Please refer to our blog 1 to get a more detailed
understanding of how SRECs work.
Basic terminology
REC: Renewable Energy Credit
SREC: Solar Renewable Energy Credit
ACP: It stands for Alternative Compliance Penalty. It is the
penalty which a load-serving entity will pay for failure to gather the required
number of SRECs
SACP: It stands for Solar Alternative Compliance Penalty. It
is the penalty which a load-serving entity will pay for failure to gather the
required number of SRECs
Tier I sources: set of energy sources, including solar,
having a separate RPS. Although solar may have a separate carve-out.
Tier II sources: Have a separate RPS for a different set of
energy sources excluding solar
RECs vs SRECs
Solar
Renewable Energy Credits (SRECs) program is that for every 1000 kWh (1 MWh) of
solar-generated electricity, one SREC is created and credited to the solar
facility. SRECs can be sold to electricity suppliers for them to reach the
requirement of percentage of solar-generated electricity.
Renewable Energy Credits (RECs) were originally created to
maintain the Renewable Portfolio Standard (RPS). Each state has its own
regulation regarding what percentage of their energy has to be derived from
renewable energy. This energy might either be generated by the utility or
bought from someone who generates it in the form of RECs. There are additional
administrative fees as well. This REC is generated only if the electricity goes
back into the grid. The penalty for not adhering to the standard attracts an
Alternative Compliance Penalty (ACP).
However, the REC could be gathered from a variety of
renewable technologies which may include gathering cheap RECs from biogas or
wind. This is where a specific standard for solar energy was created. Solar Renewable Energy Credits (SRECs)
program is that for every 1000 kWh (1 MWh) of solar-generated electricity, one
SREC is created and credited to the solar facility. SRECs can be sold to
electricity suppliers for them to reach the requirement of percentage of
solar-generated electricity. e.g. Ohio has created a standard of
generating 12.5% of its energy from renewable energy with 0.5% from solar
energy. This specific target for solar is known as the solar carve-out or
set-aside. The corresponding penalty for not gathering the requisite SRECs
results in payment of a Solar Alternative Compliance Cost. The SACP often costs
10 times over ACP. (1) It acts like the cap on the value of the SREC. This was
designed to account for difference in costs between solar and other
technologies. (6)
Solar Renewable Energy Credits, or SRECs, were once a key
part in financing solar PV systems, sometimes covering approx. 30% of
installation costs in 2011 but that is not happening anymore. (6) RECs can be
termed a failure as a financial instrument and SRECs are headed the same way
except in DC and maybe MA and NJ.
Current state of SRECs market
Renewable Energy Credits (RECs) were originally created to
maintain the Renewable Portfolio Standard (RPS). However, it encompassed a
variety of renewable technologies which may include gathering cheap RECs from
biogas or wind. Then a specific standard for solar energy was created. e.g.
Ohio has created a standard of generating 12.5% of its energy from renewable
energy with 0.5% from solar energy by 2024. This specific focus on a particular
type of renewable energy creates a constrain because they are limiting the
supply of the REC only from solar energy. This drives up prices and makes them
competitive. This is the primary motivation behind the SREC.
The overview of SREC standards, carve-out targets is given
below:
Figure 1 Reference (1) 2012 standards
Markets in Washington DC, New Jersey and Massachusetts
These states are trading SRECs at a very high price. The
graphs below illustrate how the cost of an SREC has fluctuated in these states.
The bid prices for MA and NJ has decreased and is retiring SRECs (selling
SRECs) at around $250. This is while the DC area has maintained a strong SREC
value of $480. This is just below its SACP cap of $500.
Figure 2 Massachusetts SREC prices
(Reference 2)
Figure 3 DC SREC price (Reference 2)
Figure 4 New Jersey SREC price
(Reference 2)
The main reason for these prices is the strong RPS in the
states, the regionality of the markets and some other factors:
Washington DC
The state has just increased its RPS to 50% from renewable
with 5% from solar by 2032. Also, unlike the other markets. These SRECs can
only be bought from producers located in DC or on a distribution feeder serving
DC (only parts of Pennsylvania) to qualify which constraints supply. The SACP
has also been capped at $500 and the decline rate will come in effect after
2023. This has led to really competitive prices. DC is anyhow a small state.
Constraining the supply of SRECs only to that state is keeping the prices at
95% of the SACP. A significant percentage of DC’s RPS requirement comes through
SACPs.
