Driving Renewable Energy Forward: An Interview with REDEX

Ben Hillary – Hello and good morning, afternoon or evening to all of our viewers, wherever you're listening in from today. My name is Ben Hillary, Managing Director of Commodities People, and I'm really, really delighted to be joined here by Zhaotan Xiao, Executive Director of REDEX, Asia's leading trading platform for renewable energy certificates, or RECs. This is a really fascinating company with a very exciting approach to REC markets.

And Zhaotan himself also brings a wide range of unique perspectives to this conversation, having led commodity trading teams globally across a range of financial institutions for more than a decade. Over the next 10 to 15 minutes, we'll be taking a deep dive into all things RECs, with a particular focus on developments in APAC markets, opportunities and challenges, how these compare with Europe, the US and beyond, and the technologies being brought into play to support this exciting growth. So, Zhaotan, welcome and many, many thanks for being here.

Zhaotan Xiao – Thank you for having me.

Ben Hillary – Absolute pleasure. Well, first question then diving right in. Could you start by giving us an overview of the REC market in Singapore and the Asia Pacific region and how this might differ from what you see in other parts of the world? 

Zhaotan Xiao – Sure. Thank you. So in Singapore, the RECs market there's way more demand than supply. So RECs prices are really high. In fact, they're so high that when the Singapore Government comes up with tenders for new solar projects on the rooftops, because in Singapore, there's no land just for farms, the winning bids for these tenders are selling electricity at zero. So the whole project is carried by RECs.

The RECs prices are high enough to give the payback and returns for the project. So in Singapore, again, RECs prices are just through the roof. They started at $5. They've gone through the roof now. And yeah, it's just characterized by lack of supply.

So what we did is we actually helped to craft. Our founder, Jen Wee, helped to craft a Singapore standard called SS673, which allows Singapore companies that are operating in Singapore to buy regional RECs, RECs that are from Southeast Asia, to help them in some of their compliance, according to this Singapore Standard. 

But again, that does not help if you are an RE100 company. For the rest of the APAC region in general, there are still many undeveloped power and RECs markets. Power purchase agreements are not allowed, because their power markets are just not liberalized. So in this country, the companies face a lot of problems trying to get renewable power. And RECs are the only way for these companies to buy green energy. The developed markets in the world, Europe and Americas, obviously RECs have been around for a long time. It's been around for 20 years. So we believe that in the emerging economies we will mimic the growth of these developed markets and eventually we will end up hopefully with vibrant markets for both electricity and RECs. And that enables the trading of both power and RECs across countries. I think cross border trades are very important. And in our part of the world, in Southeast Asia, there's a lot of talk about a Southeast Asian grid, an interconnected grid across countries in Southeast Asia. And we believe that RECs have a role to play in capitalizing this as an instrument of trade across countries. Again, mimicking what has already happened in developed economies.

Ben Hillary – Yeah, excellent. I mean, on our side, we obviously do an absolute ton of work with the European power and REC markets and those in the US as well. So it was really notable starting work in Singapore and just realizing that, yeah, there is no interconnection. Yeah, so that would be hugely exciting. 

How do you see the market for RECs developing in the years ahead? 

Zhaotan Xiao – Yeah, so the RECs market is growing very fast. If you look at the amount of RECs that are issued and retired every year, it is doubling, more than doubling over the last three to five years. Every year. And the interesting thing about the RECs market is that almost everything that is issued or the great majority of what is issued is being retired by companies to make sustainability claims. And the reason is actually very simple. There is an inherent expiry date to RECs. So you don't store it because it's going to end up at zero. So people are only buying it to retire. And secondly, there's a cost of issuance to this. So people only issue when they find a buyer. And this dynamic has resulted in the fact that currently, in the market, there's not that much speculation and yet the number of RECs is just growing exponentially. 

So I think this is a classic case of a rising tide. There are many good reasons why RECs are being adopted so widely and one of it is that this is factual. It is exposed. You can only issue wrecks after the power has been produced. So there's very little risk of greenwashing. And there's fundamentally not much difference between a REC and a power purchase agreement. All we're doing is we're unbundling a power purchase agreement. I think there's strong reasons for companies to be buying RECs to offset their Scope 2 emissions.

