natural gas. There is a number called the “grid emission factor”, which is a number that reflects the amount of emissions those plants emit.

Step 2: Verify carbon credits

In a compliance market, when there is enough credit volume, the energy producer hires a registered 3rd party verifier to audit the quality of the credits (i.e. ensure it’s not bullsh*t). For small producers, verifying is stupid expensive and makes no economic sense. That’s why Rewatt Power pools members into collective power plants to share the cost of verifying. This stage is the most expensive part.

For voluntary markets, the need to hire a verifier is dependent on the buyer. This is tricky: here’s where a lot of organization get nailed for greenwashing. In principle, if you’re a buyer and you use energy on the same grid, then it makes sense to buy credits from clean energy on the same grid because you’re financing clean energy growth. If you’re not, then it gets murky. More on this under my observations.  

Step 3: Find buyers

At this point, solar producers need to find buyers who want to buy your credits. 

In a compliance market, credit buyers can be utilities who own fossil fuel electricity plants. Buyers are regulated to purchase credits and the consequence of not doing so is to pay a higher penalty to the government. A broker (such as Rewatt Power again) or a marketplace (future Rewatt Power) helps you find credit buyers.

Step 4: Sale made. Get paid. Repeat.

If you find a buyer, then a credit transaction is made based on an agreed credit price. The solar producer gets their earnings, and the buyer gets their credits. This repeats itself for the term of a contract.

Easy peezy?

Author's opinion

Here are a few observations for real emissions reductions, in my opinion:

  • There needs to be a regulated carbon price and it needs to increase (or at least stabilize at the true cost of carbon emissions harm). This puts the financial pressure for buyers to change their processes.
  • As the carbon price increases, it will reach a threshold where the buyer will think twice and decide to build their own clean energy plants instead. It might cost less to build clean energy than to continue with building fossil fuel plants.
  • There is a point where the grid becomes so clean that the amount of credits becomes so small, at the same time that demand dwindles. At this point, the carbon market will be minimal and it will have achieved it purpose. Truth is, fossil fuels will never really go away, but you might need credits to incentive carbon capture.

Want to know more about trusted, high-quality carbon credits?