Q4 is always the most intense part of the year for the solar industry, as developers and EPCs rush to complete year-end deadlines. This Q4 was no different. In fact, it was even more so. Financiers all rushed to close 2015 deals. Developers rushed to lock in 2016 pipeline. MUSH hosts were rushing to issue RFPs for projects that could be built by the December 31, 2016 ITC placed in service deadline. Rush, rush, rush.
But then, everything changed.
Since the ITC extension passed, developers and host customers alike have stopped to ponder: “Why the rush?” End users that issued RFPs are asking: “Maybe I should put this project on hold and see if costs come down over the next couple years.” More often than not, we’re seeing these potential solar customers as the ones putting the brakes on a deal to retool it, or even re-shop it.
As for developers, some are noticing that in the mad rush to lock in 2016 pipeline by year-end, key diligence items were overlooked. If you have a contract for a 2016 project and missed a key item in diligence (“Shoot, how am I interconnecting this thing again?”), by all means, use this short reprieve to take a step back and get your ducks in a row before shopping your project to a financier. But, don’t wait too long. Contracts expire, SREC values decline, and pricing may change as a result. With much delay, lenders may reallocate funds.
Similarly, if the end user is asking for more time to see where the market goes, tell them there is no time like the present. Since 2010, the cost of a solar electric system has gone down by 70% according to Sunshot. Moving forward, the most potential for dramatic costs declines will come from soft cost reductions (permitting, financing, O&M, customer acquisition, etc.) that are challenging to predict. Moreover, who knows if the cost of capital will continue to drop or begin to climb as interest rates rise and YieldCos pause many of their actions in the market.
Solar has some great momentum right now, but remember: there are many unknowns. As the saying goes, a bird in the hand is better than two in the bush. Rush hour is over, but don’t get left behind.
This is an excerpt from our January edition of SOURCE: the Sol Project Finance Journal, a monthly electronic newsletter analyzing the solar industry’s latest trends based on our unique position in the solar financing space. To view the full Journal or subscribe, please e-mail email@example.com.
ABOUT SOL SYSTEMS
Sol Systems is a solar energy finance and investment firm. The company has facilitated financing for 410MW of solar projects on behalf of Fortune 100 corporations, insurance companies, utilities, banks, family offices, and individuals. Sol Systems provides secure, sustainable investment opportunities to investor clients, and sophisticated project financing solutions to developers. The company’s tailored financial services range from tax structured investments and project acquisition, to debt financing and SREC portfolio management. Inc. Magazine named Sol Systems on its annual Inc. 500 list of the nation’s fastest-growing private companies for a second consecutive year, ranking it No. 6 in the nation’s top solar companies in 2014. For more information, please visit www.solsystems.com.
Prepared in collaboration with Sol Systems Intern Mark Noll
On September 29, the Illinois Power Agency released its draft 2015 Procurement Plan regarding renewable portfolio standard (RPS) compliance for the state’s two regulated utilities, ComEd and Ameren – and then, on the very same day, decided to release a second “Supplemental” Procurement Plan for solar PV. The two plans both share great intentions for the best of interventions – and could bring projects with the right entrepreneurial conditions to glory.
Both plans call for the Illinois Power Authority to procure solar renewable energy credits (SRECs), but that’s where the similarities end. They differ with regard to funding, project eligibility, contract lengths, system requirements, and other factors. Sound confusing? It’s OK. We’re here to clear up the confusion.
The First Illinois Plan: Of the Four Procurements, Only Three Matter
The first, “regular” plan sets out the IPA’s 2015 plan for procuring power from renewables for those customers of the state’s two main utilities who have not “shopped” for electricity (most of Illinois’ residents actually have shopped for energy on their own, thanks to electricity market deregulation, and rely on their retail electricity suppliers for compliance). In addition, the IPA has set up a procedure for spending the hourly “alternative compliance payments” (ACPs) the agency has collected from retail suppliers. This is because unlike in many states, some amount of these ACPs are collected each year whether or not the suppliers are otherwise in compliance. It proposes to use ~ $13M of this funding to procure ~80,000 SRECs in one-year contracts.
Research support provided by Eric Lustgarten.
The New York State Energy Research and Development Authority (NYSERDA) is getting closer to solidifying the next iteration of its solar incentive program with the creation of the Megawatt Block. Perhaps befitting what may be one of the last major new cash incentive programs for solar, it could be one of the best; as proposed, the Megawatt Block incorporates a number of “best practices” for incentive design that should poise the Empire State for strong, steady solar growth.