And if you look at both supply and demand, on the supply side, at COP28, there was a commitment to triple renewable energy production in the world. I think supply is obviously going to keep growing. The economics works out as well on the demand side. If you look at the current trends, all listed companies in the world are now asked to calculate and disclose their scope 1 and scope 2 emissions. Once you start calculating it, it becomes a KPI. And the lowest hanging fruit. The easiest to calculate, easiest to implement, corporate sustainability program for any company that's trying to embark on a net zero journey is to get rid of your Scope 2 emissions via RECs. RECs give you the flexibility and in many cases it is the only way for you to get rid of it, to buy green energy. As I mentioned earlier, if PPAs are not available, and in many, many cases, it is also the cheapest to deliver. So this makes perfect sense that the RECs market has been doubling every year. 

Finally, I would also add that regulators are now starting to implement rules around embedded rules like CBAM, Europe's Carbon Border Adjustment Mechanism.

We believe fact based certificates like RECs have a clear and important role to play in the decarbonization and traceability of supply chains. I think these are very strong forces that are pushing this market forward and it's starting to blossom. The RECs market in the voluntary market, which is what REDEX is focused on, this market has really only started to blossom since April 2021.

So what happened in April 2021 is that Verra stopped allowing renewable energy projects from issuing carbon credits. So this is the regime change. This is what is happening. And this new instrument, RECs, that has taken over from carbon for the renewables industry is really blossoming right now.

Ben Hillary – Well, we've spoken about the opportunities, the positives. What do you see as the key roadblocks to the development of effective markets for RECs and how do we resolve these challenges? 

Zhaotan Xiao – Yes, good question. So I think the first thing that we need, the RECs market needs is more education and awareness about this instrument. 

The instrument is actually very simple and the strength of this instrument is precisely in its simplicity. And it's so easy to understand as compared to, say, carbon, where there's 200 types of carbon credits. Most participants, especially in Asia, are not even aware of this instrument. They keep still in this carbon credits world. And since Verra has now stopped allowing renewable projects from issuing carbon credits, if you are a solar farm or wind farm in Asia and you are still issuing carbon credits, no self respecting organization will be buying these carbon credits. So a lot of this is about education and awareness and making people understand why RECs is no different from an unbundled PPA. The concept is not an offset. We're not offsetting anything. All we're doing is we're tracing, we're tracing your power consumption to a renewable source that is delivering power into the same grid from which you are drawing from. How is that different from a PPA? It's precisely the same thing.

So one great thing that I really like about our business is that once our clients are educated about RECs, they will not go back to carbon for their scope 2 emissions. So it's a very asymmetric process. And I like asymmetry. I was an options trader and I think this is the way to go. We just need more business leaders and more key opinion leaders to endorse the use and legitimacy of RECs.

So that's number one. The second important point is we need to do more standardization and implementation of these rules. So GOs, the European RECs, Guaranteed of Origins have been around for two decades and there are many lessons that we can draw from that.

Now, the IREC Standard, which is in its 10th anniversary, is already the predominant standard in most of the Global South, in the emerging markets. And these are a set of very sensible rules that national regulators can recognize and adopt very quickly without having to go through another 20 years of experimentation. So clarity and harmonization of rules, especially cross border, how they should be treated, will help to accelerate the adoption of this highly versatile instrument, which can really be a very powerful tool for policymakers to achieve very specific aims. So for example, RECs can be used to support, I was talking about cross border. It can be a way for companies, for policymakers to get companies to pay for the subsea cables that we need to build for some of these underlying infrastructure or for policymakers to incentivize batteries to be installed in the grid, if you have hourly RECs, RECs that are tied to the hours. So it's actually a very powerful and flexible tool. 

And finally, I would say the third thing that we need to do is to reduce friction in the process of issuing and transacting RECs. And that's where REDEX comes in. So what we have really done is we have digitized and streamlined the whole lifecycle of the RECs. Globally, less than 10% of all installed capacity is even registered for RECs issuance. So there's another 10x out there for registration. And one of the reasons why this is being held back, one reason is the lack of awareness that I mentioned above. But another reason is the friction involved in asset registration. It was so antiquated and manual prior to this. But we are now API integrated with the IREC registry REDEX. We're the first guys to have API integration and it is now a seamless process to move RECs onto our platform for trading. We are literally opening the taps for RECs.

