Solar Renewable Energy Credit (SREC) markets can be volatile, which can create significant concerns for a financier interested in investing in a commercial solar photovoltaic project. Exposure to price volatility can undermine the economics of solar projects, or simply prevent a project from ever taking off. As state rebate programs are depleted, and SREC values become even more critical to the financing of commercial-scale solar plants, minimizing SREC price volatility will be essential to success. For these reasons, more sophisticated SREC financing solutions will be required for commercial projects to address and mitigate price risk.
When discussing commercial scale solar projects, generally we are referring to projects that are larger than residential solar systems, but that are not large enough to negotiate an SREC contract directly with a regulated energy supplier or utility. Using this definition of commercial project, a commercial project can range anywhere between 20 KW to 2 MW, and produce approximately 24 to 2,400 SRECs annually.
In robust SREC markets, particularly the ones where state rebates and incentives are draining quickly (i.e. Ohio, New Jersey, DC), the value derived from SRECs may constitute 30 to 40% of the project’s returns over the first five years of operation. So, for example, a project in Pennsylvania may be a good investment if SREC values are stable during the first five years of the system’s production, but may be a very poor investment if SREC values drop by 20%, reducing the total yield on the investment of roughly 8%. In short, SREC price volatility can turn a relatively profitable investment into a wash for the investors backing the project.
The addition of new solar capacity, legislative changes to state Renewable Portfolio Standards (RPS), and other SREC market developments can all affect SREC values. This uncertainty poses a risk to the security of a solar investment, and addressing this risk will be essential for project developers.
Sol Systems makes it possible for project developers and system owners to address this risk by providing various SREC payment structures. For commercial projects, Sol Systems can partition portions of the SREC stream into forward contracts and/or brokerage arrangements. The forward contracts are available in 3 and 5 year terms. Sol Systems can also offer an upfront payment that pre-pays for the future rights to SREC generation. The upfront payment securitizes the SREC stream, providing the greatest insulation against SREC price volatility and regulatory risk. These options allow solar investors to hedge their exposure to SREC price volatility. Depending on the investor’s risk appetite, Sol Systems can provide SREC services that provide the right level of risk and reward to ensure that a project gets off the ground and pays investors the returns they expect.