The current version of the Megawatt Block program awards incentives for solar projects on a per Watt basis. It divides market sectors into residential PV (up to 25kW), small PV (non-residential up to 200kW), and large non-residential PV (over 200kW). The final framework for projects over 200kW should be in place by mid-November, and the program is expected to open in late Q1 in 2015 on a first-come, first-served basis.
Massachusetts solar developers breathed a sigh of relief after last week’s announcement.
After the initial August 26th announcement that the 2016 Managed Growth Capacity Block would be 0MW, the Massachusetts Department of Energy Resources (DOER) opened a public comment period. As expected, solar stakeholders expressed their concern over the 2016 allocation, citing that the DOER had projected overly ambitious growth in Market Sectors A-C. In response to these comments, DOER adjusted the 2016 Managed Growth Capacity Block allocation from 0MW to 20MW .
What is Managed Growth in Massachusetts?
The Massachusetts SREC-II Program, initiated in April, creates differentiated financial incentives for each market sector (“SREC Factor”) to level the playing field. This program makes smaller solar projects more competitive compared to larger ones by ideally giving financial preference to residential and rooftop projects (a higher SREC Factor close to 1.0) and providing less support for larger projects (ground mount, landfill or brownfield projects less than 650kW.) Previously, this program allocated 26MW and 81MW for the Managed Growth sector in 2014 and 2015 respectively. As the legislation mandates, the reconsideration and final decision of the 2016 Managed Growth Capacity Block came from the following formula:
At the direction of President Obama, the U.S. Environmental Protection Agency released the Clean Power Plan, also known as 111(d) on June 2. It is the first time the U.S. government has sought to cut carbon pollution from existing power plants. In summary, by 2030, the EPA’s proposed steps should cut national carbon emission from the power sector by 30% – as measured against 2005 levels.
The proposal provides guidelines for states to develop plans to meet state-specific goals to reduce carbon pollution and gives them the flexibility to design their own programs. States can choose a mix of generation using diverse fuels, energy efficiency, and/or demand-side management. States can also choose to work alone to develop individual plans or with other states to develop multi-state plans.
Ultimately, as we look into our crystal ball, we see a large increase in the number of rate cases that utilities bring before their state’s Public Utility Commissions, and subsequent changes in the way utilities are regulated. We also see the following positive impacts for the solar and energy efficiency industries:
With the signing of Senate Bill 310 (SB 310), Ohio has become the first state to “freeze” its Renewable Portfolio Standard (RPS). Ohio Governor John Kasich signed the bill into law on June 13th, effectively halting the state’s mandates for efficiency and renewables until 2017. Come 2017, these mandates will pick up where they left off when the freeze occurred, as opposed to the annual increases in renewable energy and efficiency measures that would have occurred with the RPS.
SB310 will significantly harm Ohio’s solar industry by driving SREC prices down in both the Buckeye state as well as the surrounding states such as Kentucky, Pennsylvania, West Virginia, Indiana, and Michigan that sell their SRECs into Ohio. The bill faced tremendous opposition from health and environmental coalitions, as well as a group of 70 businesses and organizations, including Honda and Whirlpool, who urged Governor Kasich not to sign the bill.
Below, we have included excerpts from Sol Systems’ June 2014 Solar Project Finance Journal, which is a monthly email newsletter that our project finance team distributes to our network of clients and solar stakeholders. Our newsletter contains solar statistics from current real-life solar projects, trends and observations gained through monthly interviews with our solar project finance team, and it incorporates news from a variety of solar industry resources.
If you would like to receive our Solar Project Finance Journal via email every month, please email firstname.lastname@example.org with a request to be added to our Project Finance Journal distribution list.
The Public Service Electric and Gas Company of New Jersey (PSE&G) will begin accepting applications in less than a month, on February 25, for its Solar Loan program. While no major changes have occurred since the first solicitation late last year, data is now available on pricing from the first round of applications and awards.
