In most states, grid-tied PV systems have had only one income stream—the money saved by not having to purchase electricity from the utility. By monetizing the “green” (environmental) attributes of small PV systems, solar renewable energy credits (SRECs) are making PV production in some states far more profitable by providing an additional income stream.
What is an SREC?
SRECs (pronounced “ess-reks”) are “tradable commodities that represent the green attributes associated with energy generated from [sunlight]” according to SRECTrade, a pioneering company in SREC transactions. One SREC represents the environmental benefits of one megawatt-hour (MWh or 1,000 kWh) of PV-produced electricity.
SRECs are the most common, cost-efficient way for electricity suppliers to meet a state’s renewable portfolio standard (RPS)—especially an RPS with a “solar carve-out” requiring that a percentage of the renewable electricity be met using solar. Rather than build their own solar-electric generation plants, utilities often buy SRECs through aggregators or brokers that trade on behalf of small and large PV system owners. The utility meets the requirements by purchasing the green attributes of a third-party’s PV system.
The party that buys the SRECs from the PV system owner has the right to claim in marketing materials or for meeting regulatory policy goals that they are producing clean power, and the PV system owner can no longer make those claims. This promotes the spread of solar energy by making it more profitable, while preventing two parties from making green claims for the same energy produced.
If a regulated energy supplier fails to meet their state-mandated RPS, they are subject to solar alternative compliance payments (SACPs), which are set at a fixed rate—unlike SREC prices, which vary based on supply and demand. A utility is better off buying SRECs when the price is less than the SACPs, which are scheduled to begin high and ramp lower each year.
Where Can I Find SRECs?
Only eight states have true SREC markets (see map). To create local jobs and economic activity, almost all these states now require that the SRECs to meet that state’s regulatory requirements be produced in that state.
California created its own unique system that allows the use of tradable RECs (tRECS) for RPS compliance. Unfortunately, tRECs are just for electric utilities and large suppliers; small producers need not apply.
A number of other states have solar RPS requirements but do not yet have SREC markets. SREC markets must be created by regulatory action in addition to establishing an RPS; some states have yet to act. If a utility has to meet an RPS standard with a solar carve-out, it will soon realize that a tradable SREC market can be the most efficient way to meet the regulatory requirement.
Make $$ Selling SRECs
In late 2012, an SREC sold for $75 ($0.075 per kWh) in New Jersey. Further south in Washington, DC, an SREC was trading for $340 ($0.34 per kWh). Why the disparity? Simple—supply and demand. SREC demand varies in each state where they are traded, with regulatory policy being the primary driver.
SRECs only thrive in RPS markets where policies require significant solar carve-outs. New Jersey’s RPS requires that energy providers supply 20.4% of their electricity with renewable energy by 2021, with a 4.1% solar carve-out by 2028 (with accountable benchmarks that must be met each year).
As RPS or solar carve-out percentages increase, SREC demand grows. As the solar carve-out gets closer to being met, SREC demand falls, assuming the same supply. SREC supply is determined by the available qualified generation, which is determined primarily by the price of PV modules and other hardware costs, the cost of capital, and other incentives (tax credits, etc.) available to the prospective PV system developer.
In addition to prohibiting out-of-state system eligibility in its SREC market, the District of Columbia increased its RPS solar carve-out to 2.5% by 2023 from 1%, thereby increasing demand for SRECs. With demand for solar energy now greater and the potential supply limited geographically to the 68.3 square miles of the federal district, SREC prices in DC are likely to increase—at least until supply catches up with demand. Those high prices are causing more people to invest in PV systems, but as a lot more do, it will tend to reduce prices as the supply of SRECs increase.
SREC markets exist only in those states that have made regulations to create them. In DC, a 5 kW grid-tied PV system could produce about 6 MWh per year, equivalent to 6 SRECs per year. If sold in early 2013, the owner could receive a total of $2,040 ($340/SREC) if sold on the spot market. In New Jersey, it would fetch for $450 ($75/SREC).
