New Solar Panels for the White House

Last Friday, the Obama Administration finally installed the long promised solar panels on the roof of the residential section of the White House timed to correspond with the President’s Climate Action push. At the time of the installation the President was in California laying out a list of clean energy objectives he can accomplish without congress. The White House has not specified how many panels they installed or how much they cost, but reportedly, the solar installations on the White House is the size of the “typical” residential installation and will pay for itself in energy savings and Solar Renewable Energy Certificates, SRECs, in eight years. I do not know if the White House installation qualified for a federal tax credit.

At today’s costs solar panels can have a payback of eight years only with the “help” of tax rebates and Solar Renewable Energy Certificates, SRECs, which are available to residents of Washington DC and a few other states. Currently, SRECs in Washington DC are the most valuable in the nation, but it is an artificial market that will fall as more solar systems are installed and the price supports are decreased in the next few years. If you live in the District you can see what the cost and return of a solar system on your building’s roof top would be using the Mapdwell Project mapper. This assumes the SREC market remains viable. The solar system size used is based on the size of the roof and is effectively the maximum size solar array you could install. You of course could install a smaller array. To those of you not old enough to remember, this is the second time that solar panels have been installed on the White House. President Jimmy Carter spent $30,000 on a solar water-heating system for West Wing offices in the late 1970's that were subsequently removed by President Ronald Reagan.

As I watched the U-tube video of the White House installation I was a little envious of how smoothly it all seemed to go. This was not the case with my installation. On the back of my house is a roof mounted 7.36 KW solar array consisting of 32 Sharp 230 watt solar photovoltaic panels and 32 Enphase micro-inverters, somewhat larger than the “typical” home installation, but not much larger than what I imagine the White House installed. When I purchased my solar panels I choose the Enphase micro inverter system so the power cables running down the side of my house, albeit inside a pipe, are 120 current instead of 240 and the energy production of each individual panel can be checked on the internet. The solar array consists of panels the racks that hold them, micro inverters and wiring and plugs. My installation did not go smoothly, and surprisingly to me, maintenance has turned out to be an issue.

I check my solar panels production numbers every month when I get my power bill. I am on net metering with my power cooperative to sell my SRECs into the Washington DC SREC market where my system was grandfathered when it was closed to out of city systems. My installation web page allows me to see the current energy produced by each of my 32 panels every minute, every hour, daily, weekly, monthly and the cumulative total power output. I only spot check the solar panel midday on the day when my power bill arrives or after storms to make sure all the panels are performing optimally. The reason I chose Enphase was to be able to easily identify a problem with the system. Little did I know that barely three years after the installation I would be facing repair issues.

my solar array with the failed panels

About 14 months ago, less than three years into their expected 25-year life span, one of my solar panels appeared to fail. My first attempt to have my system repaired was emails, letters and phone calls to the company that installed my system. The company I hired to install the system was no longer in the solar business- without renewable energy rebates and a viable solar renewable energy certificate market; there was not enough business to sustain a solar installation operation in Virginia. They were focusing instead on energy audits, but they finally referred me to a Maryland and Washington DC based installer, Lighthouse Solar.

It took a while for them to come out. They looked into my system and spoke to Enphase and determined that the problem was probably the micro inverter so they ordered a new inverter from Enphase. By the time they had scheduled my repair a second inverter had failed. I was delighted when they were able to replace both inverters on the same day. According to Lighthouse Solar, they have replaced many Enphase inverters. The good news is that the inverters had a 10 year warrantee and it cost me nothing. The bad news is that the new inverters did not fix the problem, though for a brief period of time it appeared to fix one of the two panels. After some back and forth between Enphase, Lighthouse Solar and me, I appeared to have a solar panel failure. Sharp was not as cooperative as Enphase with replacing the panels which were guaranteed for 25 years.