The first solicitation of New Jersey’s PSE&G Solar Loan III program began last year and closed the period on November 12th, 2013. The program provides loans that make up significant portions of project construction costs (see an example here). The loans can be repaid through SRECs, with payment plans set at the closing of the loan. Cash can also be used to pay in case of low production. Once the loan has been paid in full, any SRECs produced thereafter belong to the owner of the system. The following capacities are available per each program segment:
At Sol Systems, we realize that our work is a reflection of who we are as individuals, and our success is a direct result of all the different personalities, passions, and talents that your employees bring to the table. Our team has expanded significantly in the last few years, and we are proud to employ some of the brightest talent in the renewable energy industry. On this employee highlight we have Andrew Gilligan, Senior Associate at Sol Systems:
What is your current position at Sol Systems?
I am a Senior Associate and help to lead our Investor Advisory Group. As part of this team, I assist renewable energy investors across the United States to successfully deploy capital into solar projects.
How has Sol Systems changed since you first started at the firm?
Since I started with Sol Systems in early 2011, the firm has undergone a lot of changes. Back then, we were a small start-up company only offering SREC solutions. Today, we have evolved to become a financial services firm that can help with any part of the capital stock for projects in all relevant US solar markets.
The City of Palo Alto Utilities (CPAU) has established various programs in the last few years to encourage solar development in the city. Despite space constraints that limit most projects to roof mounts and carports, the administration promotes two distinct initiatives designed to meet the statewide Renewable Portfolio Standard of 33% by 2015:
- Palo Alto CLEAN, a feed-in tariff program
- PV Partners Program, a rebate program that supports net energy metered (NEM) systems
On March 2012, CPAU launched the Clean Local Energy Accessible Now (CLEAN) program, in hopes to expand the production of cost-effective, clean local energy. This was an important step towards greater energy self-reliance, and for the city’s goal of supplying 33% of its electricity with renewable energy by 2015. The feed-in tariff pilot program was initially capped at 4 megawatts and it was targeted to medium-sized commercial rooftops with a minimum size of 100 kWs per installation. After opening the program for applications in April 2012, no applications were received at the initial rate of $0.14/kWh.
Renewable Portfolio Standards across the nation are under re-examination by state lawmakers, aiming to diminish or eliminate these programs. Despite benefits to local economies and environments, some politicians and lobbyists feel the programs are unimportant. To date, a number of proposals have reached State Senate and House floors throughout the country. Many lawmakers hold that RPS programs across the board create unduly costs for electricity consumers and taxpayers in order to support an industry that should be able to stand on its own. However, organizations funded by oil and gas interests like the American Legislative Exchange Council (ALEC), the Heartland Institute, and others have also played a strong role in fostering anti-renewables legislation across the country. Our company has been tracking the movement in many states and provides an overview of legislative progress thus far.
Maryland General Assembly on Track to Pass Legislation to Accelerate the State’s Solar RPS Requirement
Due to sun-setting Federal incentive programs for solar energy and the current structure of Maryland’s Renewable Portfolio Standard (RPS), Del. Sally Jameson (D-28) and Sen. Rob Garagiola (D-15) proposed legislation that attempts to address this concern. House Bill 1187 will accelerate the solar carve-out expecting utilities in Maryland to achieve the 2% solar energy generation requirement by 2020, instead of the current requirement of 2% by 2022. The belief is that the current standard will create a glut, or oversupply, of SRECs due to a higher annual increase in solar energy after 2016. This could distort supply and demand of SRECs, thus making the market volatile and less predictable. HB 1187 aims to provide stability to a potentially volatile market by “smoothing” out the growth of solar in Maryland.
HB 1187 does not increase the overall solar requirement for Maryland; rather it accelerates the achievement of 2% solar by two years (see chart below for comparison). Moreover, although from 2013-2020 there will be yearly increases in demand, as compared to the current requirements, the end goal and requirements for solar will not be affected.
|Energy Year||Current Requirements||Proposed Requirements|
The estimated benefits of this acceleration could not only create a more stable market with a steadier roadmap of SREC prices, but will also extend into the Maryland economy as a whole. Based upon industry information, HB 1187 could create over 10,000 jobs across the Maryland economy by 2018. Industry predictions state that the legislation could incentivize over $3 billion in investment and $144 million in revenue for the State as a result of job creation.
What does this mean for the ratepayer? The legislation was designed with a 1% price impact on the customer. HB 1187 anticipates a residential compliance cost of $0.19 per month and an average commercial electrical bill increase of 0.11%. However, the proposed RPS will actually create savings for the ratepayer when compared to the costs incurred from the current RPS schedule.