And another example is that we have aligned with the registries to enable a shortened way to register small distributed rooftop assets. It's never been done before, and this is very important because in the next five years it is projected that more than half of all PV assets are going to be on rooftops. So prior to us getting involved, this would have been untouched. But now all these rooftops can be monetized. So again, the reason why we can do this is because we have these amazing relationships with the registries where they will accept new ways of doing things that are proposed by us, as long as it's logical and it maintains the trust in the system. 

So I think these are the key roadblocks that we need to alleviate in the coming years for this instrument to really take off. 

Ben Hillary – Excellent. It's really exciting to hear about how, for example, with the roof panels, how really democratizes every citizen who wants to can become a player in this new market. And that's not something we've really seen in other markets in the past. Some of the things you mentioned around standardization, we see those as critical and standard points on the way for a commodity market developing. But this whole prosumer democratization is really exciting. 

Zhaotan Xiao – Exactly, precisely. We are democratizing green energy and we're bringing in more players into this ecosystem. And if you think about what REDEX is doing, we have built a really nice ecosystem. Think of the sellers on our platform are some of the world's largest generators, all the way down to the individual rooftop owner. And on the buy side of our ecosystem, we have the RE100 companies and their supply chain. This is really a coalition or an ecosystem of people who are really doing actual work, doing something about climate change. We're quite proud about the ecosystem we built using RECs as a glue to put everything together. 

Ben Hillary – Final question from my side really would be what does the future hold? What are the developments can we expect from REDEX in the coming months? 

Zhaotan Xiao – So firstly, we'll be expanding our footprint. We started out in Asia. We are now across ten countries, and that's China, India and most of Southeast Asia. But this year we will be expanding to Latin America, and the Middle east, working closely with our Series A investors, which are Aramco Ventures and FRV. FRV is a Spanish solar developer. And because they're Spanish, they're big in Latin America. So we'll be expanding our footprint to Latin America and Middle East and covering essentially the Global South because this is essentially where IRECs are the predominant standard for RECs. We're piggybacking on their footprint. 

Secondly, we've just recently launched our REConnect app. It’s R-E Connect app. This is a mobile application. We've launched it in Singapore which enables the simplified DIY registration process for rooftop solar systems. We're the first guys in the world to have done this. And all these rooftop solar asset owners, both for residential and C&I rooftops, commercial and industrial rooftops can now monetize their RECs in a very simple way. And we expect to roll this out to Asia and the rest of the world in 2024. 

Finally, I would say that we are working with a few partners on CBAM related pilots. So for example, we're working with the largest aluminum smelter in Malaysia where they have monthly shipments to Europe and we will slap on some IRECs to it and send them to Europe and get a determination that this batch, this shipment has zero Scope 2 emissions. So I think that's a very important principle to prove and I think it would be of interest to many commodities players.

I think it's beneficial to all commodities players if we can get the European regulators to accept that RECs are a legitimate way for individual companies to offset or reduce their Scope 2 tax liabilities, CBAM tax liabilities. 

We would love to work with more partners in the commodities world to do this. So we think it makes a lot of sense to be using RECs. And by the way, just on this point, once the shipment of products comes with the certificates, these certificates can then go downstream together with the metal, be fractionalized and go downstream with the metal and form the backbone for traceability in your supply chain. 

So we need to be thinking about greening the product, not just the mine or the project. It should be greening the product. The product itself should come with the certifications for tracking downstream.

So I think it's a very interesting project. If we look at the history of RECs, the last 20 years was about the verification of production of renewable energy. But for the next 20 years it will be about the verification of consumption of energy, and being able to say that this product that is shipped to Europe has certain environmental attributes. So this is the journey that we're on, and we'd love to have more partners from your ecosystem join us on this journey.

Ben Hillary – That's excellent. We interact daily with sustainability leads across, particularly across Europe and the US, across a wide range of commodity traders, producers, consumers. And I think what you've described would be of tremendous interest to many of them. So that's really interesting, really exciting. 

Well, thank you, Zhaotan, for a fascinating conversation. It's an absolute pleasure. And also, thank you to our listeners for joining. And, yes, until next time, wishing you all the best. And thank you.

Zhaotan Xiao – Thank you. Bye.