Ultimately, I think that the original installer paid for a new panel and when this spring arrived, Lighthouse Solar made a second attempt at repairing the system and replaced a solar panel. Once more Lighthouse Solar came through for me and got the repair done at no cost to me. Unfortunately, after replacing the solar panel I now have one failed panel and one panel working at partial capacity. After speaking once more to Enphase Energy, Lighthouse Solar now says that they will try new inverters. There are a limited number of components that could have failed, but unfortunately since Lighthouse Solar has to fight to obtain each component for me under warrantee, they have been unable to simply replace everything at once and get the problem solved. The actual cost of buying and replacing all the potentially failed portions of the system would cost more than a year’s worth of power production of the entire system.

All solar PV panels degrade and slowly over time produce less power, however based on news report there appears to be a cluster of failures after a couple three years. Solar photovoltaic panels have no moving parts so that the operating life of the solar panels is largely determined by the stability of the coating film, the quality of finish and fit of the panels and the proper sealing of the edging and connectors. Quality control in manufacturing is essential to have a solar panel that wills last 25 years in sun, rain, sleet and snow. The quality and life span of these rapidly produced solar panels is about to be tested in the next few years.

Without micro inverters a failure of one panel in an array like mine is a 3% reduction in power production and might not be noticed, it could be attributed to decreasing efficiency of the panels or weather variations. In Ed Begley, Jr.’s “Guide to Sustainable Living,” he said that over the years he had four solar panels fail, his storage batteries were replaced after 15 years and the wiring for the panels were damaged and needed to be replaced at 18 years. So, these systems are not trouble free even in sunny warm California, you cannot just install them and forget it. The President is only going to be living with the White House solar array for less than three years so he will not have to worry about maintenance, but as a nation we need to maintain our clean energy infrastructure. In my calculations of cost and return I was conservative on SREC value, but I did not consider maintenance costs or loss of power production due to equipment failure. I am on net metering and still connected to the grid so I continue to get all the power I need from the grid. I have spent a lot of time and effort on trying to get my solar panel array repaired without yet succeeding. Nothing magically maintains itself, consider maintenance and repairs whenever buying equipment.

map dwell example of cost and return

Solar Panels, SREC’s and Public Utilities

from WSSC

Last week in the Washington Post was an article by Katherine Shaver about the Washington Suburban Sanitary Commission’s (WSSC) solar farm. The WSSC plant in Montgomery County, Maryland has 8,500 solar photovoltaic panels covering 13 acres of land that began operations last fall and is expected to save the WSSC 25% of their electrical costs. They WSSC expects to save $3.5 million over 20 years without a single dollar outlay, while neighboring Fairfax Water found that even with today’s low solar photovoltaic panel prices that the solar project they considered would require 36 years of operation just to break even. How is that possible that two adjacent utilities have found such vastly different economics of solar photovoltaic installations? The answer is financial incentives provided by the state and paid for by the electric utilities and their rate payers.

Solar incentives exist in Maryland, but not Virginia. Some of the rebates are state wide, others are county incentives, there are rebates based on sales of SRECs which in turn are based on the power produced by the solar panels. A SREC is a credit for each megawatt hours of electricity that is produced, but used elsewhere. 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. Maryland has such a set aside. Maryland has a healthy and robust SREC market because they have both a significant solar carve out for solar that will be 0.35% of the RPS in 2014, a market that is open only to solar installations located in Maryland and a current $400 Solar Alternative Compliance Payment, SACP. The SACP is the amount that electric utilities, must pay per MWh of solar electricity that they are required to have, but are unable to generate themselves or buy rights to through SREC purchases to meet the state RPS solar requirement. In other words, the SACP is the maximum value of an in-state SREC. The minimum value is based on the supply. Right now Maryland has 153 MW of installed and registered in-state capacity with a 2013 requirement of 136.5 MW solar requirement under the RPS, but that requirement will jump to 194 MW in 2014 so the market will once more be under supplied and SREC value should approach the SACP price.

