The value of solar renewable energy credits (SRECs), by nature, is designed to decline over time as the cost of solar declines. SREC markets – markets generally with a solar carve-out in their renewable portfolio standard (RPS) – are governed by the laws of supply, demand, and the alternative compliance payment (ACP). While the ACP acts as a price ceiling, a lesser talked about market driver is the Tier I renewable energy credit (REC) price, which acts in some ways as a “price floor” for SREC values. Many assume that when markets become oversupplied, the value of SRECS will ultimately reach $0. Not a bad assumption, but clearly not a good one either. To understand why, a look at the broader Tier 1 market is key.
REC vs. SREC: What’s the Difference?
Unlike SRECs, RECs are not generated exclusively by solar (as you may have guessed from the name). RECs are typically produced by lower cost renewable energy sources, or those that are built at a tremendous scale (like wind). Solar gets a special carve-out with its own ACP to account for a difference in costs between solar and other technologies, and because solar can be built at smaller scale (e.g. rooftop solar and distributed generation). In Pennsylvania, for example, wind, geothermal, biomass, and low impact hydro are a snapshot of technologies that qualify for Tier 1 RECs. Non-renewable sources such as “black liquor,” a paper industry favorite, may also count toward RPS compliance in some states.
Why isn’t solar booming in Ohio and Pennsylvania?
When an SREC market becomes oversupplied, SREC prices gravitate toward the Tier 1 price, not $0. Take Pennsylvania and Ohio, two states with extremely oversupplied SREC markets. It’s no coincidence that SREC prices have hit rock bottom in both states, and SRECs are trading for about $13-$14, which is also the Tier 1 price.
Unfortunately, the oversupply in PA and OH cannot be attributed to strong solar builds in-state. Ohio only installed 10MW last year, and PA only installed 15MW of solar; to put that in perspective, tiny Connecticut installed 91MW of solar last year, and Massachusetts installed 286. The oversupply in PA and OH is due to a number of factors, most notably, relatively modest renewable targets, as well as loose compliance rules that allow for energy from out-of-state sources to qualify for SREC. Add in recent interference by the Ohio legislature to freeze the state’s renewable targets, and prices are hitting the Tier 1 price point ahead of schedule.
Regarding the first point, under PA’s version of an RPS, an Alternative Energy Portfolio Standard (AEPS), 18 percent of the electricity supplied by Pennsylvania’s electric distribution companies (EDCs) and electric generation suppliers (EGSs) must come from alternative energy resources by 2021. Only approximately 8% of that must come from Tier 1 sources. In Ohio, only 12.5% of energy must come from renewable energy sources by 2027, though even that modest amount of renewable energy procurement is in jeopardy pending current legislation. To put these numbers in perspective, legislation in Maryland, if enacted, would put the renewables requirement at 25% by 2020, and legislation being considered in Washington, D.C. would increase the renewable portfolio standard to 50%.
On top of PA and OH’s relatively weak renewables targets compared to other states, provisions allowing for out-of-state resources to count toward compliance further dilutes the standards. These provisions also do little to stimulate investment in each state’s own borders. This provision also creates a price interdependency between the two states, which is why pricing is gravitating in both markets toward the Tier 1 price. As such, if legislation moves forward to freeze Ohio’s already meager renewable portfolio standard, the Pennsylvania solar market will also be affected.
What Projects Can Be Built with Tier 1 Pricing?
Solar carve-outs were designed with the expectation that SREC pricing would one day merge with Tier 1 pricing. That is happening now in Pennsylvania and Ohio, and could soon happen in other states if oversupply outweighs renewables targets.
Even with pricing at Tier 1 rates, residential may pencil so long as the integrity of net metering is kept in place. Although some utility-scale solar will move through, the middle portion of the market – commercial and industrial (C&I) and even small utility-scale – will see far fewer opportunity for growth. As if this middle sector of the market didn’t have enough challenges…
This is an excerpt from the May edition of SOURCE: the Sol Project Finance Journal, a monthly electronic newsletter analyzing the solar industry’s latest trends based on our unique position in the solar financing space. To view the full Journal or subscribe, please e-mail firstname.lastname@example.org.
ABOUT SOL SYSTEMS
Sol Systems is a solar energy finance and investment firm. The company has facilitated financing for over 400MW of solar projects on behalf of Fortune 100 corporations, insurance companies, utilities, banks, family offices, and individuals. Sol Systems provides secure, sustainable investment opportunities to investor clients, and sophisticated project financing solutions to developers. The company’s tailored financial services range from tax structured investments, project acquisition and SREC portfolio management. Inc. Magazine named Sol Systems on its annual Inc. 500 list of the nation’s fastest-growing private companies for a second consecutive year, ranking it No. 6 in the nation’s top solar companies in 2014. For more information, please visit www.solsystems.com.
