So far we have discussed basic the structure of SREC, its market in the different states in the US and analyzed the problems SRECs are facing. We have also compared the SREC system of US with the GO system of the European market and gave a basic idea as to how SREC can still be a potential solution for the expansion of solar industry. In this blog, we will briefly discuss the challenges SRECs is facing and if SRECs revival is required? if yes then what might be the possible solutions for it.
How effective is SRECs: Case study of Massachusetts
As discussed in the previous blogs, the SRECs pricing is at all time low, once initially put forward to act as an incentivize mechanism for the solar expansion in the states, decreasing prices of SRECs forcing the installers to rethink whether “Going Solar” is really a good option. To put things in perspective, let’s take an example of 5.5 KW rooftop solar system in the state of Massachusetts, the findings have been taken from Green Tech media article [7]:
Installed Capacity: 5.5 KW
Project cost after incorporation ITC and states incentive - $ 21,000
Loan interest rate and EMI – 2.99%, $ 189 per month
SREC gain - $ 1000 in the first year assuming total generation of 5000 kWh and SREC price is $ 200 per MWh
This situation makes the project cash flow positive from year 1.
Based on the electricity consumption profile and using incentive like net metering, over the 20 years, the numbers would be like-
20-year savings on electric bills: $22,759
Production incentives: $16,028 (10 years of SRECs, assuming ~$200 for each megawatt-hour generated)
Total 20-year benefit: $38,787
To summarize, with SREC trading and net metering with higher wholesale rates, system is cash flow positive from year 1 with payback occurs in year 3 assuming SREC price remains over $ 200 per MWh (Latest bid price is $ 270 per MWh [10])
Above calculation shows us a practical example how SREC is contributing to the expansion of solar and thereby in expanding clean energy.
Now, the question comes that if SREC is so useful then why we see a decreasing trend in SRECs price over the last few years in almost all the states barring few like DC [11] -
Will SREC touch to $ 0 in future
Specifically, we see a sharp drop in the prices of SREC in PA an OH as discussed in the previous blog also which led us to rethink whether SREC price will touch $ 0 in anytime soon?
Well, it’s a good assumption but not very accurate. It is true that the value of SRECs by nature is designed to decline as the cost of solar decline. We know that the price of SRECs is governed by the law of supply- demand and alternative compliance cost (consider it is as penalty which utility might have to have in case they could not fulfil RPS requirement). So, ACP can act as a price ceiling for the SREC price but we forget to mention a lesser talked about market driver which is Tier 1 renewable energy credit price which may act as a price floor for SRECs trading [9].
So REC is basically production of lower cost renewable technologies and SREC is the special carve out with its own ACP to offset the difference between lower cost technologies like wind, biomass, and Solar. In this regard, SREC price will at max ultimately touch REC prices which are exactly the case in PA and OH.
Why only PA and OH’s SRECs touched RECs prices so soon?
Some may consider it mainly due to an oversupply of SRECs in the market but are it because of rapid expansion of solar in these states? Not really. In 2015, PA and OH total solar addition were 15 MW and 10 MW respectively while the tiny state like Connecticut installed 91 MW and Massachusetts did 286 MW [9].
So now comes the policy scenario. PA and OH are the only two states which allows SRECs generated outside the state boundary to be traded inside the state market, secondly they also have very modest renewable targets [8]. Further, Ohio legislature is freezing renewable targets which is again not a good sign for the expansion of clean energy and in turn for solar industry and SREC market.
What should be the solution then:
Clearly, as more states will be close to meeting the RPS targets along with the reduction of solar costs, more will decrease in the price of SRECs which will ultimately touch to RECs prices in the market.
This situation has been avoided in the case of New Jersey back in 2012 when it revised the total solar requirement and it helped the market to stabilize. Again, with a new bill S-2276, New Jersey is moving up the requirement that more than 4% of the states’ electricity comes from solar the system by 2021, instead of 2028 as is expected per the present law [2].
Another state Maryland through its Clean Energy Job Act-2017 raising the share of renewables from 20% by 2022 to 25% by 2020 [5]. While Massachusetts firstly come up with SREC-I plan requiring a renewable capacity of 400 MW and then revised it to 1600 MW by 2020 after the target of 400 MW has been met. Currently, it is in the process of designing and implementing Next Solar incentive program [1].
What my point here is each state have different RPS targets and time frame and states came out with unique RPS program that best fit their needs, market requirement and renewable goals. As of 2014, 95% of the RPS targets have been hit by different states and few states like the ones mentioned above continue to modify or setting new targets [4].
