Solar Renewable Energy Credits, or SRECs, are a key part of financing solar PV systems, typically covering 20 to 40% of installation costs. Therefore, it is critical that solar installers, homeowners, and businesses be prudent when projecting future values of SRECs.
An SREC is a tradable credit that represents the clean energy benefits of electricity generated from a solar electric system. Each time the electric system generates 1000 kWh, a SREC is issued that can be sold or traded separately from the power. SRECs are financially valuable because many states have Renewable Portfolio Standards (an RPS) with specific solar carve-outs that require energy suppliers to incorporate a certain percentage of solar generated electricity into their portfolio. Most energy suppliers do not have enough solar capacity to satisfy the RPS requirements with their own power and subsequently must purchase SRECs to meet the state requirement. This allows owners of solar systems to trade their SRECs as commodities and receive payments for them.
SRECs have functioned as an important tool for making solar systems more affordable, and therefore SRECs are typically a significant part of the sales pitch that installers use when explaining the economic benefits of going solar. Furthermore, as state grant and rebate programs diminish, SRECs represent a bigger piece of the way to finance solar. For example, in Ohio and D.C., state funds for solar rebate programs are currently depleted, and homeowners must now rely solely on the federal tax investment credit, SREC payments, and energy bill savings to offset the cost of their system.
In many states, the RPS requirements (that make SRECs valuable) increase annually until 2025. This leads some people to assume that SREC values will also increase annually as energy suppliers will need to purchase more SRECs to meet the solar carve our requirement. However, this is not necessarily the case. The amount of solar capacity is increasing along with RPS requirements, which means that in most states, the SREC values are actually coming down. For this reason, installers need to be honest and careful when describing the future value of SRECs, so that customers do not have false expectations about the ROI of their solar energy system.
In addition to the RPS requirement, the two key factors in determining SREC values are the Solar Alternative Compliance Penalty (SACP) and SREC supply.
The SACP is a fee that a regulated entity must surrender in the event they do not procure a sufficient amount of solar electricity. This fee acts as a price cap because a rational energy supplier would not be willing to purchase SRECs for greater than this value. The SACP is defined on a state-by-state basis, and virtually every state has a declining SACP schedule. For example, in Ohio the SACP declines by $50.00 every two years. The SACP alone will not determine the value of an SREC, but a declining SACP schedule will push the maximum value of SRECs down over time.
The supply of SRECs in the market is another essential factor to consider when predicting future values. Naturally, if there is a surplus of SRECs, then SREC prices will come down. This dynamic has already happened in states such as Pennsylvania and D.C., and solar system owners that locked into a long-term fixed contract are receiving higher values than those trying to trade on the spot market.
Since there is a lot of uncertainty about the future of SREC values, installers should make it clear that SRECs are a commodity and that their pricing can be quite volatile. They should also help their customers make an informed choice about how to sell their SRECs that accommodates their tolerance for SREC market risk. Installers will find that customers who have a good understanding of the SREC market volatility may be willing to accept a lot of risk and enter shorter contracts because they are bullish on the future of SREC markets. However, others may be risk adverse, and would prefer to lock in a fixed price for their SRECs for 3, 5, or even 10 year periods.
As long as installers adopt a cautious approach when discussing SRECs with clients, customers will sort themselves along the lines of risk preference.