Pennsylvania has long been a model of a solar renewable energy credit (SREC) market gone wrong. The market was (and still is) four times oversupplied, and SREC prices fell to $20 in 2013 from $300 in 2010. However, prices have surged to $70, which has many people asking, what is going on in Pennsylvania, and more importantly, will this bust market be revived in 2014?
To answer this question, it is important to understand the history of the Pennsylvania SREC market and why it became so oversupplied in the first place. In 2004, Pennsylvania’s Alternative Energy Portfolio Standard (AEPS) mandated for the state to procure 18 percent of power from renewable and alternative sources by 2021. Of this 18 percent, the state’s SREC market was created by a 0.5 percent solar carve-out.
As SREC prices continue to rise in Washington, DC, how can developers and investors gain access to this promising market? How will the DOER’s potential rule changes affect the Massachusetts SREC market? Will Delaware’s Procurement Program provide relief to their weakened SREC market?
Join our SREC portfolio management team, George Ashton and Amber Rivera, on Wednesday, April 3 at 12:30 PM ET as they discuss the latest market trends in the various SREC states, as well as strategies for financing projects with SRECs. This quarter’s update will include important regulatory changes and price fluctuations in the various SREC markets, including DC, Delaware, and Massachusetts.
Space is limited, so register today.
Every month, Sol Systems distributes a newsletter, the SolMarket Project Finance Journal, to our community of solar developers and investors. The journal features solar finance statistics, trends, industry news, and SREC market information. We gather this information from our relationships and experience aggregating SRECs and financing commercial and utility scale solar projects.
We have included excerpts from our February Project Finance Journal below. If you have any questions about this information, wish to receive our monthly newsletter via email, or have a solar project in need of seeking financing, please contact our team at email@example.com. We would love to hear from you.
Project Finance Statistics
Characteristics of “Hot Projects”
Capacity: 149 kW – 4.25 MW
Average capacity: 1,600 kW
Competitive EPC costs currently range between $2.15-$2.80/Watt
*Competitive prices depend on scale, location, and individual project economics
- <500 kW: $2.40-$2.80/ W
- 500 kW – 2 MW: $2.25-$2.65/ W
- >2 MW: $2.15-$2.45/ W
- DE: 9.9 cents/ kWh (20 year term; 2% escalator)
- MA: 8.6 cents/ kWh (20 year term; 1.5% escalator)
- NY: 9 cents/ kWh (15 year term; no escalator)
Feed-In Tariff rates:
- CA: 17 cents/ kWh (20 year term; no escalator)
- FL: 29 cents/ kWh (20 year term; no escalator)
- NY: 22 cents/ kWh (20-year term; no escalator)
- RI: 32.2 cents/ kWh (15 year term; no escalator)
Recently Funded Projects
Cumulative capacity: 11.8 MW
Cumulative value: $38.7 million
Locations: IN, NC, OH
Trends and Observations
Lean and Mean: Solar Project Margins Are Thin & Programs Are Competitive
It is no surprise that the economics of solar deals are changing, and in many cases, becoming more challenging. Even after solar project developers have secured state incentives, project margins are thinning, and it is increasingly difficult for developers to ensure that project economics pencil for investor partners. Solar developers effectively have two clients: (1) their host entity or lessee and (2) their investor. The changing dynamics in the solar market mean that it is more important than ever for developers to focus on their financing partners needs and requirements. This means that developers must:
- Negotiate high PPA rates
- Minimize site lease costs
- Procure and utilitze financeable power purchase agreements and leases
- Build flexibility into their offtake agreements so that they can make changes for investor partners when necessary
- Procure the most recent and most competitive EPC quotes
- Reduce property taxes and other cost centers that reduce project returns
The presence of state and regional incentives continues to play a pivotal role in determining which projects get financed. Subsequently, local incentive programs are typically competitive and oversubscribed. While it should go without saying, it is not enough to bid low and queue up for local incentives. Developers must ensure that they are bidding into programs in ways that allow them to build and finance the projects. In other words, developers need to model project costs accurately so that the incentives align with other project costs and income streams, as well as provide sufficient cash flows for equity investors. Ultimately, they have to balance these strategies with their own financial hurdles and embedded costs.
