Posts Tagged ‘SREC supply’

SREC Price Determinants in 2011

Wednesday, February 23rd, 2011

What Will Drive SREC Prices in 2011?

Most market participants are familiar with the three basic drivers of solar renewable energy credit (SREC) prices – SREC supply, SREC demand, and state solar compliance penalties. Most of this information can be found on RTO and state commission websites and analyzing this data yields an adequate view of the current state of the SREC market. However, to fully understand the 2011 SREC markets, a better understanding of the drivers of supply and demand is required.

SREC Supply Forecast:

The price of panels and installation will be an important input in determining the future supply of SRECs. Panel prices and installation margins have decreased considerably over the last year, especially on the East Coast. Cheaper panels and installation margins mean more development and increased SREC supply. However, 2011 will also see the disappearance of many state solar rebate programs. States like Ohio, Pennsylvania, New Jersey, and the District of Columbia are finding their coffers running low for state money to support solar projects. This means that new projects in 2011 will have to rely more heavily on the value of SRECs, which should slow development and SREC supply considerably. We have also seen new interest from traditional banks, particularly in large scale solar projects, which should bring down the cost of financing for large scale developers. Private high yield investors have now moved into the commercial and light commercial space, which means more money for these projects but at a pricey cost. Together these market effects will work to determine SREC supply in 2011. For example, will panel prices and installation costs fall enough to compensate for the termination of many state solar rebate programs? These questions will be important to answer before estimating additional SREC supply in 2011.

SREC Demand Forecast:

SREC demand is legislated by the renewable portfolio standards in each state. Consequently, demand would appear to be easy to determine. However, an increasing number of long term SREC contracts and energy suppliers with their own projects will mean that the demand that appears to be in a market could already be “spoken for”. Furthermore, with compliance entities in some states filing for force majeure, demand that should be in the market may in fact be pardoned. Even with all of these moving parts, demand is remains far easier to predict than supply.

Comparing Supply and Demand:

The standard interstate analysis of supply and demand will become more complicated in 2011 as SREC sellers in states with crumbling SREC markets look to cross state lines to sell their SRECs into other states. Determining the pace of those cross-registrations and the flexibility of the market to move those SRECs from one state to another, keeping in mind that some portion of those SRECs are locked into long term contract, will be important to determining the supply and demand balances in each state. Brokers have also added some complication to the market, as offers and bids are multiplied across the market and often give the appearance of significance amounts of demand or supply. Neither of which is healthy for a developing market.

Legislative Changes:

Increased reliance by projects on SREC prices and increased scrutiny brought upon compliance entities to meet the RPS standards will both cause market participants to look more closely at RPS statutes to determine exactly what will and will not qualify in-state. Additionally, where SREC markets can no longer support solar development, the solar community will apply pressure to politicians to increase demand to support job growth in one of today’s few industries reporting job growth: solar.

In the end, the three primary market drivers will remain the same. But what is more important than today’s supply and demand are tomorrow’s. To get a clearer picture of those dynamics, one will have to combine a historic view of growth with the changing landscape ahead to arrive at any number of varied outcomes. After all, that is what makes a market.

Share

Tags: , , , , ,
Posted in Uncategorized | 2 Comments »

Mid Size Commercial Solar Projects Require Guaranteed Long Term SREC Contracts

Monday, November 15th, 2010

The mid-Atlantic region has witnessed a rapid growth in solar installations over the past few years. While the large multi-megawatt commercial projects make front-page news, it is interesting to note that there is also vibrant growth in mid-size commercial projects, ranging from 50kW-500 kW. Today, the total capacity of solar installed in the PJM region (solar projects in the mid-Atlantic region) is 262 MW, of which 83 MW comes from systems in the 50 kW-500 kW range. Moreover, the mid-size commercial project segment has shown steady growth, adding approximately 26 MW each year since 2009.

Large solar projects face significant financing hurdles because millions of dollars of capital are required, but these projects also fetch the attention of large banks, energy suppliers and tax equity investors. Mid-size commercial projects face the daunting challenge of financing their projects with less visibility, but they can be successful if they make use of all the available incentives and financing tools.

Many mid-size commercial developers and installers can help the customer through the process for applying to federal and state grants; however, monetizing the Solar Renewable Energy Credits (SRECs) is often more difficult. SREC markets are complex for two main reasons. First, SREC markets differ across various states depending on the State’s Renewable Energy Portfolio Standard (RPS) and Solar Alternative Compliance Payment (SACP), the fee paid by energy suppliers for non-compliance of RPS requirements. Second, SREC markets have been known to be fairly volatile due to legislation changes and variations in supply and demand. These challenges can be mitigated by finding a stable partner with long-term SREC contracts who can help system owners navigate the legislation, and provide security of cash flow payments which allow system owners to accurately determine their payback period.

Investing in a mid-size commercial solar project is a sizeable investment for a small business owner or homeowner, thereby making it imperative to ask some difficult questions to the SREC aggregator or financier. The most important question to ask the SREC aggregator is: “Are your customer contracts backed up with energy supplier contracts?” If an SREC aggregator has long term contracts with energy suppliers, then the SREC firm has foresight into future SREC prices and can offer a fair, guaranteed rate. On the contrary, if an SREC aggregator is speculating on price and hoping to sell the SRECs in the spot market at a future date without any security of a long term agreement, their customer is exposed to a lot more SREC market risk. System owners should also be aware of the other factors that shape the SREC markets, like regulatory changes, rapid adoption of solar, and market shifts due to large-scale solar projects.