HB 1187 passed the House with unanimous support on March 21, 2012 and is currently proceeding through the Senate. After having initially failed the Senate Finance committee, SB 791 managed to pass through the committee 8-2 upon reconsideration during a vote late March 29, 2012. After a final lobbying effort by stakeholders and advocacy groups, SB 791 passed upon second reading in the Senate on April 2nd and will undergo its third reading tonight, April 4th, when it is likely to become law. Sol Systems will post an update as soon as more information is released on the status of the bill.
Sol Systems currently offers three types of SREC agreements for Maryland solar systems (both photovoltaic and solar thermal): Sol Brokerage, Sol Upfront, and Sol Annuity. Please email email@example.com or contact your solar installer for more specific pricing.
About Sol Systems
Sol Systems is a solar energy finance and development firm that was built on the principle that solar energy should be an economically viable energy solution. With thousands of customers and hundreds of partners throughout the United States, Sol Systems is the largest and oldest SREC aggregator. We provide homeowners, businesses, solar installers, and developers with sophisticated financing solutions that help make solar energy more affordable. Sol Systems also helps energy suppliers and utilities manage and meet their solar RPS requirements efficiently by providing them with access to diverse portfolios of SRECs. For more information, please visit http://www.solsystemscompany.com.
Sol Systems Issues Call for Solar Projects – Launches Project Finance Platform with $350 Million in Available Funding
Washington, DC: August 31, 2011 - Sol Systems today announced the launch of SolMarket, a new financing platform that will catalyze investment in solar energy projects nationwide by transforming how solar projects are financed. SolMarket launches with over $350 million of committed partner funds, actively seeking solar projects in need of financing.
SolMarket provides investors and developers with the tools they need to efficiently originate, evaluate, finance, and construct renewable energy projects. It provides a standardized origination platform, a document library, modeling software, and a standardized document suite. SolMarket will also offer developers group purchase discounts for solar modules and other equipment. There are no costs for developers to participate in SolMarket.
“We talk to hundreds of solar developers about prospective commercial and utility-scale projects, and unfortunately, many of these solar projects are never built due to an inability to efficiently locate financing,” said Yuri Horwitz, CEO of Sol Systems. “We have created SolMarket to help drive efficiencies into the solar market and connect investors and developers effectively. SolMarket will reduce the cost of financing transactions and enhance the tempo of solar project development.”
SolMarket has already attracted funding from a number of investors and is seeking projects ranging from 50 kW to multi-megawatts in size. Solar developers are encouraged to submit their projects prior to September 30th because investors are quickly building out their portfolios for 2011.
Sol Systems invites interested solar developers to attend a SolMarket webinar on Thursday, September 1st, Friday, September 2nd, or Tuesday, September 6th at 11 am EST. For more information, please email firstname.lastname@example.org or visit www.solmarket.com.
About Sol Systems
SolMarket is a wholly owned subsidiary of Sol Systems. Sol Systems is a Washington D.C. based solar finance firm, and the largest solar renewable energy credit (SREC) aggregator in the nation, with over 2,300 customers and over 20 MW of solar capacity under management. Through its SREC offerings, it has promoted the development of the solar market by providing long-term financing options for SRECs, facilitating over $100 million in solar development.
Ms. Sudha Gollapudi, Director of Strategic Partnerships
Many definitions of solar renewable energy credits (“SRECs”) say that an SREC is equivalent to one megawatt-hour (1,000 kilowatt hours) of electricity generated by a solar facility. While this is mostly true, it’s not always the case that 1 MWh of solar = 1 SREC. In order for an SREC to be created (or “awarded”), the system must receive certification from the state where that SREC will ultimately be sold – and the system must be registered with the regional transmission organization, such as PJM GATS or NEPOOL GIS. These organizations are the entities that acknowledge solar electricity production of 1 MWH and award the system owner with 1 SREC.
In other words, if a solar energy system is not registered with at least one state and registered with PJM GATS or NEPOOL GIS, the system may produce solar electricity without producing any SRECs. This is important because if no SREC is created, no SREC can be sold.
To further complicate matters, each state has different rules about retroactive SRECs — or how far back SRECs can be awarded. In select situations, SRECs can be retroactively awarded years into the past, whereas other circumstances only allow SREC creation from the state’s certification date forward.
