Making Sense of Solar Renewable Energy Credits (SRECs)
If you live in a state with a viable Solar Renewable Energy Credit (SREC) market and you are considering installing a solar panel system, the way you account for SRECs in your financial calculations could be the difference between pulling the trigger and holding back. But SRECs are complicated and uncertain, so how can you make sense of them? And how can you incorporate them in your financial model and feel confident in your final decision? This post will address the basics of SRECs and give some advice about how you should and shouldn't account for income from SRECs.
What are SRECs?
In many states, including Massachusetts, utility companies are required to purchase a certain number of kWh of electricity from renewable solar technology. SRECs are the currency for trading this generated power: one SREC is equal to 1000kWh of generated energy. If you have a solar array on your roof that generates 1000 kWh of electricity per year, you will earn 1 SREC per year, which you can then sell to the utility companies to help them meet their quotas. If the utility companies fail to meet the quota defined by the state’s Renewable Portfolio Standard (RPS), the utility company will have to pay a fee for the remaining kWh. This fee is called the Solar Alternative Compliance Payment (SACP), and is set by the state legislature.
Once you have earned SRECs, how do translate to cash?
This is an important point: SRECs are not cash. Just like any other commodity, the value is set by supply and demand and other market forces. The most dominant forces that affect the price of SRECs are the RPS (quotas utilities need to meet), the SACP (fee per kWh for utilities short of their quota), and the amount of available solar energy on the market (how much PV has been installed). In general, legislature forces the RPS upward over time, increasing SREC prices. However, SACP decreases over time and more PV systems are continually installed, both of which force SREC prices downward.
Since residential PV systems are usually too small to try to sell SRECs directly to utility companies, homeowners often sell their SRECs to aggregators: companies that buy SRECs from many different sources and sell them in large quantities. A list of SREC aggregators can be seen here: http://www.mass.gov/eea/energy-utilities-clean-tech/renewable-energy/solar/rps-solar-carve-out/market-resources-aggregators-retail.html.
So how can you use SRECs in financial calculations?
There is no fool-proof way to determine how much revenue your PV system will make from SRECs over the lifetime of the system, or even over the next few years. For this reason, we highly recommend that you stay well within your financial means. Many homeowners in the past few years have seen astronomical SREC prices (up to $600 / SREC, about 4 times the retail price of electricity) and built large PV systems, only to find themselves overextended as SREC prices have plummeted. But this doesn’t mean you should ignore SRECs completely, especially if you’re able to absorb a small amount of risk.
The best way to estimate SREC prices is to look at past trends and analyze market forces. SRECTrade (http://srectrade.com/massachusetts_srec.php) is a good resource for SREC auction closings and state RPS and SACP schedules. In Massachusetts, SREC prices were well over $500 for many months until they decreased dramatically to a current low of $210 in 2012. This is because super high SREC prices spurred lots of solar development, leading to a surplus of SRECs and a lower selling price. Now, solar development will slow, and since RPS quotas will continue to rise and SACP will be steady for 1-2 years, SREC prices will likely rise again. Thus, a number like $210 might be a good conservative price for including SRECs in your financial calculations. With a simple modeling tool like Ekotrope, you can then determine how this will affect your payback and lifetime savings, and whether installing PV makes sense for your particular project.
For more information on SRECs, check out this recent article on Understand Solar: https://understandsolar.com/renewable-portfolio-standard-rps-srecs/