Given our experience with multiple investor clients, we suggest that sufficient cash flows typically mean a 20 year IRR of 11-12 percent or higher for smaller projects, and 9-10% or higher for 2 MW+ projects. The smaller and more complex the transaction, the higher the required return. Additionally, developers’ models are likely to differ from that of your investor, which is why developers should accurately consider the same upfront costs and ongoing expenses that an investor incorporates into their model. Our team is intimately familiar with our investor clients’ models, and we recommend communicating with us as you consider project economics.
Manufacturers Getting Creative to Find Channels for Panels
With a glut of solar modules in the market and fewer developers warehousing panels, we have seen virtually all major panel suppliers become more creative in their efforts to procure sales channels. In addition to partnering with and acquiring downstream solar players, we have seen module manufacturers attempt to secure direct relationships with hosts before a developer is involved, or provide developers with construction financing in exchange for a commitment to use their panels.
Manufacturers’ credit and reputation will certainly play a role in whether or not projects ultimately obtain take-out financing, but only time will tell which manufacturers’ efforts are the most successful.
The Sol Systems team welcomes and encourages all creative ideas that lead to successful project development, and we are in discussions with a number of manufacturers to facilitate project finance opportunities.
Sol Systems Call for Projects 50 kW – 2 MW
We are actively seeking solar projects 50 kW -2 MW in size. Our investors are looking to close deals by the end of March 2013. Please contact Sol Systems as soon as possible if you have projects that meet the following criteria:
- Rooftop, ground-mount, or carport
- Located in California, Connecticut, D.C., Hawaii, Maryland, Massachusetts, New Mexico, New York, or Rhode Island
- To be placed in service prior to September 1, 2013
- Rated SREC contracts for D.C., Maryland, and Massachusetts preferred, but not required; Sol Systems’ investors will take on SREC risk
Of course, we are always interested to hear about solid projects, even if the project does not meet all of our above criteria. Please contact our team to discuss financing options for any of the projects in your pipeline.
Priority consideration will be given to developers with a proven track record of success and who have demonstrated progress on site control, interconnection, and permitting. Learn more.
This month, Sol Systems increased pricing for Sol Annuity fixed price SREC contracts for systems certified within Washington, DC. The pricing increase was largely attributed to the aggressive change in the RPS requirement, which was amended in the summer of 2011 with the help of Sol Systems’ efforts. If you are interested in our Sol Brokerage clear prices and price movements on the spot market, please view our SREC clear prices, which are updated quarterly.
Sol Systems also offers its network the opportunity to view historic SREC marks and model future pricing using their own market assumptions. To utilize our SREC supply and demand model, please view our SREC Analytics tool.
About Sol Systems
Sol Systems is a boutique financial services firm that offers investor clients direct access to the renewable energy asset class and provides developers with sophisticated project financing solutions. Founded in 2008, Sol Systems focuses on meeting the most critical needs of the industry, including SREC monetization, capital placement, tax equity, and New Market Tax Credits. To date, the company has arranged financing for thousands of projects and facilitated hundreds of millions in investment on behalf of Fortune 100 companies, private equity, family offices and individuals.
For more information, please visit www.solsystemscompany.com.
At the end of each quarter, Sol Systems takes the weighted average sales of the SRECs from our 3,300+ customers to calculate our final clear prices. These SREC clear prices are then posted to Sol Brokerage page of our website. Sol Systems publishes our quarterly SREC clear prices in order to help provide transparency to the SREC marketplace for both our Sol Brokerage customers and developers in the solar industry.
As the oldest and largest SREC aggregator in the country, Sol Systems’ portfolio management team leverages our SREC expertise to transact in the SREC market on a daily basis when we see strong opportunities for selling our customers’ SRECs at the highest market values.
The Sol Systems approach differs from other SREC broker services and auction-based platforms in that we have in-house expertise that is constantly monitoring SREC markets, communicating with SREC buyers (utilities and energy suppliers) and achieving the highest sales prices available for our customers by selling bundles of SRECs on the spot market. Using an aggregation approach instead of selling SRECs individually, we often secure higher spot prices than competitors.
Please see below for our most recent spot market clear prices for SRECs generated in compliance years 2012 and 2013. Our next clear prices will be posted after the Q4 payment cycle, which is at the end of February and encompasses all generation between October and December for PJM customers and July to September for Massachusetts system owners.
2013 Compliance Year SRECs
2012 Compliance Year SRECs
About Sol Systems
Sol Systems is a solar finance firm and a leader in financial innovation in the renewable energy industry. Since its inception in 2008, Sol Systems has partnered with 350 solar installers and developers to bring over 3,000 solar projects from conception to completion by offering innovative financing solutions for residential, commercial, and utility-scale projects.