Figure 5
Massachusetts
The Massachusetts launched the first Massachusetts SREC
program in January 2010. The program, now referred to as SREC-I, was created as
a Massachusetts-specific solar carve-out of the New England REC market. SREC-I
was originally established with a capacity limit of 400 MW, but this was
reached in the spring of 2013. The DOER continued to qualify projects under
SREC-I through the first half of 2014, after the initial 400 MW limit was
reached.
On April 25, 2014, launched its SREC-II program to carry
Massachusetts to its goal of installing 1,600 MW of solar capacity by 2020.
Facilities qualified under either SREC-I or SREC-II are granted up to 10 years
of SREC production. The SREC market depends upon continual extension of RPS and
solar carve-outs
New Jersey
NJ’s SREC market is the largest in the US. Each SREC in the
market is valid for 3 years. Thus, there are three separate markets going on.
All three are closely following each other. The last year, supply has again
gone in overdrive and this year the market is expected to go for another bust
cycle (9). However, the NJ only allows SRECs from within the state and has a
stronger market than the others we will talk about now.
Markets in Ohio and Pennsylvania
The states of Ohio, Pennsylvania and Maryland are selling
SRECs for cheap varying from $6-$9. Ohio allows imports from neighboring states
(OH, PA, MI, IN, KY, WV). (2) Pennsylvania allows the import of SRECs from PA,
OH, NJ, DE, MD, DC, VA, WV. Further, those holding SRECs in IN, KY, MI can sell
SRECs if they come within the utility AEP’s domain. Similarly, SRECs from IL
have to be in ComEd utility territory and those from NC have to be in
Dominion’s territory. (2)
For both Ohio and Pennsylvania, this has led to an
oversupply of SRECs and they are not worth considering as financial instruments
in these states. These states also have very weak RPS standards. In Ohio, only
12.5% is set as the standard until 2027. (7) This is in comparison to DC, which
has RPS of 50% until 2032. It is no surprise that Ohio just installed 10MW and
PA installed 15MW in 2015.
Market in Maryland
Maryland presents a unique case. Its SREC price was $120 per
SREC till 2015. In 2016, the price tanked and stands at $9 currently. This was
motivated by two factors: 1) a large scale 1 GW of Maryland-based utility-scale
project entered the planning queue. This was motivated by the fact that
utility-scale solar projects are now feasible even without SRECs and 2)
Maryland RPS allows projects from both the state distribution grid and regional
transmission grid to apply for SRECs. (4) Thus, many utilities glutted the
market after solar panels were erected along the eastern shore. Although this
doesn’t affect utilities much, but small-scale projects get adversely affected
by the price drop. The graph below shows how the SRECs value which used to stay
near the SACP ceiling till 2011 and was still slightly competitive till 2015
has completely slacked off. Interestingly, SRECs account for 4% of the RECs in
the Maryland market but 31% of the cost of compliance. (5) Although, it is
better than other RECs, but solar is still more cost-prohibitive than other
renewables, especially for residential consumers.
Figure 6
The state of Maryland has recently passed a bill to revise
its portfolio standards. It has increased its RPS from 20% of retail
electricity sales by 2022, to 25% by 2020. Also, the solar set-aside or solar
carve-out has also been increased from 2.0% to 2.5%. The market-based mechanism
will provide price signals to market participants considering whether to
initiate additional projects. Ideally, the low level of SREC pricing today will
lead a sizeable portion of the current project queue to wait on adding new
capacity until the supply and demand balance normalizes. (8) This should
typically drive up prices. The only question is by how much.
Figure 7
Future value of SRECs: They are going down
Even if we were to say that regulatory authorities will be
improving the quality of the market by constraining supply from neighboring
states, this still does not help.
In many states, the RPS requirements will increase until
2025. This may lead people to believe the value of their SREC will increase as
the demand for solar increase. This is not true for two reasons: 1) the amount
of solar capacity is increasing. This will lower prices. (6) 2) The SACP caps
are set to decrease. With the notable exception of Washington DC which has
fixed SACP until 2023, the SACP caps have been set to decline, e.g. in Ohio,
the SACP declines by $50 every year (which doesn’t matter, because Ohio’s SREC
price is under $9 anyway).
