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.

DOE Loan Guarantees and Potential Consequences

The US Department of Energy (DOE) Renewable Energy Loan Guarantee program ended on Friday, September 30th 2011 with the DOE closing four deals with government loan guarantees totaling around $4.7 billion. This end of program rush was disturbing after learning some details about the programs's first $535 million loan guarantee given to Solyndra, a would be manufacturer of unique solar photo voltaic modules that filed for bankruptcy earlier this month. With recent revelations about the company it appears that loan was ill conceived lacking the primary method of repayment (cash flow) and the secondary method of repayment (sale of the collateral) will not cover the loan. The San Francisco Chronicle described the Solyndra factory. “It wasn't just any factory… it covered 300,000 square feet, the equivalent of five football fields. It had robots that whistled Disney tunes spa-like showers with liquid - crystal displays of the water temperature, and glass-walled conference rooms.” The loan guarantee represents about $1,785 a square foot, though the actual cost of building and equipment was closer to $2,500 a square foot and DOE gave up first position in the loan restricting, so it is very likely that DOE with have to pay on the guarantee and the people of the United States will have a significant loss on this loan guarantee.

This project required venture capital not a government loan guarantee and has raised a myriad of questions about the decision process to award renewable energy loan guarantees. In a widely quoted email sent last year Larry Summers, former economic advisor to the President stated that the U.S. was not well equipped to make venture capital decisions relating to Solyandra. Venture capital investments require oversight and management, not an open checkbook. Citizens Against Government Waste, CAGW, believes the federal government should not operate loan programs. According to the CAGW the government typically funds risky ventures losing significant portions of taxpayer money or funding companies and industries which are mature and profitable and don’t need the money and creating windfall profits for the chosen. The difference between loan guarantee programs and venture capital is apparently not clear to the DOE.

One government loan programs I have had experience with and operates as a loan guarantee program is the SBA Loan programs and though considerably more modest in their goals, had a cumulative combine loss rate of 6.04% in 2008 the last year for which statistics are available. With that kind of loss rate a bank would fail and be shut down by the regulators. Unlike some of the DOE loan guarantees, SBA loans have a 75%-85% guarantee for most of their guarantee programs so that the banks operating the program would also experience a loss on a failed loan. The guarantee loan program has a loss rate of 5.04% still over twice the target small loan loss rate of commercial banks. Surprise, banks do plan to lose money on some loans and price risk groups of loans to cover the anticipated loss. The loans made directly from the SBA have been reduced in recent years because of high loss rates. At this time only micro loans (loans under $35,000) are made directly from the SBA and the cumulative loss rate is 11.12%.

In the final hours of the Energy Department’s loan guarantee program, the agency managed to approve renewable energy loan guarantees for, SunPower, First Solar and Prologis to build solar power projects. These are much less risky than manufacturing plants, as long as the solar modules operate at specified levels, and as long as the sun shines at historical rates, the project will generate electricity, and will have revenues as determined by regulation and state policies. The projects approved on Friday were:

California Valley Solar Ranch Project a $1.237 billion loan guarantee to allow SunPower Corp to borrow the money to build a 250-megawatt photovoltaic electricity generating array in San Luis Obispo County, California using sun tracking technology to increase electricity output. The power will be sold to Pacific Gas and Electric Co. and will generate enough (very expensive electricity to power 64,000 homes and will allow SunPower to increase demand for their panels and maintain or increase production.

Desert Sunlight Solar Farm a $1.46 billion loan guarantee for 80% of a Goldman Sachs Lending Partners and Citigroup loan to First Solar to build one of the world’s largest photovoltaic solar power projects, a 550-megawatt generating project near Desert Center, California. This project will be built by First Solar using their cadmium telluride thin film solar PV modules and sold to NexEra Energy Resources. This combined with the project below will assure sales of 780 megawatts of solar photovoltaic panels for First Solar.

Antelope Valley Solar Ranch a $646 million loan guarantee to the Federal Financing Bank, which is run by the U.S. Treasury. Apparently, they could not find a committed lender and had to get a loan from the federal government. AV Solar Ranch will be a 230-megawatt project in North Los Angeles County, California built and operated by First Solar once more using their cadmium telluride thin film solar PV modules. I guess that the DOE likes these PV modules. The project was recently bought by Exelon Corporation and all the power will be sold to Pacific Gas & Electric Co.

Project Amp 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 more than 80 percent 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 and whose panels they install they could significantly impact pricing and economics in the solar market and the cost of electricity across the nation.

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. 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. In order for SRECs to have any value, the states must have a mandated Renewable Portfolio Standard, RPS, the SRECs must be tradable and there must be a punitive financial penalty for not meeting a solar carve out portion of the RPS. A renewable portfolio standard (RPS) is a state legislative requirement for utilities 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. California regulations (if not ammended during the coming years) require that by 2020 utilities get 33% of power from renewable sources.

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. The three California (only) generating projects will in all likelihood ultimately be paid for by California electricity rate payers as an increase in rates under their mandated RPS or by the US taxpayer if the revenue from selling the solar generated electricity does not cover the loan repayment.