WSSC is engaged in a solar leasing contract with Washington Gas Energy Systems who actually paid the $12 million to install the solar panels on the WSSC land and will maintain and service the installation. The solar leasing companies are profit making enterprises that excel at managing, government guarantee loans, rebates, incentives, tax credits and SRECs, to maximize their profit while providing discounted electricity from renewable sources to landowners with favorably oriented roofs or large areas of open land in locations with adequate rebates. However, many of the solar panel leasing companies have enough scale to negotiate multiple year deals with utilities to buy their SRECs reducing their financial risk and ensuring a better deal than a small generator and eliminating market risk. They can in essence they can lock in a guaranteed annual profit for setting up the deal.

There are no RPS solar requirements in Virginia, thus no value to SRECs beyond the $10-$15 that a RPS credit is worth. Thus, Fairfax Water would have to pay about $12 million dollars today to save $14 million over 20 years in addition to incur the expenses to maintain the solar photovoltaic panels and borrow the money to buy the solar panels. This is not an expenditure that would be a good deal for their rate payers. If they paid just 3% interest on the money borrowed to install the solar panels then it would cost $21 million to save $14 million in electricity over 20 years. Lack of financial incentives for solar leasing companies is why Fairfax Water cannot “afford” to install a cool solar photovoltaic panel farm to power their water treatment and waste water treatment plants. However, Virginia electric rate payers have lower electricity costs than Maryland.

Washington’s DC Water has a different problem. The District of Columbia passed a law in 2011 which prevents out-of-state systems registered after January 31st 2011 from participating in the DC SREC Market. DC is currently the only under-supplied SREC market in the nation, because of the lack of large commercial solar farms and large industrial installations. Washington DC is a city with limited non-governmental buildings and no available private land. Approximately 288 MW of solar capacity is required under the Washington DC law by 2023. The 2013 RPS requirement is approximately 49 MW of solar power. Currently, there is only 28 MW registered, and Washington DC SREC prices are the highest of any SREC market at $480/SREC. Yet, despite the very rich SREC incentive in the District, construction of solar photovoltaic arrays has been slow. The leasing companies have been stymied by the lack of locations to install solar farms and building capacity one single family home and church at a time is simply slow going and requires a lot of overhead and sales staff. DC Water’s Blue Plaines Advanced Sewage Treatment Plant own much less buffer land than either Fairfax or WSSC, but is considering installing solar panels on the waste water treatment structures to allow them to reap the benefits of the SREC based solar savings.

I am watching these developments closely because due to a bit of luck, and the soul of an accountant, I registered my Virginia based solar photovoltaic array in the Washington DC market in July 2010 and I can sell my SRECs in the Washington DC market. The dollar value of the solar power I generate from my solar panels is worth less than half the money I have sold my SRECs for over the past three plus years. However, there is no guarantee that my SRECs will be worth anything next year and as more solar power is registered in DC the value of my SRECs will decrease. A nice big installation at DC Water or the Aqueduct properties could potentially eliminate the value of my SRECs.

Leasing Solar Panels – No Free Lunch

It is not possible to lease solar photovoltaic panels in all locations. The solar leasing companies are profit making enterprises that excel at managing, government guarantee loans, rebates, incentives, tax credits and solar renewable energy certificates, SRECs, to maximize their profit while providing discounted electricity from renewable sources to homeowners with favorably oriented roofs in locations with adequate rebates. Due to a bit of luck, the dollar value of the solar power I generate from my solar panels is worth less than half the money I have sold my SRECs for over the past three plus years. However, there is no guarantee that my SRECs will be worth anything next year. However, many of the solar panel leasing companies have enough scale to negotiate multiple year deals with utilities to buy their SRECs reducing their financial risk and ensuring a better deal for them than I can get on my own.

Incentives and solar rebates have been reduced in many locations, but still exist. Some of the rebates are state wide, others are county incentives, there are rebates based on household income and many that are based on sales of SRECs which in turn are based on the power produced by the solar panels. A SREC is a credit for each megawatt hours of electricity that is produced, but used elsewhere. 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.

