Pennsylvania's Tier II RECs: How Energy Efficiency Projects Can Generate Significant Revenue for Building Owners

Pennsylvania's Alternative Energy Portfolio Standards (AEPS) require electricity suppliers to procure Renewable Energy Credits (RECs) from both Tier I and Tier II resources. While Tier I includes traditional renewables like solar, wind, and biomass, Tier II offers significant opportunities for facility owners, especially in energy efficiency (EE) and combined heat and power (CHP). With recent policy changes, Tier II RECs are increasingly valuable and provide new revenue streams for businesses.

The AEPS was designed to promote a diverse portfolio of alternative energy resources in Pennsylvania. Unlike single-technology mandates common in other states, Pennsylvania's approach recognizes that reducing energy waste (through efficiency) is as valuable as generating clean energy. This philosophical foundation is what makes Tier II uniquely accessible to commercial and industrial building owners who may never install a solar panel but can readily upgrade their lighting, HVAC, or motor systems.

The following resources are eligible for Pennsylvania's Tier II Renewable Energy Credits under the AEPS: Energy Efficiency and Demand-Side Management projects (including LED lighting upgrades, HVAC optimization, and VFD installations), Combined Heat & Power (CHP) installations, large-scale hydropower, waste-to-energy from municipal solid waste, waste coal generation, and by-products of pulping and wood manufacturing such as black liquor, wood chips, bark, and sawdust.

CHP (Combined Heat and Power) systems deserve particular attention within the Tier II framework. CHP installations that simultaneously generate electricity and capture waste heat for productive use achieve overall system efficiencies of 65-85% — far exceeding the 33-45% efficiency of conventional power generation. For hospitals, universities, manufacturing plants, and large commercial complexes, CHP systems can generate thousands of Tier II RECs annually while also reducing energy costs by 20-40%.

A typical hospital CHP installation illustrates the opportunity. A 2 MW natural gas-fired CHP system operating 7,500 hours per year generates approximately 15,000 MWh of electricity. When compared to conventional grid electricity (at approximately 35% system efficiency) plus separate boiler heating, the CHP system saves roughly 8,000 MWh equivalent in primary energy. At $26/MWh, this generates over $200,000 in annual REC revenue — in addition to energy cost savings of $500,000 or more per year.

Since Act 114 in 2020, Tier II compliance must be met using only Pennsylvania-based Tier II credits. This in-state requirement reduced supply from regional markets and significantly increased REC values, creating stronger incentives for businesses to pursue qualifying projects. The impact of Act 114 cannot be overstated — it transformed a regional market with ample supply into an in-state market with structural scarcity.

The in-state requirement had immediate and dramatic effects on pricing. Before Act 114, LSEs could source Tier II RECs from waste-coal plants in West Virginia, hydro facilities in New York, and efficiency projects throughout the PJM region. This broad supply base kept prices under $5/MWh. Post-Act 114, demand was concentrated exclusively on Pennsylvania resources, and prices quickly climbed above $10/MWh, then $20/MWh, and now approach $27/MWh.

Recent Tier II REC prices tell a compelling story of rising value. The weighted average price has climbed from $10.86/REC in 2021–2022, to $19.69 in 2022–2023, to $26.47 in 2023–2024, and most recently to $26.92 in 2024–2025 — with price ranges reaching as high as $41.00/REC. This consistent appreciation reflects the structural supply-demand imbalance created by Act 114 and the ongoing retirement of waste-coal generation.

For facility owners and operators, Tier II RECs are one of the most actionable pathways to capture financial value from energy projects. Unlike Tier I, which often requires large-scale renewable development with significant capital requirements and long development timelines, Tier II credits can be generated through energy efficiency upgrades and CHP systems. This means that projects already planned for cost savings or sustainability can double as revenue-generating assets through REC sales.

The administrative process for CHP REC registration differs slightly from efficiency projects. CHP systems are registered as generation units in PJM-GATS, with the REC-eligible output calculated based on the thermal efficiency advantage over separate heat and power production. Proper metering of both electrical output and thermal recovery is essential. Most CHP operators engage an M&V firm to establish and verify the baseline comparison and ongoing performance.

Key takeaways for businesses: Many common energy efficiency improvements can earn Tier II credits, including LED replacements, VFDs, HVAC optimization, and CHP solutions. The rising market values — from $10.86 to $26.92 per REC in just a few years — mean this additional revenue stream significantly improves ROI and shortens payback periods. Proper measurement and verification (M&V) processes are crucial to ensure successful REC issuance and maximize financial benefits.

The sustainability reporting angle adds further value. Many companies are facing growing pressure from investors, customers, and regulators to demonstrate environmental performance. Tier II RECs provide documented, third-party-verified evidence of energy savings that can be incorporated into ESG reports, sustainability disclosures, and carbon accounting. While the RECs themselves are typically sold for compliance purposes (rather than retained for voluntary claims), the underlying efficiency projects support sustainability narratives.

By aligning capital projects with Pennsylvania's Tier II REC program, businesses can reduce operating costs, increase sustainability performance, and generate ongoing revenue through the state's AEPS compliance market. Emergent Energy works with building owners, third-party engineers, and project development partners to get projects approved, register the credits in the applicable registry, and monetize them.

For businesses considering their first REC-eligible project, the barrier to entry is lower than most expect. If you've completed any efficiency upgrade at a Pennsylvania facility in the past few years, you likely already have a qualifying project. The first step is simply reaching out to discuss your project history and identify which installations are eligible for certification. The potential revenue makes this conversation well worth having.