The only thing that can be said prices will not hit $0. This
is because while the SACP act as a ceiling for SREC prices, Tier I REC price
acts as the floor. (12) (Please check basic terminology for Tier I, Tier II)
Taking the case of Ohio and Pennsylvania, even though they have been
oversupplied by SRECs from out-of-state resources and have relatively weak RPS,
their prices are still above $6. These provisions also do little to stimulate
investment in each state’s own borders and creates a price interdependency
between the two states, which is why pricing is gravitating in both markets
toward the Tier I price.
Also, in terms of future values, not much can be deduced.
This is because these prices are much too sensitive to SACPs, RPS and solar
production. SACPs and RPS are under regulatory oversight and not market
factors. Thus, prices go up and down very fast and may be hard to predict. Also,
a study conducted in 2012 on the cumulative discounted cash flow has been
proven wrong for a few states. (1) The study was based on earlier values of
SACPs and RPS and constant rate of production which has led to misleading
results.
Figure 8 (Reference 1)
The figure shows that the highest cash flows will continue
to be from New Jersey, which is the largest market. But the highest cash flows are
being generated by DC where the state is not able to meet its requirements due
to increased RPS in 2016. Thus, regular changes in RPS can distort calculations
of future values.
Long-term SREC Contracts
Engaging in long-term contracts will lead to stability and
cash flow security. However, prices found in long-term contracts for SRECs are
generally higher than the spot prices since the system owner is taking on
market risk. If increases in supply outpace the growing demand, spot prices
could fall.
In some states like DC, MA and NJ, long-term contracts will
demand some sort of premium over market prices to compensate the off-taker for
putting up the credit to guarantee the contract if prices drop. This premium is
also affected by the general lack of availability of credible off-takers in the
market.
However, in some markets like Maryland’s, where short term
supply has overtaken demand, long-term prices are competitive and can be better
than spot prices. (10)
Comparison with European market
There are two types of equivalent credit systems in the EU.
One type of credit is known as the Guarantee of Origins (GOs) and the other is
the RECs. The difference is that GOs are issued by the EU governments and are
recognized in all EU Member States who have this system, while RECs are issued
by energy companies and not accepted by all countries. (12) European GOs can
also originate from heating and cooling systems and not limited to electricity.
(12) Once the energy is sold, the GO is then cancelled to avoid double counting.
(15)
The main differences between SRECs and RECs are the
exclusivity of the solar energy source in terms of its high price and its
operation even by individual retail-end users. 2016 has been interesting year
for the RECs market in Europe. While some American SREC markets have collapsed,
RECs market in Europe have seen great gains. In 2015, for the first time, an
increase in cancellations of GOs, (and therefore of renewable energy demand)
together with the decrease in issuing volumes, created a shortage of supply. In
2016, the prices of GOs more than doubled in Feb before dropping again with a
net total increase in prices e.g. prices for Norwegian hydro GOs climbed to
0.40 ($0.43) per MWh February from 0.15, before seeing prices drop back down to
0.20. (13)
GOs’ demand is constantly increasing in the EU as compared
to US where there is cyclical demand occurring.
Figure 9 (Reference 14)
Conclusion
We wanted to prove earlier that SRECs are a great market.
However, after a careful analysis, I have been forced to believe the market is
not as good as it seems. At a macroscopic scale, it might seem that the SRECs
market has been more successful than traditional RECs. However, they don’t seem
feasible as a financial instrument in most of the states. With, the exception
of DC, none of the states have the bidding price of an SREC near the SACP. The
bottom-line is: it is a very niche market. The bidding price is determined by
the demand-supply economics, SREC life and the damage cost, with the damage cost
here being the SACP. The market prices are really sensitive to the RPS. As soon
as the RPS target is achieved, SREC prices start to crash. These lead to
regular boom and bust cycles. In most markets, the supply is too much in comparison
with the demand. Added to the fact that there is no standardization across even
two states, solar will have a tough time surviving with SRECs. Each state has a
different RPS, different SACPs, different SACP decline rates, different solar
carve-outs etc. It becomes hard to develop a uniform market strategy.
Also, RECs are traded only when they inject electricity into
the grid. This imputes in it a value separate from the electricity it
represents. Thus, more injection means less demand. Less total demand means
lesser RECs required. Despite this, build rates did not taper in US leading to
crashing prices in many states. Therefore, EU markets for RECs may be more
successful because they are not only based on injecting electricity in the grid
which reduces the demand for it. They can be generated from other energy
services, not only the grid.