 You must live in a county or state where there are rebates and other incentive still available to make creative options like leasing solar panels possible. Even with the current lower cost of solar panels, without any rebates or incentives, the return on investment before depreciation for solar panels is about 6%. The return on investment after depreciation is about 2.5%. This return would not be acceptable to any investor and could not repay a loan taken out to build a solar photovoltaic array on a roof.

In this part of Virginia I buy my electricity from an electric cooperative that sells me power for $0.114 a kilowatt hour (this is slightly lower than it was five years ago), has no currently available incentives and there is no viable way to sell SRECs. Thus, there are no opportunities to lease solar panels at this time. Leasing arrangements depend on the solar leasing company obtaining enough incentives, rebates and other government incentives to produce a high double digit return for the leasing company that needs to borrow the money (with federal loan guarantees), pay their staffs of sales people, financial types that manage the lease contracts, others who navigate and manage the incentive market and profit for the subcontractors who install the solar panels.

In the typical leasing arrangement, the homeowner agrees to pay the leasing company a predetermined price for the electricity the system produces; the rate is pegged to be at least 10% lower than prevailing electricity prices in that area. Customers buy any additional power needed from the local utility at the going rate, but are locked into long-term electrical contacts from the leasing company which is in essence an unregulated, government subsidized profit making utility.

Lease arrangements are a rapidly growing part of the solar market, but the financial benefits to the homeowner are often limited. In states like California where the electricity prices increase steeply with increased usage, leased solar panels could keep the rest of the usage in a lower tier and increase the return. Leasing arrangements enable homeowners and businesses to get a reduction in electricity and the psychological benefit of having solar power without paying the full cost of the still expensive systems. The problems with leasing are two fold. The first the return to the leasing company is much higher than to the individual homeowner and practically all the return to the leasing company is based on incentives that are ultimately paid for by the taxpayer and electric rate payer. The contract with the leasing companies is written (by the leasing company’s lawyers) in the leasing company’s favor. Typically, all the obligations are on the homeowner with limited remedies.

The risks: electric rates may fall due to lower cost natural gas or remain flat and the contracts tie the homeowner into a set schedule of payments that typically escalate over the life of the lease (usually 15 years which is the life not of the solar panels, but of the SRECs). Solar photovoltaic panel costs may continue to fall and the value of subsidies may increase down the road (which happened with the Washington DC SREC market increasing my return). Typically at the end of 15 years the homeowner has the option to have the panels removed, buy the panels (which usually only have a 25 year life) or renew the contract. It is very possible that a long-term lease is more expensive than buying solar panels outright in future years, or it may be a bargain because the incentives for solar panels will not be available in the future and the price will not be low enough.

If you choose to jump on a solar leasing deal, get at least three bids, check the installer’s references compare the quality of the solar panels installed and read all the contracts carefully. You need to understand your rights and obligations under the lease who is responsible for insurance, roof leaks, repairs, snow damage or lightning strikes as well as the economic risks of the agreement to make a sound choice. Just because the company is providing solar panels does not make them altruistic or your friend.

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.

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.

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.

Solar Power, My Tax Returns and My Electric Bill

I electronically filed my tax returns and now that the threat of a government shutdown is past I am looking forward to receiving my refund from my renewable energy tax credit shortly. With my tax returns I filed form 5659 Residential Energy Credits Part II to obtain my tax credit. In summary, too 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. (Last winter while interviewing a solar photovoltaic purchaser I discovered that the solar market is cheaper in San Francisco than Virginia which I suppose was no surprise.) Calculating the final cost of my solar panels is complicated, but I will walk you through it.

The 7.36 KW gross 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 and promptly (within 4 weeks) received my renewable energy rebate of $12,000 from Virginia. This payment is not taxable income, but according to the Commonwealth of Virginia, the Federal Tax instructions for form 5659, my accountant, Scott Price, and research performed by Andy Black, the payment reduces the cost basis of the solar system that the federal tax credit is calculated on. A tax credit is more valuable than an equivalent tax deduction because a tax credit reduces taxes dollar-for-dollar, while a deduction only removes a percentage of the tax that is owed. My 30% tax credit is calculated on $46,540 and was $13,962. Thus, from the original installation cost of $58,540 I subtract 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 (I have an air heat exchanger) is $1,400 per year. That is slightly over a 4% return on my investment each year.

