The future value of Solar Renewable Energy Credits (SRECs) in any one state can be a contentious issue. People have different points of view regarding what the future holds in terms of (1) regulatory frameworks, (2) state and federal subsidies, and (3) the costs of solar energy technologies. Therefore, there can be very different conclusions on the value of SREC markets in the out-years. However, people interested in the future values of SRECs, like homeowners who are considering whether to invest in solar, should put these variables aside (as they are speculative in nature), and first analyze the Solar Alternative Compliance Penalty (SACP) schedules in their respective state.

The current and future value of Solar Renewable Energy Credits (SRECs), and SREC markets, is largely determined by a state’s Solar Alternative Compliance Penalty (SACP). Although the SACP schedule is not harmonized amongst states with SREC compliance markets, a common theme between many markets is a declining SACP that will likely lead to lower SREC values.

The Solar Alternative Compliance Penalty (SACP) is the fee a regulated entity must surrender in the event they do not procure a sufficient amount of solar electricity to meet their compliance obligation for their state’s Renewable Portfolio Standard (RPS) . An easy way to think of an SACP is as a price cap. If the SREC market functions properly, an SREC will not be traded at a price above the SACP, but can be traded at a price below the SACP. The SACP is defined on a state-by-state basis within the state’s RPS (or Alternative Energy Portfolio Standard for states like Pennsylvania and Ohio).

An SACP schedule is a schedule that defines the price penalties that a regulated energy supplier must pay if they do not generate or purchase enough SRECs to meet their compliance obligation. For example, in Ohio, the SACP schedule is as follows: the penalty per SREC in 2011 is $400.00, in 2013 the SACP is $350.00, in 2015 the SACP is $300.00, and by 2020 the SACP per SREC is $150.00. As indicated in this SACP schedule, the Ohio SACP declines quite precipitously over time.

The two main policy reasons for a declining SACP schedule are:

(1) To incentivize solar installers and developers to lower their installation costs. A decreasing SACP means solar developers must develop and install projects at lower costs to ensure profitability.
(2) To limit ratepayers’ exposure to electricity rate increases as RPS requirements escalate. The costs of meeting the Renewable Portfolio Standard can result in slightly higher electricity prices, which are sometimes passed onto ratepayers through rate increases. The declining SACP schedule ensures that rate increases are contained.

Although SACP schedules are not harmonized between states, pretty much all states with compliance markets have declining SACP schedules. For example: Ohio’s SACP declines by $50.00 biannually, starting in 2015, Maryland’s ACP declines by $50.00 biannually, and even New Jersey’s ACP is expected to decline by $35.00 between 2010 and 2012 and an additional $64.00 between 2012 and 2016. The one state without a declining SACP schedule, Pennsylvania, is now considering legislation in the state Senate that would dramatically reduce the state’s SACP beginning in 2011.

Although SACP schedules alone do not determine current and future SREC values, it is very clear that declining SACP schedules lead to declining SREC prices . As this occurs, long-term fixed priced SREC contracts , competitive with current spot market prices, become increasingly more valuable to the homeowner interested in investing in solar.