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.  

A Full Year of Solar Power- My Return on Investment This Year

How did I do with a full year with my solar photovoltaic panels? To purchase and install a 7.36 KW solar array consisting of 32 Sharp 230 watt solar panels, 32 Enphase micro-inverters and mounts was $57,040. For the engineering and permits I paid $1,500 for a grand total of $58,540 out of pocket. Now it gets complicated. The 7.36 KW are equivalent to 6.2 KW PTC. I reserved 6 KW PTC Renewable Energy Rebate from Virginia and on completion of installation, inspection by the county, and sign-off by my power company, NOVC, I filled out all my paperwork, provided copies of permits, signed off inspections, invoices, technical information, contractor information and pictures of the installation, and meter (before the 180 day deadline despite snow, rain and contractor problems), and promptly (within 4 weeks) received my renewable energy rebate of $12,000 from Virginia. This payment was not taxable income, but rather reduced the “cost basis” of the PV Solar system for federal tax purposes. Thus, from the original installation cost of $58,540 I subtract the Virginia Renewable Energy Rebate of $12,000 to obtain my net cost of $46,540 to apply the 30% and obtained a federal tax credit of $13,962. My total out of pocket cost for my solar system after the first year is $32,578. My energy production as tracked by Enphase was actually higher than the PV Watts the DOE model energy production at 9.7 megawatt hours for the year (there was a several weeks during the spring where my internet connection was spotty and the data from the solar panels was not consistently received by Enphase so my generation was probably a little higher). My savings on electricity is $1,200 per year, NOVEC, a cooperative, has very good residential rates. That is about a 4% return on my investment each year (unless NOVEC raises their rates). Without additional incentives my PV solar array would return about 4% a year.

The cost and return on a solar power system is largely based on regulated incentives and there are more. The final incentive is the Solar Renewable Energy Credit or SREC. Each SREC is a credit for each megawatt hours of electricity that is produced. SRECs have value only because some states have solar set asides from their Renewable Portfolio Standards, RPS, which require that a portion of energy produced by a utility be produced by renewable power. Utilities in those states buy SRECs from solar installation producers. It is a way for states to ensure that the upfront cost of solar power is recovered from utility companies (and ultimately from the rate paying consumers). Some states, like New Jersey and Maryland, require their utilities to buy SRECs only from residents of their states creating a closed market where the price can be very high until supply responds to that price. Other states, like Virginia, have no current solar RPS requirement and their RPS is voluntary. Still other states, like Pennsylvania allow their utilities to buy their RPS from any resident within the PJM regional transmission organization. The Pennsylvania SREC price has collapsed due to oversupply and a method of calculating the penalty fee, the Solar Alternative Compliance Payment, SACP, that is favorable to the utilities and ultimately the consumer.

There are estimated to be about 105 megawatts of solar capacity now in place in Pennsylvania, while the 2004 law requiring utilities to buy only 44 megawatts of solar renewable energy credits 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. I am fortunate that my SCREs are registered and were grandfathered in the (now closed) Washington, D.C. market when they accelerated their solar RPS. So, for the moment, I can still sell my SRECs at an attractive price. I expect that the Washington D.C. market price for SRECs will increase in the short run, then fall as the market supply over responds to the regulatory demand and the falling SACP. For the moment and probably for the next two to three years I expect favorable SREC prices in the near term with the Washington D.C. SACP set at $500 until 2016, and with regulatory demand slightly more than or near balance with supply for the moment. The DOE loan to Project Amp remains a market supply risk. Remember, the DOE recently approved a $1.4 billion loan guarantee 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 and in what time frame they could significantly impact the solar market and change the SREC markets in several states.

Overall, the return on investment for my solar panels will be 4% based on the power they generate and the current cost of electricity from NOVC, who have not raised their rates in more than 5 years and returned some profits to their customers recently as rebates. As long as they are available I will continue to obtain additional profits from SRECs, but those returns are not guaranteed for the long term. This year I sold 8 SRECS for a net of $1,458 after fees but before taxes. So that my return on my solar panels was 8% for the year and slightly more than half the return is taxable income. Still this was the best investment we had this year.