Also known as a renewable energy credit, green certificate, or green tag, this is a mechanism created by state statute or regulatory action to make it easier to track and trade renewable energy. RECs represent the environmental attributes of a renewable energy project (for example, wind, solar, and geothermal) and may be sold together or separately with the electricity the project produces. Generally, each megawatt-hour of electricity produced by a qualifying renewable energy project generates one REC.

Under a REC regime, each qualified renewable energy producer has two income streams: one from the sale of the energy produced and one from the sale of the RECs. As a result, RECs can be used to offset the cost of developing a solar or another renewable project or to repay the lenders, in the case of a financed project.

Many lenders, as a condition to making a loan to a renewable energy project developer (for example, a solar installation) project, require that the developer execute a long-term REC sales agreement with a utility or other electricity supplier that can use these RECs to satisfy its requirements under its state's renewable portfolio standard.