Tier I vs. Tier II RECs in Pennsylvania: What Actually Separates Them

Pennsylvania's Alternative Energy Portfolio Standard creates two distinct tiers of alternative energy credits, each with different qualifying resources, compliance requirements, and market dynamics. Understanding the differences between Tier I and Tier II is essential for anyone looking to participate in the state's clean energy markets.

The two-tier structure reflects Pennsylvania's pragmatic approach to clean energy policy. Rather than focusing exclusively on traditional renewables (as many states do), the AEPS recognizes that energy efficiency and demand-side management deliver equal or greater environmental benefits at lower cost. This inclusive framework creates opportunities for a broader range of participants — particularly commercial building owners who might not have the capital or site characteristics for solar or wind installations.

Tier I Resources include solar photovoltaic, wind energy, low-impact hydropower, geothermal, biomass, biologically-derived methane gas, fuel cells, and ocean energy. These are the 'traditional' renewable energy sources that most people associate with clean power. Tier I compliance requirements are set as a percentage of total retail electricity sales, currently around 8% and growing.

Tier II Resources encompass a broader and more unusual category: waste coal generation, demand-side management (energy efficiency), large-scale hydropower, municipal solid waste, wood pulp and wood waste byproducts, and integrated combined coal gasification technology. The Tier II compliance percentage is approximately 10% of retail sales — actually higher than Tier I, reflecting the legislature's recognition of the importance of energy efficiency.

The interesting story in this market is not a price premium — it is convergence. Per the PA PUC 2025 AEPS Annual Report (Table 2) and the PennAEPS 2024/2025 pricing table, both covering reporting year 2025, Tier I non-solar cleared at a $29.29 weighted average with transactions between $2.25 and $60.00; the Tier I solar carve-out cleared at $33.20 with transactions between $0.01 and $81.00; and Tier II cleared at $26.92 with transactions between $0.01 and $41.00. Tier II therefore trades at roughly 0.92x Tier I non-solar — slightly below it, not above it.

One clarification worth making, because the confusion is widespread: the $1–$5 per MWh figures that circulate in general REC coverage describe national voluntary-market RECs. Those are a different instrument entirely — unbundled attributes bought for corporate claims, not credits eligible to satisfy a Pennsylvania AEPS compliance obligation. They should never be quoted as PA Tier I compliance prices.

What makes the convergence remarkable is where Tier II came from. Tier II credits cleared at $0.09 in RY2016. By RY2025 the weighted average had reached $26.92, and the tier now sits within a couple of dollars of Tier I non-solar. That is not a stable equilibrium reached from above; it is a floor-priced tier that repriced upward into the range of the renewables tier over a decade.

So if price no longer separates the tiers, what does? Supply geography. Act 114 of 2020 restricted Tier II compliance to generation and savings sited in Pennsylvania. In RY2025, 100% of Tier II retirements originated in-state. Tier I non-solar, by contrast, still draws on the whole PJM footprint, which means a Pennsylvania LSE short on Tier I can source from a wide, well-supplied regional pool. The two tiers are priced similarly today but are bid against pools of very different depth.

That difference is what makes the tier a forward-looking question rather than a spot-price one. The PUC projects a likely Tier II shortfall beginning in 2028: waste-coal plants that historically supplied a large share of the tier continue to retire, large hydro in Pennsylvania is fully developed, and the only meaningful growth pathway left is registration of in-state energy efficiency and distributed generation. A tier whose supply is capped at one state's borders while its obligation keeps growing behaves differently from one with a regional supply base — regardless of where the two happen to be priced in any single year. That structural picture is what sets current Tier II clearing prices.

Solar RECs (SRECs) deserve special mention as a Tier I subcategory. Pennsylvania maintains a solar carve-out within Tier I, requiring a specific percentage from solar resources. SREC prices, which once exceeded $200/MWh, cleared at a $33.20 weighted average in RY2025 — the highest of the three credit types, and a reminder that a dedicated carve-out with its own higher penalty ceiling supports its own price level.

For building owners, the practical takeaway is not that Tier II pays a multiple of Tier I. It is that an efficiency or distributed generation project in Pennsylvania earns credits into a compliance market priced in the high twenties, sourced exclusively in-state, with a projected shortfall ahead — and that it does so without any capital investment in generation equipment.

The compliance mechanics differ slightly between tiers but follow the same framework. Both Tier I and Tier II credits are tracked through PJM-GATS. Both must be retired for the appropriate compliance year. And both face the same consequence for non-compliance: the ACP penalty. The Tier I ACP is $45/MWh and the Tier II ACP is also $45/MWh, creating identical ceilings for the two non-solar tiers. The solar carve-out is the exception: its ACP is set by the 200% formula in 73 P.S. § 1648.3(f)(4) and was $66.40 for RY2025.

Measured against those ceilings, the two non-solar tiers again look alike. Tier I non-solar at $29.29 sits at about 65% of its $45 ceiling; Tier II at $26.92 sits at about 60% of the same ceiling. Neither is trading far below its cap, and neither gives buyers the comfort that abundant, cheap compliance supply is available. The closer market prices get to the ACP, the more likely some LSEs are to simply pay the penalty rather than compete for scarce supply — which has the paradoxical effect of tightening supply further for remaining buyers.

Future outlook: the structural distinction between the tiers will likely widen even if the price gap does not. New waste-coal supply is extremely unlikely given environmental regulations and economics. Large hydro capacity in Pennsylvania is fully developed. The only growth pathway for Tier II supply is in-state efficiency and distributed generation registration — which is growing but from a very low base, against an obligation that keeps rising and a projected shortfall from 2028. Which tier a project lands in determines which of those two very different markets it sells into.