Most often, systems are registered with the state in which they are located, but in certain circumstances, SRECs from one state may be sold into another state which has an open SREC policy and a higher price for SRECs. In cases where the SREC will be sold into a different state, the system must be registered in the state where the SREC will be sold.
In order to ensure that a solar energy system is producing SRECs, the system owner must complete various forms with one or more state agencies. This paperwork can be submitted by system owners themselves, or it may be done through the installer, or an SREC aggregator, such as Sol Systems — the nation’s largest and oldest SREC aggregator.
Once a system is registered and producing SRECs, the SRECs can be sold to entities that are willing to buy them.
Why would anyone buy an SREC?
Some states in the U.S. have created Renewable Portfolio Standards (RPS) that require energy suppliers and utilities to produce a minimum amount of their energy from renewable energy sources. These pieces of state legislation essentially create a marketplace for renewable energy at a premium price and thus stimulate the development of renewable energy markets. Some Renewable Portfolio Standards have specific provisions that require a portion of the electricity to come from solar (a “solar carveout”), and these states typically have strong solar energy markets and robust SREC markets.
When faced with an RPS with a solar carve-out, utilities have three options: build solar power facilities and produce the solar energy themselves, purchase Solar Renewable Energy Certificates (SRECs) or pay a Solar Alternative Compliance Payment (SACP) – a set price for each Megawatt-hour (MWh) of renewable energy they fail to acquire.
The price at which SRECs are sold is dependent on 3 market factors: supply, demand, and the level of the alternative compliance payment (ACP). Demand is driven by state RPS requirements and supply is driven by the number and size of individual solar energy systems which are certified to produce SRECs in a given state. In markets that are undersupplied, the ACP tends to set a ceiling price on the price of SRECs, so a state with a high ACP often leads to high SREC prices – at least until supply catches up to demand. Depending on the intersection of supply, demand, the level of the ACP, as well as the terms of the SREC contract – SREC prices can vary widely.
For more information about SRECs, please visit www.solsystemscompany.com.
Solar Renewable Energy Credit (SREC) markets are comprised almost entirely of solar photovoltaic generators. However, recent legal changes offer opportunities for solar thermal developers to participate in two of the country’s most lucrative programs.
As a background, a solar renewable energy credit is a tradable commodity like a carbon credit. However, unlike carbon credits, an SREC signifies the environmental attributes associated with 1 MWH of electricity, or its thermal equivalent, produced by a solar energy generator.
The value of an SREC is derived by a state’s Renewable Portfolio Standards (RPS). A RPS is a state-specific statute dictating that certain percentage electricity must come from renewable energy generators. Thirty-one states within the US have RPS statutes on the books. Of these thirty-one states, seven require a percentage of the renewable electricity production come from solar energy technologies (i.e. solar carve-out). These seven states also define a Solar Alternative Compliance Penalty (SACP), or the penalty a regulated utility or energy supplier must pay if they fail to acquire the dictated number of SRECs to meet the RPS. For example, energy suppliers in MD and DC must surrender $400.00 and $500.00, respectively, for each SREC they fail to acquire to meet the solar carve out defined within the RPS. The SACP functions as the price ceiling for an SREC market.
Currently, only a very small number of solar thermal generators participate in these SREC markets, because until recently solar thermal generators did not meet the definitional requirements of a solar energy generator within RPS statutes. However this is changing.
The SREC landscape for solar thermal generators is now open for system owners in MD and DC. Effective January 1, 2012, the Maryland RPS will allow solar thermal generators to earn SRECs. To earn SRECs in Maryland the following conditions must be met: (1) the system must be installed on or after June 1, 2011, (2) if the system is residentially owned, the facility must meet the Solar Rating & Certification Corporation’s (SRCC) OG-300 standards, (3) if the facility is commercially owned, the components installed must meet the SRCC’s OG-100 standards and an OIML certified meter must be installed to measure generation at the facility, and (4) the facility must be located within Maryland. To participate in the DC SREC market, (1) residentially owned systems must meet the SRCC OG-300 standards, (2) commercially owned systems must utilize components that meet the SRCC’s OG-100 standards and have an OIML meter installed to measure generation, and (3) pending new legislation, the facility must be located within the District.
In light of these recent legal changes, solar thermal developers can now participate in two lucrative SREC markets. In 2015 alone, the Maryland SREC market alone will have a ceiling value of over $100 million. Or, put another way, more than 195 MW-eq. of new compliance appetite is legislated in DC and MD over the next 3 years. To learn more about SREC options available to you, please visit www.solsystemscompany.com. As the country’s oldest and largest SREC aggregator, we can craft the solution that is right for you.
