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.

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.