What will SRECs be worth in 3, 5, and 10 years?
When potential customers ask me about their options for selling SRECs, I explain that they have different options depending on their appetite for risk and their investment time horizon. Some of these potential customers then ask me “what will SRECs be worth in 3, 5, and 10 years?”
This is a very important question in determining the return on a solar investment, so I am always very careful to point out that there are many factors that determine the value of an SREC and these factors change over time, therefore the future value of SRECs is uncertain.
When I note the uncertainty about the future value of SRECs, many customers remark that they believe that the SREC values will go up. As a solar industry advocate, I certainly hope they are right, but I feel that it is my duty to explain the risk factors that affect SREC values.
I usually start by discussing Renewable Portfolio Standards (RPS), and I mention that SREC demand will go up in line with yearly RPS increases, but not necessarily the value of the SRECs.
Sometimes these customers, particularly those bullish on SREC futures, express interest in entering into a shorter-term SREC agreement, such as Sol Brokerage or our 3-year Sol Annuity contract because they fear that they will lose if SREC prices go up in the future. At this point in the conversation, I usually mention that SREC values will not rise (or remain stable) in perpetuity; instead prices will likely decline.
For example, in Pennsylvania and DC, we have witnessed a decline in SREC values on the spot market by 15% and 23%, respectively, over the last three months. In these cases, system owners that decided to “gamble” by selling their SRECs on the spot market (versus entering into a long-term agreement) have lost value in their SREC transactions – and have no guarantees on the future value of SRECs.
However, in explaining that SREC values can fall, I have noticed that some potential customers suspect we are misleading them, attempting to create doubt about SREC values in order to capitalize on our position in the market.
I now realize this is likely the first time they have heard the idea that SREC values will decrease. After all, many installers claim that SREC demand is going to rise exponentially (or stay constant) over time, and SREC values will be strong for 10, even 20 years (long after the system has been paid for) – which is a line of reasoning that helps installers close more sales.
In an attempt to be objective, I often provide details on particular provisions within a state’s Renewable Portfolio Standard (RPS). For Ohio, I may cite that the Alternative Compliance Penalty (ACP) is set to decline by $50 per SREC in 2012, and will decline another $50 bi-annually thereafter. Similarly, Maryland, DC, and New Jersey all have declining ACP schedules.
Sometimes this information strikes a chord with a customer, but in more cases, it becomes clear that the customer favors a short-term contract, such as our Sol Brokerage service. This is perfectly fine so long as they understand the risk factors, but I cannot help but conclude that it is easier to sell somebody what they want to believe, instead of trying to educate them on the inherent uncertainty of complex SREC markets.