New Jersey, one of the nation’s largest and fastest growing solar markets, recently released the 2011 Energy Master Plan (EMP). The 2011 Energy Master Plan (EMP) is a 10-year non-binding proposal that lays out the energy agenda and guides legislators on energy policy decisions. The plan calls to reduce the 2016 Solar Alternative Compliance Payment (SACP) by 20 percent and then by 2.54 percent each year thereafter. Additionally, the EMP suggests lowering the Renewable Portfolio Standard (RPS) target to 22.5 percent of energy generated from renewable sources, down from 30 percent. The SACP is a fee imposed on electricity providers if they fail to meet their solar requirement established in the RPS.
Governor Christie claims that the previous ten-year energy master plan was unrealistic and that a more obtainable set of standards based on the current situation is needed. Christie is concerned about what the RPS, particularly the solar carve out is doing to electricity costs for the average New Jersey customer. Therefore, in this Master Energy Plan, Christie wants a cost-benefit analysis of the Solar Renewable Energy Credit (SREC) market in New Jersey created by the solar carve out. To this end, his EMP proposes reducing the SACP as discussed above. Governor Christie has maintained that the projected plan is not intended to lessen the role of wind and solar energy in New Jersey but rather to set a more realistic target for the next ten years.
Opponents of the plan claim that the previous RPS goal of 30 percent is realistic and contributed to the vast solar development in New Jersey. The solar carve out and SACP created one of the more robust SREC markets in the country. An SREC, or solar renewable energy credit, is a tradable credit that represents all the clean energy benefits of electricity generated from a solar electric system. Energy suppliers must procure a certain amount of solar-generated electricity, either through building their own systems or purchasing these SRECs, and so these SRECs became valuable. NJ system owners were able to sell SRECs and decrease their payback period on solar systems significantly.
With the increasing deployment of solar energy and continually decreasing costs in the solar industry, critics of Governor Christie‘s Energy Master Plan claim now is not the time to reduce solar goals. Although the EMP itself does not impact the current NJ RPS (actual legislation would be needed for that), the proposed EMP could undermine the state’s exceptional leadership in renewable energy development and may lead to doubts on the continuing success of New Jersey’s solar market. The New Jersey Board of Public Utilities (BPU), the lead implementing agency, will hold three public hearings in July and August before Christie issues his final plan.
Sol Systems is proud to welcome a new member to its team. Andrew Gilligan will be joining the company full-time beginning in late June as an Analyst and will be responsible for customer relations, state registrations, and providing research support on a wide variety of solar topics. Many of Sol Systems’ SREC customers and partners may have already had the pleasure of speaking to Andrew, as he has been an intern with the company for the past 4 months.
“A hard work ethic, leadership ability, and passion for the solar space are characteristics that are hard to find when searching for new employees,” said Yuri Horwitz, President and CEO of Sol Systems. “Andrew has all three traits and more. During the course of his internship, he has proved to be a valuable and committed employee and we are excited he will be joining us full-time. I’m confident our customers and partners will enjoy working with Andrew.”
Andrew comes to Sol Systems from Georgetown University, where he recently graduated magna cum laude with a degree in Science, Technology, and International Affairs and also a certificate in Business Diplomacy. While at Georgetown, Andrew spearheaded launching and running the Georgetown Solar Co-op, a student run organization created to ease the solar procurement process for homeowners. Under his leadership, the Georgetown Solar Coop educated hundreds of prospective customers on the benefits of solar, negotiated price discounts from solar vendors, led numerous homeowners through the solar procurement process from start through installation completion, and participated in local lobbying efforts for shaping the D.C. renewable portfolio standard.
Recent reports about both the domestic and global solar market have all pointed towards another year of remarkable growth. In fact, Bloomberg Finance identified Apple’s growth following the release of the iPad last year as the best analogy for the projected growth of the solar industry. Just a few days ago, the CEO of the Solar Energy Industries Association announced that the “solar is the fastest growing industry in America”.
With this incredible growth, it is useful to examine the key drivers behind the acceleration of the solar market. One key driver is the continuous reduction in PV cost, as prices for solar panels have declined by around 75% in the past 10 years. Solar panel prices in the U.S. specifically are set to drop by U.S. $0.20 per watt in 2011, bringing the average panel price to U.S, $1.40 per watt.