The best way to improve the SREC market is to keep each
state market separate and not allow inflows of SRECs from other states, not
reducing the cap at the SACP and improving the RPS regularly. Otherwise, I
believe the SREC market will continue to fail again and again, except perhaps
in DC, MA and NJ (also, possibly Maryland) which have followed this model
partially.
Keeping with Yash’s overarching theme, I’m going to focus on Solar Renewable Energy Credits (SRECs) as opposed to just Renewable Energy Credits RECs.
ReplyDeleteI’m in agreement with Yash’s findings that the market for SRECs is pretty weak over a long time horizon. Based on what I’ve read about SRECs, it seems like their market prices follow the standard supply and demand principles that rule most free markets.
SREC supply is determined by the amount of solar systems generating energy; going forward the projected amount of energy generated by solar sources is projected to increase significantly. With solar PV doubling every two years, it is expected that 1,280 GW worth of solar capacity will be operational by 2020. This is going to have a significant impact on the market prices of SRECs. Additionally, supply of SRECs on the state level is also impacted by the rules governing the buying and selling of SRECs. If SRECs in a particular state can be bought from many states, you’ll likely see a high supply in that particular state. If SRECs can only be purchased from generators in that particular state, like in New Jersey, the SREC supply will be significantly lower relative to the demand.
SREC demand is determined by a given state’s Renewable Portfolio Standard or RPS. As states increase the requirement for solar generation, the demand for SRECs will go up.This will obviously help push the price higher. State’s are projected to increase the solar carve out going forward, but it is overwhelmingly likely that the supply of solar energy will greatly outpace the regulation and thus SREC prices will continue to fall.
To really quantify the future of SRECs I wanted to dig a little deeper into how SRECs work in Pennsylvania, my home state. Pennsylvania’s SREC market is grossly oversupplied. Many state and federal incentives have lead to a rapid increase in solar generation in PA. PA has currently installed 295 MW of solar, and the state is projected to bring another 575 MW online in the next five years. PA also accepts SRECs from 13 additional states. PA only sends SRECs to one outside state, Ohio. From a supply perspective, the picture is pretty clear, PA has a lot solar, PA is getting more solar up and running, and PA has many outside solar suppliers who are also getting more solar to an operational state.
On the demand side, PA’s RPS is only requiring 0.5% PV by 2021. Given the explosion of Shale gas in PA, it makes sense that PA is minimally compliant with solar generation guidelines. Once again this will serve to limit the demand for SRECs going forward.
With a very high supply of solar, and a relatively low demand for SRECs, PA’s market for SRECs will continue to be weak. Based on my analysis in PA, I agree with Yash’s conclusions. I also think that many states are in a similar situation to that of PA; supply is increasing very rapidly and demand is not keeping pace. Many states don’t even have Renewable Portfolio Standards. The only way to really change this is to adopt Yash’s recommendations and constrain the supply coming from outside sources and raise the PV minimum in each state's RPS.
References
1. http://programs.dsireusa.org/system/program/detail/262
2. http://www.seia.org/state-solar-policy/pennsylvania
3. http://www.srectrade.com/srec_markets/pennsylvania
4. https://cleantechnica.com/2016/08/09/will-solar-pv-industry-look-2020/
5. https://en.wikipedia.org/wiki/Solar_Renewable_Energy_Certificate
Scott and Yash have done a nice job summarizing the state of SREC markets, but I disagree with their conclusions. I do not think SREC markets are doomed, and even if they were, I do not think that constraining supply to state boundaries is the right solution.
ReplyDeleteSREC market prices reflect state policies and solar production in a given year. Low prices are not inherently bad. They indicate that states are able to achieve their goals because there is a lot of supply or their goals are low. I am personally happy to see that supply is high in many states, and disappointed when state RPS goals are low, but my opinions here don’t reflect anything about how well the market is working.
I can think of two indications that SREC markets might be failing. First, the combination of low SREC prices and utilities not meeting goals would suggest major flaws in state policies, such as a lack of penalty enforcement. Second, if utilities are meeting their targets by intentionally paying with compliance penalties, then the market cap on SREC prices is essentially limiting states ability to meet its goals. This appears to be happening if Washington, DC because it requires SRECs to be created locally. Otherwise, I don’t see any indication that the SREC market is failing. The volatility of SREC prices was also mentioned. It’s true that this is a problem, but this is common in other electricity markets (e.g. the capacity markets run by ISOs) and we don’t say that these markets are doomed.