The constant revision of RPS guidelines are making a way for a strong SREC market in the future and the decreasing trend we are witnessing now is just an indication of that many states are close to achieving their defined targets and as more and more states will come with new RPS guidelines, the SRECs market will expect a boom in the coming future.
References:
1. https://pv-magazine-usa.com/2016/09/26/massachusetts-reveals-draft-of-new-solar-incentive-program/
7. https://www.greentechmedia.com/articles/read/What-if-Nevadas-Solar-Regulators-Came-to-Massachusetts
I had no idea what the SREC market was or how it worked so I thought it would be worth going back and reading the entire thread. I’m glad I did because this is certainly an interesting topic and study as to how incentives and punishments can help drive adoption of a new technology such as solar power. I also learned the meaning of a whole new bunch of acronyms that I never knew existed (SREC, REC, RPS, SACP, ACP, SACP) and can get confusing until you have their meetings sorted out!
ReplyDeleteMy biggest takeaway not only from this particular post but from reading and learning from the whole thread is that this SREC market seems to be totally reliant on government intervention and regulations. If the state governments, or perhaps even the federal government were to raise the compliance obligations on states RPS and impose harsher SACP’s wouldn’t the price of the SREC’s implicitly move higher? If my understanding of how this stuff works is indeed correct it would go something like this (unrealistic numbers):
• It is imposed on state utilities that now 5% of energy on the grid must come from solar energy, or they pay a large SACP
• They scramble around looking for SRECS to buy on the open market to use towards their credit.
• Prices move up as with the current residential installations, there are not enough SRECS for everyone who needs them.
• Homeowners, realizing the implicit cost of installing solar panels now is even cheaper as the SREC price rises, install a record number of rooftop systems!
It sounds pretty good, but the problem here is that this can run in a vicious circle. Perhaps to profit from rising demand PV prices rise to a level that makes it cost prohibitive for residential installation even after SRECS are considered. OR, after everyone has installed their solar roof tops, there is a massive supply of SRECS that again drive down the price to levels that once again hinder the installation growth. And now you have utilities stuck paying massive fines.
As someone who generally favors less government intervention in markets, I don’t see how this system can be fixed, or even if it needs to be. Don’t get me wrong, I am all for clean energy and its role in the sustainability of our planet. I just don’t know if this structure of financing is what will help lead to mass adoption.
I really enjoyed reading your blog post. You clearly identified why SRECs are meaningful using a simple example, identified the core question (will SRECs come back stronger) and explained the drivers behind prices nearing $0.
ReplyDeleteYou hit an important point by pointing out that by nature, there are several dynamics impacting SREC prices: supply / demand balance, state-level policies around renewable targets and ability to trade the instrument, and finally the spread in cost compared to the next best (renewable) alternative.
The notion that RPS targets are going to increase in the future and likely lead to >$0 SREC prices is logical on the surface. Based on your description of the interplay of the drivers, I do question though whether the pace of regulatory adjustments may lag advancement in solar economics and increased supply. In such a scenario a significant price recovery would be unlikely.
I didn't read the whole thread, so I my next comment may be covered in another section. I think it is worth considering an expiration date for the SREC instrument since it is really an incentive meant to spur solar in its early stages. Why do you think this should/would happen or not? If they are effectively retired (by not increasing regulatory requirements), will solar companies really struggle (I'm talking long-term here).
Finally, just a little nit-pick: Even if you have defined them before, write out the names before using abbreviations. Thanks!
Your overall point --- that we should expect to see SREC prices increase because of tighter RPS constraints coming in the future --- is an important one. Nicely said. This should be valuable in terms of your overall point at the end.
ReplyDeleteI love the concrete SREC, res solar example. Doing stuff like this always makes things tangible, easier to understand and retain.
I didn’t understand your argument for a floor on SREC prices. I reading the following three times. I don’t get it (the grammar mistakes don’t help, but I tried to work through them):
“So, ACP can act as a price ceiling for the SREC price but we forget to mention a lesser talked about market driver which is Tier 1 renewable energy credit price which may act as a price floor for SRECs trading [9].
So REC is basically production of lower cost renewable technologies and SREC is the special carve out with its own ACP to offset the difference between lower cost technologies like wind, biomass, and Solar. In this regard, SREC price will at max ultimately touch REC prices which are exactly the case in PA and OH.
The grammar in this post was not very good.
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: VG
Substantiates the position: G
Informs the casual reader: G
Clarity/quality of exposition: CBB