Sol Systems’ financing programs catalyze investments for a broad set of solar projects by simplifying their origination, diligence, and financing processes. Developers seeking financing for solar projects can access over $2.5 billion in capital through the Sol Systems investor network.
In addition to providing financing, Sol Systems also offers project due diligence, deal structuring, and asset management services – all designed to reduce overhead and transaction costs and quicken project development timelines.
For more information, please visit www.solsystemscompany.com.
Lots of people know that New Jersey is the 2nd largest solar market in the U.S. and that the market’s strength is largely credited to a robust solar renewable energy credit (“SREC“) market (SRECs traded on the spot market at approximately $650/SREC in early 2011), but there are three things that most people don’t know about the New Jersey SREC market…
1. When does SREC creation begin?
2. What are New Jersey’s solar meter requirements?
3. When will NJ SREC prices fall?
When does SREC creation begin?
SREC creation does not begin as soon as the system is installed or when the system is capable of producing solar electricity. Rather, SRECs are awarded after New Jersey has awarded the system a certification number and the utility has signed off on the interconnection agreement. Thereafter, one SREC is awarded for every megawatt hour of solar energy that is generated.
The SRECs can be sold after the system has been listed on PJM’s Generation Attributes Tracking System (GATS). PJM GATS is responsible for tracking SREC production for systems located in New Jersey and throughout the PJM region (so that SRECs aren’t double-counted).
When it comes to selling SRECs and collecting money for SRECs, system owners have a variety of options. They can sell on the spot market through an aggregator or broker, they can sell through a fixed price contract with a utility or aggregator, or they can pre-sell their SRECs through an upfront agreement. In all of these arrangements, there will be a slight delay in when the system owner actually receives a payment for their SRECs. One reason for the delay is that GATs does not award a credit for an SREC until one month after the SREC is generated.
What are New Jersey’s solar meter requirements?
The most recent rules from the New Jersey Clean Energy Program require systems to have an ANSI certified solar meter with a 5% accuracy rating for systems 10 KW or less and a 1% accuracy rating for systems larger than 10 KW. (Systems that have received REIP funds and that are 10 KW or smaller in size do not need to meet this requirement.)
A solar meter (often called a “utility-grade meter”) is different than the utility meter, the solar meter is installed with the solar energy system and it is ultimately what measures SREC production. To get credit for each SREC that is generated, system owners who have systems larger than 10 KW must provide a monthly meter reading. This reading can be taken manually, or through a remote monitoring system.
When will SREC prices fall?
Unlike some other SREC markets, New Jersey has historically enjoyed high and stable SREC prices. In fact, SREC spot prices actually rose from September 2008 to March 2009, which led some people to regard SRECs as an appreciating asset. The history of high and stable prices has led many system owners and solar developers to believe that spot market SREC prices are guaranteed to remain stable in New Jersey, but unfortunately, this is not true.
To understand why SREC prices will fall eventually, one must understand why NJ SREC prices are currently high. In today’s world, New Jersey energy suppliers have the choice to:
a. Develop their own solar energy facilities
b. Purchase SRECs from solar energy system owners via the spot market or through long-term fixed price contracts
c. Pay an “Alternative Compliance Penalty” (ACP)
Thus far, most energy suppliers have elected to (b) purchase SRECs from solar energy system owners through the spot market and long term contracts. They have done so because they do not currently have enough of their own solar capacity to meet their obligations and they would rather purchase SRECs (at an amount slightly less than the ACP) than they would pay a penalty fee for non-compliance. However, energy suppliers have plans to develop their own plants, and they know that the ACP declines slightly every year (by approximately $15 every year) which means that, no matter what happens, they will be paying less for SRECs in the future.
In addition, the supply of SRECs in New Jersey is increasing as more solar farms, residential and commercial solar energy systems are built (“SREC supply”). Luckily, New Jersey’s RPS legislation calls for an increasing number of SRECs to be bought and/or created by energy suppliers (“SREC demand”). In fact the SREC demand will increase in June 2011, but the supply of SRECs is edging closer and closer to SREC demand.
As of March 2011, there was an SREC undersupply of approximately 10,000 SRECs (equivalent to what 8 MW generates annually). This gap is smaller than it has ever been – but the gap is what helps keep New Jersey’s solar REC prices high. Moreover, new projects are coming online every day (11 MW were installed in February 2011), and there is a pipeline of small residential projects and more than 200 megawatts of large-scale projects that have already been announced. (Here at Sol Systems, it seems we talk to at least one developer each day who is planning a 1+ MW project in New Jersey.)