Good public policies generally do not try to mandate solutions. Instead, they often set a standard and let the market find the best solution for meeting that standard. Constraining supply to state borders is a move in the direction of a mandated solution. Yes, it will increase SREC prices. Yes, it will encourage more solar developed in that state. However, this strategy will not meet the state’s primary goal in the least cost way. Why, for example, should Pennsylvania spend money on encouraging solar in-state when New Jersey has a better solar resource and can produce cheaper solar energy?
In all of these details, let’s not lose focus on the real problems. Fossil generation contributes to tens of thousands of deaths each year and to climate change. These problems necessitate ambitious goals, and RPSs with RECs have proven to be a fairly effective mechanism for achieving them. We should increase RPS standards, but we should not limit the ability of states to meet these standards.
I guess I just come from a whole different mindset all together. There is a large assumption propping up this whole discussion that I have not been convinced of in the first place. That assumption being that renewable energy sources are the best thing for our country at their current technology maturity level. But I will try to stay away from this point.
ReplyDeleteI also agree with Yash’s conclusion and learned a lot from his post. I was not aware that the government has even more than subsidies helping out the renewable energy industry grow. From the post it seems to me that supply and demand is pretty much driving everything in these markets and that Yash’s analysis is spot on. In markets like PA and Ohio where there is an abundant amount of supply, the prices are low and the producers have no problem meeting their credit quotas. The only real way to fix these markets, or make them even worthwhile for trading is to try to get supply more in line with demand. This can be done via disallowing out of state credits or increasing the demand via increasing the quota. In some select states, they did just this.
The markets where supply and demand are more in line may be able to maintain the credit markets for some time. But there are even more questions that come up with this. Policy makers are setting these limits, are they the right limits? Are renewables growing too slow? Should solar really be 2% to 2.5% in the northeast? Does it make sense to put solar in Pittsburgh, the city second on the list for most rainy days?
Switching subjects, I have a couple of questions around the magnitude of the cash flows that these RECs and SRECs have on an energy producer’s bottom line. How much are they paying every year to buy the credits? How much would it cost them to make their portfolio of energy match the government mandated percentages? What REC/SREC price does it make sense for these producers to build their own renewable projects?
Great effort. Thanks. Your point is pretty clear --- that fragmentation does not bode well for someone wanting to *invest* in SRECs --- and you do a convincing job. But I find myself wanting to take a step back …. the point of these things isn’t to create a new financial market. It is, I guess, to “subsidize” renewable generation and at the same time facilitate an efficient reduction in carbon (ie, polluters can buy them so that the firms that can most cheaply reduce pollution do so to hit some sort of aggregate target). Perhaps this might be an interesting angle to go down as we go forward.
ReplyDeleteI’d like to see a few less graphs and more description and analysis of each graph. In some cases I really don’t understand what the graph is saying. The DCF Fig 8, for instance. DCF of what?
You might also consider a simple example or two. There are a few things that I’m confused about. Suppose that in the state of PA there are 100 SRECs produced this year, but the RPS mandates that the utilities only generate 50mWh of solar power. The fine is, say 400 per mWh that the utilities are under their constraint. What should the market price of the SRECs be? Zero, I guess. Suppose not. Suppose that the utilities were paying 400 to 50 SREC owners. Then those holding the other 50 would try to undercut. This would continue all the way to the floor. Do I have this right? Also, if there are fewer SRECS that the limit, then the price must be $400. Who dreamed up this market? Does it makes sense? Why or why not?
Also, following Zigarovich’s post (sorry, I peaked) … some concrete aggregate numbers would be helpful. He claims that PA will have around 800-900 MW of solar in the near future. What is the RPS, in MW units? Are these things just totally out of touch? If so, why?
Anyway, good post. Got me thinking (about what I know and I don’t know). I suggest trying a little harder to pin down exactly what the purpose is and how the outcomes are not (or are) looking with this purpose in mind.
Grading Rubric (badly formatted because comments don’t allow formatting)
Possible “grades:” Excellent (E), Very Good (VG), Good (G), Could be Better(CBB)
Takes a clear position: V G
Substantiates the position: VG
Informs the casual reader: VG
Clarity/quality of exposition: VG