Thursday, October 25, 2012

SRECs in 2012 –What Will I Get For Mine

Solar Renewable Energy Certificates, SRECs, are not real, they are environmental “commodities” created by regulation that was born in New Jersey in 2004-2005 as a way to encourage and support the growth of solar energy within the states that utilize them. SRECs are not physical entities, but merely a credit for having made power.  In order for SRECs to have any value, the state must have a mandated Renewable Portfolio Standard, RPS, which is a state legislative requirement for utilities within the state to generate or sell a certain percentage of their electricity from renewable energy sources. The percentage requirements under RPS programs vary widely from state to state, but for SRECs to have any real value there must be a solar carve out and be tradable, because renewable energy credits from landfill  gas and other  less expensive sources sells for between $10 and $20. In addition, the SRECs must be tradable and there must be a punitive financial penalty for not meeting a solar RPS. The punitive payment is the Solar Alternative Compliance Payment (SACP) is what utilities must pay per megawatt hours, MWh, of solar electricity that they fall short of the RPS solar requirement through generation or buying SREC s. In addition, some markets have price supports embedded into the solar carve out to maintain a minimum price in an oversupplied market.

The RPS is mandated by state legislation (or city in the case of DC) varies from state to state, ranging from modest to ambitious. Some states have mandated requirements and others “goals” and the qualifying energy sources vary across states. Some states also utilize other incentives to encourage the development of particular resources (biomass, wind, solar, landfill gas, etc.).In some states with solar grant or rebate programs the utility company owns the SRECs so that the homeowner cannot sell them. This has worked in states like California where electricity rates are high and tiered and the solar installation market has become is more competitive and utility payments effectively fund solar rebates. As of September 2012, thirty-eight states plus the District of Columbia and Puerto Rico have enacted an RPS or a renewable portfolio goal (RPG). Of these states, only New Jersey, Maryland, Washington DC, Delaware, Ohio, Pennsylvania, and Massachusetts have assigned a multiplier to Solar RECs and created a separate SREC market where the homeowner or facility owner maintains ownership of the SRECs.

The legislation creating SRECs and RPS in various markets creates a situation where most markets loose SREC value. Without minimum price support, markets like New Jersey where SREC prices were once over $600 become oversupplied and collapse. There is always price pressure as the market over builds and the next project is willing to accept a lower SREC price. Then either the market collapses or the state closes its SREC market to outside systems and accelerates the solar carve out. In the District of Columbia, after the market price collapsed, the market was closed, and the RPS requirement was accelerated.  For the  51 megawatts of required average capacity for next year, there are over 24.6 megawatts of solar photovoltaic systems currently registered and certified in DC that are eligible for the DC SREC market, but DC allows a three year life on SRECS so any saved SRECs from the oversupplied period can be sold. Only 5.3 MW of the 24.6 megawatts are actually located within the District the others were registered and grandfathered before the market was closed. The SREC prices in DC are currently the highest in the nation and will encourage the installation of solar projects within the district, but peculiarities of the market may slow the installation of solar projects in the short run. The SACP is currently at $300 and set to begin stepping down in less than five years ultimately reaching $150.  In 2017 when the SACP is cut the market price of SRECs should fall to reflect that even if there is no sudden surge in solar installations in DC.

In Pennsylvania the RPS requirement for next year is 65.6 megawatts and there are 223.3 megawatts of solar photovoltaic systems currently registered and certified in that state with only 159.1 are actually located in Pennsylvania, but there is little hope of the SREC market recovering without legislative action to close the market and  accelerate the solar RPS and create price supports. There are no effective SACP (the state uses the average price actually paid for SRECs) and the market price has collapsed and SRECs are selling for under $20 from a high of around $300 in 2009.

Even with price supports, a vastly oversupplied market cannot maintain minimum prices for SRECS for long. New Jersey and Maryland have closed markets with price supports and still there has been downward pressure on prices as the markets have become oversupplied. In July 2012, the New Jersey passed new legislation to greatly increase the RPS solar requirements beginning in 2014 to counter the substantial amount of excess solar capacity installed in the state. Maryland is currently oversupplied, but the market remains viable thought prices for SRECs have fallen significantly. The two most important factors that also keep the Maryland market alive are that it is closed only in-state solar generators may participate and the RPS steps up aggressively each year through 2020.

Of the SREC markets only Washington DC and Delaware are not currently oversupplied, but both had to accelerate their solar RPS to overcome oversupply in the past. DC may remain stable for a few years because as a city it has no large capacity projects and is closed. To meet the existing solar RPS the city would have to increase its current installed solar capacity by putting solar panels on government buildings, University dorms and museums- a much slower build out. Ohio has a two tiered market in-state and out of state and meets it’s solar RPS with a combination of in-state and out of state SRECs at different price points. Under the RPS rules, at least 50% of the solar requirements must come from in-state sited systems, but oversupply in both halves of the market has pushed prices down.

When SREC prices are high within a market, because a market is under supplied, there is an incentive to build. The market can be thoroughly changed in short order by the construction of a few large capacity projects. Within the SREC market the largest solar installations are the PSE&G utility pole mount project in New Jersey at 25.1 MW, the second largest is in Maryland at 16.1 MW and the third largest system at 12.5 MW, is also located in New Jersey. Commercial projects at more than a thousand times the typical residential system can rapidly overwhelm a market with excess supply and make residential SRECs worthless. There are other incentives beyond the SREC prices which can encourage the overbuilding in commercial projects and crush the SREC market that was heavily considered in the return of residential projects.

The US Department of Energy (DOE) Renewable Energy Loan Guarantee program which ended on September 30th 2011 included on the last date the closing of a DOE government loan guarantees for Project Amp. DOE made a $1.4 billion loan guarantee to Bank of America Merrill Lynch to support Project Amp; the installation of 752 megawatts of photovoltaic solar panels on 750 existing rooftop owned by Prologis. This represents 57% percent of the total amount of PV installed in the U.S. in all the SREC markets combined. Depending on where these solar photovoltaic panels are installed they could significantly impact pricing and economics in the solar market, SREC market and the cost of electricity across the nation. 

Since installing my solar PV system I have come to understand the solar SREC market. DC may remain stable for a few years because as a city it has no large capacity projects. The city would have to oversupply on putting solar panels on government buildings, University dorms and museums a much slower build out. I hope that is the scenario that plays out because that is where I am selling my SRECs. In my cost and return projections for my project I included $10,000 over five years from SRECs and I am almost half way there in less than two and a half years. This happens to be an instance of luck rather than true understanding of the market at the time.  

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