However, that’s not the final cost. The cost and return on a solar power system is based entirely 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 of electricity that is produced. SRECs have value only because some states have Renewable Portfolio Standards, RPS, which require that a portion of energy produced by a utility be produced by renewable power. Utilities in some states can fulfill that requirement by buying 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 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 is very high. Some states, like Virginia, have no current RPS requirement. Other states, like Pennsylvania allow their utilities to buy their RPS from any resident within the PJM regional transmission organization (at least for now). Still other states like California do not allow the purchase of SRECs to meet RPS requirements. I am currently selling my SRECs in Pennsylvania. SRECs in Pennsylvania have ranged from $180-$300 per megawatt hour recently. So, I could earn an additional $1,800-$3,000 a year for 15 years or as long as the demand for RPS lasts which ever is less. This past year I earned $1,045.94 in SREC income for the partial year that my panels were installed. This income needs to be reported on your tax returns. You report the total dollars received in SREC payments during the calendar year on Line 21 of the 1040 form-other income.

After the tax exercise and calculating my total return I was not feeling particularly excited about my solar panels and this was compounded by having nothing but trouble with the Enphase micro converter system that is sending a constant stream of error messages. Nonetheless, several service calls to the solar company identified the problem as a network and monitoring problem. The solar panels continue to work and produce power into the grid. The customer service for the installation company is virtually non-existent for the Enphase micro converter and the customer service at Enphase was virtually useless to me though I did buy another router to boost the signal of my internet.

Two days after filing my tax returns, I received my electric bill for $55.17 (compared to the $213.53 for the same month last year). That was a quick way to regain the joy with my solar system. Though, I have more solar panels than Ed Begley, Jr., my panels in Virginia do not have quite as many sunny (and not covered with snow) days as Ed’s panels in Southern California and in truth my multiple refrigerators and freezers and my air heat exchanger consume a lot of power. Only when my heat pump is operating within its most efficient range and cycle combined with the insulation and passive solar steps I have taken are my electric bills this low, but it still felt really good.

The effectiveness of a heat pump is based on the temperature difference between the source and the sink and which cycle it is in. Heat pumps are more effective for heating than for cooling if the temperature difference is held equal. This is because the energy used to power the compressor is largely converted to useful heat when in heating mode and released into the house as extra heat. During the cooling cycle, the condenser is normally outdoors, and the compressor's dissipated work is rejected rather than put to a useful purpose. When the temperature is below 48 degrees Fahrenheit or above 90 degrees the air source heat exchanger becomes much less efficient and my electric power use soars.

The most effective type of heat pump is the geothermal heat pump. Like all heat pumps it doesn't create heat by burning fuel. Instead, in winter it collects the Earth's natural heat through a series of pipes, called a loop, installed below the surface of the ground or submersed in a pond or lake. As you may have experienced in a cave, the temperature six feet beneath ground surface is cooler in summer and warmer in winter than the ambient temperature. Using this temperature as its source the geothermal heat pump can operate within its most efficient range at all times. In winter, fluid circulates through the loop and carries the heat to the house. There, an electrically driven compressor and a heat exchanger concentrate the Earth's energy and release it inside the home at a higher temperature. I have not been able to find any calculators of cost savings I might experience by converting to a geothermal heat exchanger, only the grand claims of the manufactures. The American Recovery and Reinvestment Act of 2009 extended the tax incentives under the Energy Policy Act of 2005 (EPACT) and eliminated the limit on the credit and extended the tax credit until 2016. Like solar panels, geothermal heat exchangers are eligible for an unlimited 30% tax credit and I have four years to save up to buy a geothermal heat exchanger to replace my air heat exchanger that should be near the end of its useful life by that time.