Like commodities, SRECs go up and down in value. In August 2011, the New Jersey SREC price plummeted from $640 to $300, due to 49% more PV being installed in the first quarter of 2011 than in the same quarter of 2010. In June 2011, 520 PV projects came online, totaling more than 40 MW of capacity. In early 2013, NJ SRECs are trading for $90. The market is flooded because declining module prices, along with continued federal tax subsidies, make investing in PV systems attractive financially—for many, the SREC price is icing on a cake that is tasty enough. More people and companies are going solar and able to supply SRECs while the demand for SRECs remains stable.
Trading SRECs
Typically, homeowners must rely on third-party aggregators or a brokerage firm to sell their SRECs. “The way the market is designed makes it virtually impossible for a homeowner to sell directly to a primary energy supplier. These entities, mainly large utilities, must meet quotas for several thousand SRECs per year. They simply do not have the resources to work up deals with individual homeowners who want to sell three or four SRECs at a time,” says Brad Bowery, CEO of SRECTrade, a San Francisco-based SREC brokerage.
An aggregator/broker’s goal is to bring buyers and sellers together to transact SRECs. They act as an intermediary between small generators (homeowners and small businesses) and big energy suppliers, bundling small transactions into high-volume transactions that can be processed more efficiently.
Since the market is still relatively new, there is no universal model—each aggregator/broker (often one and the same) seems to have their own way of doing business. Most operate in SREC markets in multiple states. Some will only do spot trades or over-the-counter transactions, usually for a set fee—about $2.50 per trade. Others require contracts. Some do a mix of both. Many aggregators act as brokers, trading the SRECs on their client’s behalf. In this scenario, the aggregator’s interests are usually closely aligned with those of their clients, since the aggregator usually earns a commission as a percentage of the traded price—the higher the price, the higher the commission.
Other aggregators purchase SRECs from homeowners and then resell them in a bundle to energy suppliers at marked-up prices. The aggregator is motivated to buy as low as possible from homeowners and sell as high as possible to energy suppliers. This model is often packaged as an annuity with fixed payments or as one upfront payment for a specific term, from three to 20 years. While this approach may hedge against the potential decline in SREC prices and eliminate the market risk of fluctuating SREC prices, a homeowner may end up selling at the wrong time for too little.
“Transparency is probably the most important factor when shopping for a brokerage firm or an aggregator,” says Michael Flett, president of Flett Exchange. “Do not sell your SRECs to someone if they aren’t willing to substantiate their pricing. Ideally, you want to work with someone that makes their pricing public. You want to understand the basis for their price and whether the price reflects fair market value.”
Flett Exchange operates a stock exchange with a 24/7 marketplace where homeowners can watch the bids from energy suppliers and choose to sell their SRECs when the price is right. When a hands-off approach is preferred, Flett, like most other brokerage firms, will manage a homeowner’s SRECs—for a higher fee. Alternatively, SRECTrade sells SRECs online via monthly auctions in which homeowners set a price floor and are matched with buyers that will meet or exceed the homeowner’s minimum price. Rounding out the mix are the more traditional aggregators like Washington, DC-based Sol Systems, which offer homeowners options based on their desired level of risk.
“It’s the age-old risk/reward paradigm. How much risk are you willing to take? Most homeowners do not have the time track to the SREC markets, and they do not understand why prices go up and why prices go down,” says Williams Graves, an associate at Sol Systems. “Managing your own SRECs trades take time and commitment, and homeowners should be realistic about what they can take on.”
If you want to spend your time first learning and then keeping up with the SREC market and you like trading (similar to stocks and commodities), the DIY approach of spot (aka over-the-counter) trading offers the greatest flexibility and the greatest potential reward, but with the highest risk. Remember, buyer’s bids reflect supply and demand in the market—SRECs could be worth less in the future than they are today. If you go this route, you will need to register your SRECs with the appropriate authority (it varies by state).
The SREC market is an emerging one, and no specific resources, such as books, are available to study. Scour the websites of the SREC trading companies and employ your search engine of choice.