The second key driver is government policy and incentives. German and Japanese governments have been two of the leaders in the solar industry because they have legislated high incentives for solar deployment at the federal level. In the United States, however, state policies and utilities have played a larger role in growth, which has been impressive. In fact, the U.S. solar industry experienced a year-over-year growth of 67 percent. Furthermore, this growth is no longer simply due to California; over 16 states installed more than 10 MW in 2010. Solar Energy Industries Association (SEIA) CEO, Rhone Resch said, “the Mid-Atlantic region is beating California as the largest market in the U.S. for PV installations”.
Solar growth in the Mid-Atlantic and Northeastern region is due primarily to policies at the state level, which include both incentive programs and Renewable Portfolio Standards (RPS). These state programs award money to owners of solar systems to help offset the initial cost of the system. Renewable Portfolio Standards that include specific requirements for solar (i.e. solar carve-outs) mandate energy suppliers and utilities to generate or procure a certain percentage of electricity from solar or risk paying a steep Alternative Compliance Penalty (ACP).
Both measures have been effective, but solar carve-outs in the RPS represent a sustainable, market-based approach to solar financing. These solar carve-outs make Solar Renewable Energy Credits, or SRECs valuable, allowing solar system owners to realize the financial benefits associated with clean energy production. The percentage of solar electricity that energy suppliers must obtain increases each year until 2025 for most states with an RPS, guaranteeing that there will be a market for SRECs. Furthermore, an RPS is budget-neutral, and thus state governments do not have to worry about running out of funds prematurely, which has happened to several state solar rebate programs.
The Mid-Atlantic and Northeastern U.S. will have need for more than 3 gigawatts (GW) of new photovoltaic capacity by 2015, which is due in large part to these state solar carve-outs. The new capacity will be a mix of residential and business systems as well as utility-scale projects. Furthermore, with continued reductions in PV cost, there may actually be more solar deployment than is needed to satisfy the RPS. This makes the value of SRECs hard to predict in the short and long term; however, it does not change the fact that SRECs will remain an important piece of the solar financing puzzle for the next decade.
Looking forward, consistent and stable policies coupled with technical improvements will allow the solar industry to continue its remarkable growth.
Last Wednesday morning, I was lucky enough to attend President Obama’s speech at Georgetown University on U.S. energy security. The President has made this issue one of the top priorities for his Administration, and Wednesday he reinforced many of his goals and beliefs, while adding two new targets meant to improve the energy security of the U.S.
The central part of the speech was an analysis of U.S. dependence on foreign oil and ways in which that can change. President Obama listed natural gas powered vehicles, biofuels, electrical vehicles, and an overall decrease in oil demand as ways to reduce the amount of oil America has to import. Towards that aim of reducing foreign oil dependence, Obama revealed two new targets. First, by 2025, Obama wants the U.S. to have cut the amount of foreign oil imported by one-third. To put this in perspective, when Obama took office, the U.S. imported 11 million barrels of oil a day. Second, by 2015, President Obama is calling for all federal vehicles (around 600,000) to run on alternative fuel. President Obama defined both these targets as ambitious but achievable goals that would significantly increase American energy security.
President Obama also addressed the role of renewable energy such as solar in America’s future. He not only cited the environmental benefits of renewable energy, but also stated, “the nation that leads in the creation of a clean-energy economy will be the nation that leads the 21st-century global economy”. In a speech given to predominately college students, Obama urged young people not only to be more environmentally aware than previous generations but also to break into the clean energy industry in terms of future careers. Within the solar industry alone, there is a projected 26% increase in jobs over the next year. President Obama made it clear that growth in clean energy industries will be one of the pillars of an overall American recovery.
For anyone working in the renewable sector, Obama’s speech was familiar rhetoric. He has demonstrated his commitment to clean energy by requesting substantial funds in each of his budget requests and making a goal in this year’s State of the Union for “80% clean energy by 2020.” Given the federal government’s deficit issues, however, the renewable sector cannot rely on heavy government support despite Obama’s views. That is why state programs, and especially ones that are budget-neutral, become so important in making sure that the U.S. remains competitive in the clean-energy economy.
