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.