As of September 20, 2010, 36 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. Prologis operates the world’s largest and most diverse portfolio of industrial distribution facilities with properties in many of these locations as well as others. Depending on the location of the projects and regulations, these DOE guaranteed loans could finance the collapse of SREC value and an increase in electric rates. Though there will be a short term increase in construction jobs, long term employment for these projects will be minuscule. However, these projects will for a short period of time increase the demand for US made solar panels which has fallen in the past six month as worldwide demand falters and serve to protect those manufacturing jobs in the short term. (Chinese solar panel maker Suntech Power, opened a manufacturing plant in Goodyear, Arizona in 2010.)

The Value of Solar Renewable Energy Certificates (SRECs)

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. 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. Some SRECs were actually designed in a way that would decrease in value over time and state legislatures have stepped in to prevent that.

SRECs are created by state regulations. In order for SRECs to have any value, the states must have a mandated Renewable Portfolio Standard, RPS, the SRECs must be tradable and there must be a punitive financial penalty for not meeting a solar carve out portion of the RPS. A renewable portfolio standard (RPS) is a state legislative requirement for utilities 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.

In some states with solar grant or rebate programs the utility company owns the SRECs so that the homeowner can not 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 20, 2010, 36 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 is always in flux. In the District of Columbia, the RPS market has requirements of about 7.6 megawatts of installations for next year, but there are over 45.7 megawatts of solar photovoltaic systems currently registered and certified in DC that are eligible for the DC SREC market. Only 1.2 MW of the 45.7 megawatts are actually located within the District. In Pennsylvania the RPS requirement for next year is 44 megawatts and there are 104.8 megawatts of solar photovoltaic systems currently registered and certified in that state with only 36.3 are actually located in Pennsylvania.

Even in a market created by regulation, the relationship between supply and demand creates the price. A market that cannot attract the supply to meet the mandated demand will have above market SREC prices until the supply increases this is effectively what happened in New Jersey’s closed market with aggressive RPS requirements. An open market that attracts too much supply too quickly would face a collapse in SREC pricing. Virtually all states have more SRECs available for sale than mandated RPS at this time. Price collapse has occurred in the states with open markets and small RPS requirements. This situation creates the dynamics for legislatures to limit access to these open markets in the future to protect in-state generators or conversely to slow the development of solar projects in the eligible adjacent states. That is the problem in markets dependent on regulation for their existence a state legislature will determine the ultimate return I get on my investment in solar photovoltaic panels.

New Jersey, Maryland, Delaware and Massachusetts have SREC markets closed to out of state facilities. Ohio, Pennsylvania and Washington DC allow sale of SRECs of facilities in adjacent states. New Jersey and Massachusetts have additional mechanisms to protect the market SREC value and the instate market from significant oversupplies like those seen in Pennsylvania and DC. New Jersey pioneered the SREC program in their 2004 and launched in 2005. In the early years, in addition to closing its borders to out-of-state facilities, New Jersey placed a cap on the size of project eligible for the SREC market to protect the small generator. There is also a protection to the SREC value in the Solar Alternative Compliance Payment that is the punitive fee for failing to meet the solar carve out. Massachusetts has made a 10 year commitment to their program setting a floor price of $300.

Virginia where my solar panels are located does not have a mandated RPS, it is voluntary. In addition, Virginia does not have a solar carve out in their voluntary standard. All REC are priced the same in Virginia at about $15 a megawatt as I would be competing against the landfill gas generators such as the Prince William County landfill. In addition, my electric cooperative sells power at a very low cost (about 11.5 cents per kilowatt over 300). I am eligible to sell my SRECs in Pennsylvania and Washington DC. Currently both of these markets have and oversupply of SRECs and the price has collapsed. Two factors have created this dynamic; there is no cap on the size of eligible projects and the recent SREC prices, state rebates in several states and federal tax credits that had effectively reduced the cost of solar installations increasing both the return on investment and thus the supply of solar installations and SRECs. Large projects and small consumer projects responded to these incentives and anticipated SREC payments to overbuild solar installations. The time lag inherent in SREC generation feeds the market inefficiency.

This delay has created the price collapse in the market. Too much supply of SRECs entered the market over the past 18 months before SREC prices were able to indicate to the market that it needs to slow growth. At this point, one of two things is likely to happen, either growth of solar projects will slow in the markets where the SREC price has collapsed (Washington DC and Pennsylvania) or the states will incorporate a price support feature into their market. That price support could either come in the form of a floor price akin to that seen in the Massachusetts market, or a mechanism that triggers a requirement increase in the event of a price collapse. Often these price supports are accompanied by closing the market to avoid paying out of state generators with local rate payer money. On the other hand if more states create open SREC markets, the price support could come in the form of shifting supply from one state market to the next. If each facility is eligible in several states, the market becomes more diverse and subsequently more secure. However, regulators tend to choose to protect their own and their faith in open markets is not something I would bet on. At this point it appears that my investment in solar panels will return will be less than I hoped.

The total installation cost was $58,540. I obtained the Virginia Renewable Energy Rebate of $12,000 and the 30% tax credit of $13,962 and my total out of pocket cost for my solar system after the first year is $32,578. A rough estimate using the DOE model of my savings on electricity is $1,400 per year. This past year I earned $1,045.94 in SREC income for the partial year that my panels were installed. That is slightly over a 7.5% return on my investment last year. Now my future returns do not look as bright. My husband, an experienced investor, has reacted well to this lowering of anticipated return on investment reminding me that our own power generation savings is worth more than 4% each year at the current cost of electricity.