Fleeting Solar Incentives and Regional Markets

The government has determined that solar, wind and geothermal sources of renewable energy are to be encouraged. Tax incentives, cash incentives and rebates targeted at end users were created to encourage the adoption of renewable energy projects including solar panels. These incentives change from location to location and from year to year making the decision to invest in solar photovoltaic system very complex and potentially risky. The renewable energy credit that I obtained in Virgina to help offset the cost of my solar photovoltaic installation has been exhausted and there are no current expectations to continue to fund the program in Virginia. However, I have discovered as I look at programs in other locations that the state rebate in Virginia at $2,000 per kilowatt PTC was quite generous.

Over the past few months I have watched the price for SRECs (solar renewable energy credits) fall each month in Pennsylvania where I have been selling my SREC. If you recall, SRECs are not physical entities, but merely a credit for having made power (I used all the power produced by the panels in my own home). 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 SRECs could become worthless at any time if regulations change. Of course they could become worth more. Meanwhile, I will continue selling SRECs on the spot market. I continue to observe the market and it appears to be due to changes in regulation.

Utilities in the state buy SRECs from solar installation producers to meet their mandated Renewable Portfolio Standard, RPS. 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 is kept high. Other states, like Virginia, have no current RPS requirement. Still other states, like Pennsylvania allow their utilities to buy their RPS from any resident within the PJM regional transmission organization. The power in the grid is purchased and sold on a regional basis, so I suppose there is some logic to a regional SREC market, but it may not be in the best interests of state residents. There is a virtual market place where nothing is sold by virtual companies. Only accounting entries change hands in this market.

The SREC programs in the eastern states of Pennsylvania, Maryland, Delaware and New Jersey, have been one of the catalysts for solar development because they increase the return on investment in a solar photovoltaic systems in their markets. When Maryland, Delaware and New Jersey recently updated their SREC laws to increase the requirements and raise the fines, the price in their closed markets went up. However, that change coincides with the falling SREC price that I have received. In addition, Pennsylvania has been examining closing its SREC sales to out of state installations.

When the original PA SREC program was created in 2004, the law included SRECs from out-of-state facilities. A recent PA bill to increase RPS failed, but it would have excluded all out-of-state facilities that have already been built and certified by the Pennsylvania AEPS Program to sell SRECs in the state’s market. These are existing solar facilities like mine that have been selling SRECs for the Pennsylvania market, and could be shut out of the SREC market in the future. This may actually be a good thing for the PA SREC market, but has the potential to significantly reduce the return from my solar photovoltaic installation. This; however, was always the risk with financial incentives based on regulations and laws in other states. This was a risk I accepted and must now live with.

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 8 megawatts of installations at the current time, but there are over 27 megawatts of solar photovoltaic systems currently registered and certified in DC that are eligible for the DC SREC market. Only 1.1 MW of the 27 MW are actually located within the District. This situation creates the dynamics to limit access to the market in the future.

California has a series of solar financial incentives that are location specific and very different from the eastern markets. I will be looking the various incentives and costs associated with a residential solar project in San Francisco in the coming days. California does not have a SREC or as they call it a Tradable Renewable Energy Credits (TRECs) market to meet California’s RPS. Though there are stiff RPS in California utilities have not been allowed to buy TRECs to comply with RPS. In addition, the CA PUC has maintained cap on TREC volume and price preventing the development of a TREC market in the state..

The Cost of My Solar Panels

One of my choices when I purchased my solar panels was to choose the Enphase micro inverter system. Though this system was more expensive than a single power inverter, it does two things for which I was willing to pay. The first is that the power cables running down the side of my house, albeit inside a pipe, are 120 current instead of 240. The second advantage to the micro inverters is that the energy production of each individual panel can be checked on the internet. If there should be a problem with the system, I can easily identify which panel needs to be attended to. However, my installation web page allows me to see the current energy produced by each of my 32 panels every minute, every hour, daily, weekly, monthly and the cumulative total power output. After two months of checking several times a day, I only spot check the solar panel midday to make sure all the panels are performing optimally. Though each panel is rated at 230 watts the rated PTC output per panel is 203 watts. The micro converter efficiency is rated at 95% so theoretically maximum actual production per panel is around 193 watts. I regularly see that watt output or slightly above at midday if a cloud is not floating by. Just by viewing the Enphase web page I can verify the proper functioning of my system.

