Solar Renewable Energy Certificates (SRECs) or Solar Renewable Energy Credits are a form of Renewable Energy Certificate or "Green tag". SRECs exist in states that have Renewable Portfolio Standard (RPS) legislation with specific requirements for solar energy, usually referred to as a "solar carve-out". The additional income received from selling SRECs increases the economic value of a solar investment and assists with the financing of solar technology. In conjunction with state and federal incentives, solar system owners can recover their investment in solar by selling their SRECs through spot market sales or long-term sales.
SRECs represent the environmental attributes from a solar facility, and are produced each time a solar system produces one thousand Kilowatt-hours (KWh) of production. For every 1000 kilowatt-hours of electricity produced by an eligible solar facility, one SREC is awarded. In order for a solar facility to be credited with that SREC, the system must be certified and registered.
In order to produce SRECs, a solar system must first be certified by state regulatory agencies, usually public service commissions or public utility commissions, and then registered with the registry authorized by the state to create and track SRECs. Once a solar system is certified with the state agency and registered with a registry such as PJM-GATS or NEPOOL-GIS, SRECs can be issued using either estimates or actual meter readings depending upon state regulations.In some cases, smaller installations may be able to use estimates, while actual meter readings are required for large installations. Solar installations may be registered in states other than the state in which they are physically located and many SREC aggregators will navigate the certification process on behalf of their customers to ensure that systems are certified in the states with the highest SREC values so as to ensure long-term price stability.
Solar Alternative Compliance Payment
The SACP is the fee that energy suppliers must pay if they fail to secure SRECs as required by state regulations called an RPS. A state's ACP therefore generally sets a cap on the value of SRECs because energy suppliers and utilities may simply pay the fee if SREC prices approach the fee level. In rare cases SREC prices have approached and even surpassed ACP levels because SRECs can sometimes be recovered by charging more to electricity customers (rate basing), while ACP payments are usually precluded. In many states, the SACP is scheduled to decline over time with the intention of eventually phasing out the solar industry's reliance on SREC sales as an incentive for installing solar.
Solar RPS requirements are meant to create a marketplace for SRECs and a dynamic incentive for the solar industry. Solar RPS requirements demand that energy suppliers or utilities procure a certain percentage of electricity from qualified solar renewable energy resources in a state. These Energy suppliers and/or utilities can meet solar RPS requirements by purchasing SRECs from homeowners and businesses who own solar systems and produce SRECs. Homeowners and businesses can then utilize the sale of the SRECs they generate to help finance their solar systems. SRECs can be sold a variety of ways, such as on the spot market, at auction, or by negotiating long-term contracts.
Supply and Demand
SREC supply in a particular state is determined by the number of solar installations qualified to produce SRECs and actually selling SRECs in that state. As more solar systems are built, SREC supply will increase. SREC demand is determined by a state's RPS solar requirement, typically a requirement that a certain percentage of the energy supplied into a state originate from qualified solar energy resources. Load-Serving Entities or organizations that supply electricity into the state are required to meet these requirements. RPS solar requirements in many states are set to increase in the coming decade.
Typically, there is no assigned monetary value to an SREC. SREC prices are ultimately determined by market forces within the parameters set forth by the state. If there is a shortage in SREC supply, pricing will rise, resulting in an increase in the value of the incentive for solar systems and an intended acceleration in solar installations. As SREC supply catches up to SREC demand, pricing will likely decrease, resulting in an intended deceleration in solar installations. Over time, SREC markets are designed to find the equilibrium price that encourages enough installation to meet the growing demand set forth by the RPS. Generally speaking, SREC prices are a function of (1) a state's solar alternative compliance payment (SACP), (2) the supply and demand for SRECs within the relevant state, and (3) the term or length over which SRECs are sold.
There are several ways to monetize SRECs. They can be sold on the spot market through an auction or exchange. An aggregator can sell SRECs to a utility or energy company through a fixed-price, multi-year contract or, less commonly, in a lump-sum payment. or sold by an aggregator to a utility or energy supplier in a fixed-price, multi-year contract or - less commonly - in a lump-sum payment.
Spot price for SRECs are generally higher than prices found in long-term contracts since the system owner is taking on market risk. If increases in supply outpace the growing demand, spot prices could fall. SRECs have traded as high as $400 in Maryland.
In addition to providing cash flow security and stability, long-term SREC contracts are often required by banks or other lending institutions unwilling to accept market and legislative risk associated with SREC markets. However, SREC contracts longer than 3 years can be difficult to secure in some SREC markets because in deregulated electricity markets, energy suppliers rarely have electricity supply contracts longer than three years. Some SREC aggregators have managed to negotiate 3-10 year agreements and are able to offer similar length contracts to their residential and commercial customers. In most cases, long-term contracts demand some sort of premium over market prices to compensate the off-taker for putting up the credit to guarantee the contract in the event that prices drop. This premium is also affected by the general lack of availability of credible off-takers in the market. In some markets, however, where short term supply has overtaken demand, long-term prices are competitive and can actually be better than spot prices