Monday, October 31, 2011

SREC Values in Pennsylvania

The decline in Pennsylvania solar REC prices over the past year can be explained very simply by supply and demand. The demand for SRECs is dictated by Pennsylvania’s Alternative Energy Portfolio Standards Act which requires 44 MW of solar capacity in order to meet the solar-carve out for 2012 Compliance Year. (The Pennsylvania Compliance Year is between June 1, 2011 and May 31, 2012). However, there are estimated to be 105 megawatts of solar photovoltaic systems currently registered and certified in Pennsylvania of which only about 36 are actually located in Pennsylvania, which is one of the last states within the PMJ to allow “foreign” SRECS to fulfill their Solar renewable energy portfolio standard.

Solar Renewable Energy Certificates, SRECs, are not real, but merely a credit for having made one megawatt hour of solar electricity that was used elsewhere. SRECS have no intrinsic value. In other words, if there is no buyer for the solar REC, it is worthless. Like most consumer solar arrays I use all the power produced by the panels in my own home, nonetheless, my system generates 10 SRECs a year. Because SRECs are not physical items their value depends entirely on regulation which can change over time and that is the inherent risk in making financial decisions based on regulations. There was always a risk that some (or all) SRECs could become worthless at any time if regulations change.

Solar projects are sold based on state rebates, tax credits and SRECs to make financial sense. Electricity costs would have to be much higher to make solar photovoltaic panels a rational choice without incentives. Many solar projects built within the PMJ service area were sold based on selling the SRECs for the power they produce to make the cost versus return of the projects work as well as the state and federal tax incentives/rebates. The costs of the SREC are ultimately paid by electricity consumers rather than taxpayers. There are estimated to be about 105 megawatts of solar capacity now in place in Pennsylvania, while the 2004 law requiring utilities to buy a steadily increasing portion of renewable power envisions a demand of only 44 megawatts for the current year. The result: SREC prices have crashed within Pennsylvania. The solar industry says the market may remain oversupplied for several years unless the legislature steps in. The solar industry lobbied Harrisburg to accelerate the annual increases for solar-power mandates for the next three years.

Legislation amending the 2004 law has been introduced annually for the past few years. Two bills were introduced this year one in the state senate this past spring and one in the house this month. The senate bill would have increased the solar requirement and banned out-of-state projects from selling their credits to Pennsylvania utilities. This would effectively raise the price and value of in-state SRECs and make the out of state SRECs worthless in Pennsylvania. The legislation was introduced in the State Senate on June 14, 2011 and referred to the Environmental Resource and Energy Committee on that day. It has not emerged from committee and in the current legislative session appears to have no traction. The house bill, HB 1580, introduced in October of this year modifies the solar carve-out requirements for energy years 2013, 2014, and 2015 increasing them from approximately 71 MW, 118 MW and 205 MW to 207 MW, 238 MW, and 290 MW, respectively. This bill also proposes to close the Pennsylvania market so that only in-state systems registered after January 1, 2012 would be able to sell SRECs in the PA market. It appears under this amendment that out of state systems registered before January 1 2012 would be grandfathered. This bill is currently with the Consumer Affairs Committee of the house and has wide sponsorship and support.

The future of SRECs as always is dependent on political and economic environment. For three years Pennsylvania’s lawmakers have debated legislation to increase the state’s Alternative Energy Portfolio Standard (AEPS). Each effort ultimately sank under the weight of amendments- too many, too complicated, too confusing, and too messy. In the 2010 legislative session Pennsylvania lawmakers introduced HB 1128 to increase the solar requirements under PA’s Alternative Energy Portfolio Standards (AEPS). In addition to increasing the solar requirements, HB 1128 was written to amend the program by introducing a fixed alternative compliance payment (ACP) for the Solar PV portion of the AEPS as was done in the Massachusetts program. That bill failed on a roll call vote. It remains to be seen if the current simpler amendment can move forward and what regulatory interpretation of the amendment is if it passes both houses.

The regulatory interpretation of the 2004 legislation ACP was surprising to the solar industry. The regulators assumed that since Pennsylvania accepted SRECs from throughout the PJM region, it was a fair indication of the average price in the region. Therefore, Pennsylvania uses an ACP of 200% of the average price paid for SRECs in Pennsylvania. This was a different interpretation than the SREC market participants expected; that the utilities would be fined based on neighboring state closed market SREC values as well as the reciprocal Ohio market. So as long as there are some market participants willing to accept a low price and the market remains well supplied by allowing out of state participants, there is no price support for SRECs.

However, ACP mandates for 2011-2012 are increasing in other states some of which still have reciprocity with Pennsylvania. So if there are no legislative changes to offer relief the Utilities, and the state rebate monies are all spent there might be an improvement in the Pennsylvania market in the 2013 compliance year without the current bill passing. SRECs are valid for RPS compliance for the year generated and the following 2 years. Remember, though, that DOE recently approved a $1.4 billion loan guarantee to Bank of America Merrill Lynch to support Project Amp; the installation of 752 MW of photovoltaic solar panels on 750 existing rooftop owned by Prologis. This represents more than 80% of the total amount of PV installed in the U.S. last year when the renewable energy solar photovoltaic rebates were widely available. Depending on where these solar photovoltaic panels are installed they could significantly impact pricing and economics in the solar market and the cost of electricity across the nation and could change the SREC economics in all states.


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