SRECs: A Good Way to Incentivize Solar or Too Much Boom and Bust?by Chris Meehan on 06/07/2013 in Alternative Energy, Renewable Energy, Solar Energy, Solar Power, Solar Rebates
Solar renewable energy credits (SRECs) are being used in a number of U.S. states, particularly along the East Coast, to incentivize solar. But the question is: Does the U.S. need higher SREC requirements and more markets? Or are SRECs creating boom and bust cycles in markets that don’t promote job stability or even pricing stability?
SRECs are currently being used in nine states and Washington, DC. They were first used in New Jersey and Pennsylvania and have been added in Delaware, DC, Maryland, Ohio, North Carolina, New Hampshire, and Massachusetts, and Missouri (in order of their introduction), according to the National Renewable Energy Laboratory (NREL). And in a number of those states (New Jersey, Pennsylvania and Massachusetts, primarily) the SRECs have effectively led to much greater amounts of solar being installed. New Jersey is the third-largest market for solar in the U.S.—it’s the second largest for distributed solar—and Massachusetts recently announced that it reached its renewables goals four years early! Massachusetts Gov. Deval Patrick (D) now wants to double that.
States incentivize solar through many means, including net metering, rebates, tax breaks, renewable portfolio standards (RPS) and more. SRECs, however, are a bit more complicated. They are tradable or salable credits that are accrued as solar system produces electricity or in some cases thermal energy. One SREC is equal to 1,000 kilowatt hours of electricity. After a system has produced an SREC, that credit can be traded, sold or retired on the market. It’s a tool that owners of residential, commercial and large-scale PV systems can use to reduce the time it takes a solar system to pay for itself. However, SREC prices are subject to wide fluctuations and some home and business owners with small installations are often forced to sell them on the spot market instead of through long-term contracts.
The SREC represents the additional values of solar power, including local energy, pollution reduction and less need for peaker power plants. SRECs are similar to solar carve-outs, which a number of other states have implemented, including Colorado, Nevada and Oregon, and help drive the rebates and net-metering programs that utilities offer. In states with SREC markets, utilities are required to purchase certain amounts of SRECs each year or pay an alternative compliance penalty or payment, either way it’s called an ACP. Generally each year the utilities or power suppliers are required to purchase more SRECs, meaning they need support more solar installations.
But there’s a downside to all of this. SRECs are traded on the open market, which means they’re subject to market dynamics. So an SREC that was worth $670 yesterday could drop in value to $225 today, in a market that’s fully sold. This happened in New Jersey in November of 2011, according to SRECTrade data. Since then, SREC prices have dropped to as low as $70 earlier this year. New Jersey has continued to expand the amount of SRECs that utilities have to purchase, and as of June 2013, SRECTrade has them trading at up to $130 per SREC.
In two other states, Pennsylvania and Ohio, the SREC markets have sunk to abysmal levels. In Ohio, SRECs traded for as much as $400 when they were introduced in 2010. And in Pennsylvania where they were introduced in 2009, they traded at $300. Now they have traded as low as $10 in both states.
In Pennsylvania, the solar industry quickly flocked to the state creating jobs and putting solar on homes and businesses. The volume of the market helped drive down the price of solar and PV system owners lined up to sell the SRECs, decreasing their payback time significantly. The utilities gobbled up all the SRECs they needed in a frenzy, and then—nothing. Jobs were lost, installers looked for other markets. What looked like a burgeoning industry almost disappeared overnight.
From the utility side, Pennsylvania’s SREC market benefits them. With the market glutted they can pluck SRECs like a frog in pond catching gnats, purchasing clean energy for low rates. And those low rates help them save money and pass some of those savings on to customers, benefitting those that haven’t gone solar the most.
In New Jersey the price has remained protected somewhat because the state keeps expanding the amount of SRECs that the state’s power providers must purchase. And recent news revealed that Public Service Electric and Gas Company’s (PSE&G’s) solar expansion proposals were accepted, which included long-term purchasing agreements for SRECs that should ensure some stability in that market.
But there’s another looming problem for New Jersey. Though it has expanded the amount of SRECs each company must buy, the state hasn’t increased its renewable portfolio standard. So once the mandate is met, New Jersey's power providers aren’t required to purchase any more SRECs or other renewable energy for that matter.
So, back to the question, good or bad? SRECs can be a good tool to help encourage more solar growth, but it appears that the approach needs to be refined to ensure stable and progressive solar growth as well as a good value for SRECs. However, there needs to be care in implementing them to prevent a market from becoming swamped with SRECs or it can encourage a boom and bust cycle. Perhaps the best things happening in the SREC market is long-term SREC contracts, like those long-term prices that PSE&G plans to offer. Similarly, some companies like SRECTrader and Sol Systems offer multi-year SREC contracts, which sell for less than the highest market values seen, but offer pricing stability and provide the system owner with a better idea of how much a system will cost and how soon it will pay off.