For the first month of full operation (the panels were actually installed on the first day of my billing cycle) I checked the use of electricity on the solar on demand digital meter, added my recorded solar electricity production and compared it to my overage daily summer use of electricity twice a day. We use air conditioning. I am old enough to remember a time before air conditioning was common, but it is not a time I want to return to, not here in Virginia. A few weeks ago when my electric bill actually came, our power usage was slightly more than half of what it had been for the same period last year. My husband has taken to telling the neighbors who ask how much power we have that we have more solar power than Ed Begley, Jr., which is true. I believe we also use more power than the Begley household does. My husband explains this as a reference like saying a place is a little bigger than the state of New Jersey.

The energy produced by the solar panels has gone a long way in erasing the memory of my misadventures in solar that were topped off by actually finding a roof leak. I finally discovered the leak when the water began dripping in my first floor office during a thunder storm. Fortunately, rain storms make finding a leak easy. The solar installation company was actually a subsidiary of a roof and gutter company and was able to verify the location of the leak (and a few other nail pops) and dispatch a roofing repair crew (with full safety equipment) in the rain. The last few thunder storms have confirmed the integrity of the repair. Last week the wall board damage from the installation and leak were finally repaired and painted. The house looks good as new (or at least good as before the solar panels were installed). I just need the final bill from the contractor for the interior repairs to my home to deduct from the retainage and make the final payment to the solar installation company and we are done. Both the solar installation company and I are looking forward to that moment. Though it has been a bumpy road, they have always been responsive to problems and nice.

So, what did the solar project cost? The answer to that question is not simple.
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 and promptly (within 4 weeks) received my renewable energy rebate of $12,000 from Virginia. This payment may or not be taxable income. When I file my federal tax returns at the end of the year, I will have to provide copies of all the documentation for my federal tax returns as well as evidence that Virginia paid my Renewable Energy Rebate to obtain my 30% tax credit of $17,562. Thus, from the original installation cost of $58,540 I subtract the Virginia Renewable Energy Rebate of $12,000 and the 30% tax credit of $17,562 and my total out of pocket cost for my solar system after the first year is $28,978. A rough estimate using the DOE model of my savings on electricity (I have an air heat exchanger) is $1,400 per year. That is an under 5% return on my investment each year.

However, that’s not the final cost. The cost and return on a solar power system is based entirely 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 of electricity that is produced. In the first two months of operation, my system has produced 1.9 megawatt hours. SRECs have value only because some states have Renewable Portfolio Standards, RPS, which require that a portion of energy produced by a utility be produced by renewable power. Utilities in the state 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 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 is very high. Other states, like Virginia, have no current RPS requirement. Still other states, like Pennsylvania allow their utilities to buy their RPS from any resident within the PJM regional transmission organization.

Within the PJM (where my house is located) I can currently sell my SRECs to utilities in Pennsylvania and Washington, DC. I need to have my solar system certified by both Pennsylvania and Washington so that I can sell my SRECs in their states. Once the system is certified, I can sell my solar power by estimate on the spot market or I can shop for a long-term SREC contract. The discount for a long term contract is huge. The value of SRECs will go up and down depending on the supply and demand as determined by the number of solar installations, states requiring RPS, and states allowing sale within the PJM regional transmission organizations. RPS requirements are currently set to increase over time, but regulations can change. SRECs in Pennsylvania have ranged from $200-$300 per megawatt hour. So after having my system qualified in Pennsylvania, I could earn an additional $2,000-$3,000 a year for 15 years or as long as the demand for RPS lasts which ever is less.

The bottom line is that I paid $58,540 for a photovoltaic system of 7.36 KW and we the American tax payer, and PJM power buyer will pay hopefully $29,562 in the first year for my solar system and maybe pay up to another $30,000 (or so) over the next 15 years.