Renewable Portfolio Standards (RPS) are increasing as an important state mechanism and have demonstrated the ability to increase the deployment of renewable energy without costing state or federal governments millions of dollars. An RPS mandates that energy suppliers must procure a certain percentage of their electricity from renewable sources, and many states have specific solar carve-outs, which give value to Solar Renewable Energy Credits, or SRECs. An SREC is a tradable credit that represents all the clean energy benefits associated with 1 MWh of solar-generated electricity. These credits allow solar system owners to monetize their clean energy production, thus decreasing the payback period on a system and incentivizing more homeowners and businesses to go solar.
After the speech, I was able to talk briefly with Secretary of Energy Steven Chu who is very excited about the growth prospects for clean energy but still stressed the importance of continued innovations in solar panel production. It is certainly encouraging that the current Administration is embracing clean energy as a means to protect the environment and also increase energy security. However, it is still important to utilize programs like state RPSs to ensure that the clean energy sector grows at the pace desired by the Obama Administration.
When talking with potential customers at Sol Systems, it is often interesting to hear the diverging views on the benefits and drawbacks of selling Solar Renewable Energy Credits (SRECs) through spot market agreements or multi-year contracts. With spot market brokerage-type agreements, SRECs are sold every month or quarter for the highest current price. Long-term contracts (often called forward contracts) are when a solar system owner locks into a fixed price per SREC for a multi-year term.
A solar REC, or SREC is a tradable credit that represents all the clean energy benefits associated with 1000 kWh of solar generated electricity. Solar system owners can monetize these SRECs because energy suppliers must procure a certain percentage of their electricity from a solar source or pay a steep Alternative Compliance Penalty (ACP). Therefore, energy suppliers look to buy large sums of these SRECs for each compliance year and naturally will attempt to buy these SRECs at a low cost. However, energy suppliers understand that the SREC market, like almost any commodity market, can be volatile and subsequently the majority of energy suppliers hedge their risk by buying some SRECs through the spot market, and some SRECs through forward contracts.
Since there is good reason to believe that SREC prices will trend downwards over time, energy suppliers will typically be able to negotiate lower prices for the SRECs they are purchasing in multi-year contracts than the ones they buy on the spot-market. However, for various reasons, energy suppliers and utilities don’t typically meet all their SREC needs with multi-year contracts (perhaps they want some flexibility for their solar obligations in case SREC spot market prices drop dramatically or they plan to build solar power plants so that they can generate their own solar energy). Thus there are two distinct markets for SRECs: the spot market and longer-term agreements.
For an individual owner of a solar energy system, the decision of which market to enter is all about risk preference and their view of future SREC prices. Customers who are willing to accept more risk because they believe SREC prices will remain high are going to prefer a spot market solution, like the Sol Brokerage option, where Sol Systems acts as a broker and seeks out the highest SREC price. The spot market option allows customers to maximize their revenue from SRECs provided there is strong SREC demand in the market into which they are selling. Furthermore, it does not lock them into an agreement that will prevent them from taking advantage of an unexpected increase in SREC prices.
Other potential customers may be more risk adverse and would prefer for Sol Systems to take on the majority of the market risk. In that scenario, the customer may find it more appealing to lock into a fixed price per SREC, through an agreement like Sol Annuity, for the next 3 or 5 years. A fixed price allows clients to more accurately calculate their payback period as well as shifting risk away, even though they may be giving up some revenue per SREC.
However, in states like Pennsylvania and D.C., customers who entered into long-term contracts with Sol Systems several months ago will be receiving higher prices per SREC that those available on today’s spot market because the market in those states became oversubscribed. Thus in these examples, the multi-year contracts will actually maximize revenue over the course of the agreement. States like New Jersey and Massachusetts currently have very robust SREC markets and high spot prices, meaning many customers are likely to prefer Brokerage agreements because they can see those rates are higher than the Annuity prices. Yet, if those states follow the trend of DC and Pennsylvania and become oversubscribed, the solar REC price may drop substantially at some point.
For the individual customer, there is no “right choice” on how to sell SRECs. It truly depends on their risk preference and market outlook. However, for the SREC market overall, long-term contracts are more desirable because they provide stability, consistent volume, and liquidity. At Sol Systems, we have been able to enter into multi-year agreements with energy suppliers for the sale of SRECs, which has allowed us to become a preferred supplier instead of the supplier of last resort. This is important because it allows us to back up our contracts to solar system owners with agreements and provide them with reliable ways to ensure their solar energy investment pays off.