If just a portion of this pipeline comes to fruition, there may be an oversupply of SRECs which will flood the SREC market and cause SREC spot market prices to fall. On the other hand, history has shown that multi-megawatt solar projects are often delayed or never come to pass – so it’s hard to know exactly when supply will catch up with demand. If an oversupply occurs, SREC spot market prices will begin to fall, and system owners who do not have a fixed-price, multi-year contract like Sol Annuity with an SREC aggregator or an energy supplier could see decreases in their SREC income and their solar energy system ROI.
Alas, even the SREC experts can’t tell you if or when spot market SREC prices will fall in New Jersey. The truth is that SRECs are commodities and system owners need to evaluate their own tolerance for risk when determining their strategy for selling them.
About Sol Systems
Sol Systems is a solar energy finance and development firm that was built on the principle that solar energy should be an economically viable energy solution. With thousands of customers and hundreds of partners throughout the United States, Sol Systems is the largest and oldest SREC aggregator. We provide homeowners, businesses, solar installers, and developers with sophisticated financing solutions that help make solar energy more affordable. Sol Systems also helps energy suppliers and utilities manage and meet their solar RPS requirements efficiently by providing them with access to diverse portfolios of SRECs. For more information, please visit www.solsystemscompany.com.
Many prospective solar energy owners are quick to notice that spot market rates for Solar Renewable Energy Credits (Solar RECs or “SRECs”) are typically higher than long-term SREC rates on the contract start date. For example, a person that owns a solar energy system in Delaware could sell a single SREC on the spot market for approximately $275 in December 2010, but if that same person wanted to lock-in at a 5 year SREC rate, she would only be able to get approximately $250 for each SREC produced between today and 2015.
This price difference sometimes leads solar owners to sell their SRECs on the spot market, particularly if they expect SREC prices to go up over time.
So, why would a solar owner choose to enter a long term SREC agreement?
The main reason a system owner would choose a long term contract is because they realize that spot market rates may not always stay high. These owners prefer to guarantee their SREC returns by locking into a fixed rate multi-year contract, which will give them long term security and a predictable source of income. If these system owners are correct, they will end up getting more income over time than they would have by selling their SRECs on the spot market.
But why are long term rates lower than current spot market prices?
There are a few reasons why multi-year contract rates are initially lower than spot market rates, and they relate to SREC buyers appetite to buy SRECs. Let’s start by considering the profile of an SREC buyer.
The ultimate SREC buyer is an energy supplier or utility that is subject to a state Renewable Portfolio Standard with a solar carve-out. These energy suppliers and utilities have the choice of:
(1) Building solar power plants and generating solar energy themselves
(2) Buying the environmental attributes of solar (SRECs) from independent solar energy system owners, or
(3) Paying an Alternative Compliance Payment (ACP) or a penalty fee for not meeting their legislative mandates
If these energy suppliers and utilities do not own operational solar power plants, they typically prefer to buy SRECs. If they want to buy SRECs they can do so by buying them on the spot market or they can enter multi-year agreements at a pre-determined price.
Most energy suppliers will hedge their bets by buying some SRECs on the spot market and some SRECs through multi-year agreements. However, in virtually all cases, these energy suppliers will contract for lower prices per SREC for multi-year agreements than they will pay on today’s spot market. There are a few reasons for this:
(1) They expect that they will not need to buy SRECs in the future. Why? They plan to build solar power plants and generate their own solar energy, so they won’t have to buy them from independent system owners.
(2) They expect that they can buy SRECs at lower costs in the future. Why? They anticipate that there will be more solar projects and that the increased SREC supply (http://www.solsystemscompany.com/faqs-recs-and-srecs) will lead to lower SREC prices.
(3) They want to wait and see what happens to requirements and prices in future years. Why? They expect that legislative changes may reduce or eliminate the requirement for them to buy SRECs.
In other words, energy suppliers themselves believe SREC prices will go down. Because of these expectations, energy suppliers are usually only willing to engage in multi-year agreements at reduced SREC prices. And these uncertainties are the very same risk factors that create SREC spot market volatility.
In summary, when choosing between the SREC spot market and a long term contract, a solar energy system owner should examine their appetite for risk and reward.
System owners who choose to sell their SRECs on the spot market get the reward of higher spot market prices today, but they are likely to face reduced or eliminated SREC values in future years. System owners who choose to sell their SRECs through long term contracts typically receive lower SREC rates today, but they get more certainty on their solar investment returns.
About Sol Systems:
As the largest and oldest SREC aggregator in the U.S., Sol Systems aggregates SRECs from independent solar energy system owners and sells them directly to energy suppliers and utilities through spot-market arrangements and multi-year contracts. Sol Systems operates in 13 states. For more information, please visit www.solsystemscompany.com.