Solar renewable energy credit (SREC) markets are a highly efficient tool for financing solar projects. This market-based mechanism saves a lot of headache for policymakers and stakeholders alike while stimulating the growth of solar on much of the East Coast.
SREC Market Factors: Supply, Demand, & Legislation
SREC markets differ from other incentive programs in that there is a self-correcting mechanism built into the system. In other words, SREC prices are influenced by the legislation, as well as basic supply and demand. An increase in solar projects installed in a given state leads to a decrease in prices and a decrease in projects increases the prices based on simple supply demand relation. This jettisons solar energy growth while capping the penalty, alternative compliance payment (ACP), that the utilities and compliance entities must pay if they do not produce or purchase the amount of solar mandated by the renewable portfolio standard (RPS). Thus, SREC markets also ensure that the states can fashion the growth of the solar industry in a controlled manner.
How does an SREC market function?
An SREC market works based on supply and demand economics similar to a commodity market. Let us take a look at the precious metals industry to elaborate this concept. The price of gold increases when the perceived demand for gold increases. Conversely, an increased supply of gold will apply a downward pressure on prices.
Compliance entities (ie: utilities and energy suppliers) by law must ensure that a certain percentage of their portfolio consists of solar energy as prescribed in the ‘solar carve-out’ within their respective state’s RPS. This can either be done by owning solar projects or by buying SRECs from the market as explained earlier.
Solar energy system owners receive 1 SREC per every 1 megawatt hour (MWh) electricity produced. This certificate can be traded on the open market, or can be sold off via a contract for a lump sum or an annuity payment.
An SREC market controls two major dynamics:
A) Growth rate of solar projects as a result of stabilizing SREC prices. Applying a limit on the amount of SRECs required to be bought by compliance entities on a yearly basis results in a controlled growth of capacity for solar projects. If too many solar projects are built, the reward mechanism declines.
B) Amount to be paid by compliance entities (utilities) to promote solar energy as a form of renewable energy. An alternative compliance payment (ACP) ceiling is set at rates which justify financing of solar renewable energy. This is meant to ensure that this program does not reward poorly designed projects.
Now let us look at the different combinations of scenarios in the SREC market:
I) SREC supply is less than or equal to SREC Demand
Scenario I (Demand > Supply): When the supply of SRECs is less than or equal to the prescribed quota as per the RPS, compliance entities must make the ACP to fulfill the rest of the requirement. Hence prices are likely to hover around the ACP levels as explained in scenario 1 at $350.
II) SREC Supply is greater than SREC Demand
Scenario II (Supply > Demand): This scenario answers the core question raised by this article. As the supply of SRECs increases, the prices tend to fall based on simple demand-supply dynamics. The fact that there is higher supply than there is demand means that not all projects require funding at the higher ACP rate in order to qualify.
Projects that require lower SREC rates than the ACP value will settle for locking lower SREC prices (Scenario 2.1 at $200). Continued increase in project supply and hence SRECs will keep pushing the SREC prices lower until no new projects are able to qualify. This applies an automatic stopper on the SREC supply and hence capacity (Scenario 2.2 at $100). The reduction in capacity will drive down the supply in the future which in turn will drive up the prices in the future until the rates are favorable once more (Scenario 2.3 at $150).
This self-correcting mechanism ensures a healthy market as opposed to a fixed rate incentive program (ie: a feed-in tariff) which can overpay projects not needing the support and disqualify perfectly viable projects at the same time.
Start Selling Your SRECs
Sol Systems provides fixed price SREC contracts (Sol Annuity), spot market sales (Sol Brokerage) and upfront purchase (Sol Upfront) for commercial and residential solar energy system owners. Contact our team at 888-235-1538 x1 or email@example.com to get started.
About Sol Systems
Sol Systems is a renewable energy finance firm that provides secure, sustainable investment opportunities to investor clients, and sophisticated project financing solutions to developers. Founded in 2008, Sol Systems focuses on meeting the industry’s most critical solar financing needs, including tax structured investments, capital placement, debt financing, and SREC portfolio management. To date, the company has facilitated financing for thousands of distributed generation solar projects and hundreds of millions in investment on behalf of Fortune 100 corporations, utilities, banks, family offices, and individuals. For more information, please visit www.solsystemscompany.com.