Being the oldest and largest SREC aggregator in the country, Sol Systems has matched a majority of its long-term SREC contracts with its energy supplier contracts, thereby providing the market stability and flexibility that mid-size commercial customers seek. Today, Sol Systems works with over 200 developers and installers in financing mid-size commercial solar projects. More information can be found at www.solsystemscompany.com.

Share

Tags: , , , , , , , , , , , , ,
Posted in Uncategorized | Comments Off

The NJ SREC Bubble & Importance of Long Term Contracts

Tuesday, September 14th, 2010

by Natacha Kiler

What do the dot-com bust, the home mortgage crisis, and the NJ solar market have in common?

Lots of people started believing that their investment was certain to make them rich. Perhaps we should learn from history: when the masses start believing they are certain to get rich easily, they are likely to be wrong.

While it is true that New Jersey solar renewable energy credits (SRECs) are fetching high prices on the spot market today, they will not always get such high prices. Let’s recall the major goal of solar legislation and performance-based solar renewable energy credit (SREC) markets is to help the nascent solar industry grow and reach economies of scale in both manufacturing and installation so that solar energy becomes cost competitive with polluting fossil fuels. Legislation can do this by:

1) Making solar an attractive investment to early-adopters
2) Creating a financial penalty for energy suppliers and utilities who do not employ clean technologies

Inherent in this logic is that one day the solar industry won’t need legislation-based financial incentives to succeed.

California provides a great example of how a production based incentive is supposed to increase solar capacity while driving solar incentive costs down. The program was set up in steps so that every time a certain capacity of solar applications were queued, the incentive would drop to the next level. The idea is that the solar incentive would drive scale and help cause the costs of panels to drop, while installers learn to be more efficient at installations and drive their costs down. The starting production based incentive for Step 1 for residential systems was $390/MWh; today two of the three investor-owned utility programs have incentive levels at Step 7 ($90/MWh). As of September 1, 2010, there are 690 MWs of installed solar capacity in California, and the state is perceived to have the most successful solar market in the country.

Certainly, the legislation and market dynamics that support the New Jersey market are different than those of California, but the intent of the legislation and the driving forces will ultimately lead to the same results: more solar capacity and a decrease in the level of solar incentives.

So why do so many people in New Jersey believe that solar is a surefire investment?

There are two main reasons.

REASON 1: The Alternative Compliance Payment (ACP) for not creating or purchasing SRECs is high (currently $675/SREC with scheduled decreases annually) and the current supply of solar capacity does not generate enough SRECs to meet the legislation-driven demand.

REASON 2: Installers who want to sell more solar have an inherent incentive to lead prospective solar energy system owners to believe that SREC values will remain high because it shows a higher ROI.

Buyer beware.

The first half of reason 1 is true today, but solar capacity will not always be undersupplied. Each and every energy supplier who is subject to the ACP is trying to figure out how to avoid paying the expensive penalties. Energy suppliers can avoid these fees by developing their own solar plants or purchasing solar-generated energy from large solar farms through Power Purchase Agreements (PPAs).

The development of small and large solar plants will continue as long as the investment returns are good, but the more solar plants there are, the lower the returns will be. Ultimately, solar will succeed, energy suppliers won’t have to pay alternative compliance penalties and the value of SRECs will diminish.

There is no question of whether this will happen, the only question is when this will happen.

What about the installers that lead their customers to believe that SREC prices will be high? Unfortunately, we expect that some customers will get burned when they expect their surefire investment to perform and they’re left with minimal SREC payments.

Luckily, some citizens of New Jersey are starting to talk about the risks of assuming spot market rates will stay high. We expect that, over time, more and more people will recognize the importance of long term SREC contracts. There are also forthright installers who educate their customers about the risks of the spot market and offer them the option to lock their rates with long-term contracts that ensure the SREC value over time.

Share

Tags: , , , , ,
Posted in Uncategorized | Comments Off

Long-term SREC Contracts to Secure Financing for Solar Power Projects

Thursday, September 9th, 2010

An article recently posted in the Novogradac and Company Journal of Tax Credits discusses the implications of securing financing for solar energy developments utilizing long-term SREC contracts (as opposed to state rebate and grant money). We recommend reading the full article, but we wanted to provide a quick analysis of its central points, and follow up on the central strength of long-term SREC financing that this article misses.

The article observes that regional and state solar grant and rebate programs are being cut back as cash strapped governments find ways to reduce costs. In replacement of the grant and rebate programs, states (like Massachusetts) are instituting performance-based incentive structures, also known as Solar Renewable Energy Credit (SREC) markets. The subsidy for solar development is tied to performance, the value of the subsidy is determined by market and regulatory forces, and the costs of funding the subsidy are distributed to regulated energy suppliers and their customers.

The article concludes that securing long-term contracts for the sale of SRECs provides a solar energy developer with better leverage to secure financing for his or her project because the SREC contract provides a stable revenue stream for the financier. We agree in full. The article also notes, “prices offered in contracts could likely be either the floor price or something perceived as substantially below market”. While this point may appeal to those bullish on the future of SREC markets; we think this article misses a fundamental purpose of SREC markets.

The intended goal of SREC markets and Renewable Portfolio Standards is it to stimulate economies of scale for solar development, driving down manufacturing and installation costs thereby pushing solar energy markets towards grid parity (i.e. making solar electricity competitive with fossil fuel generated electricity). As solar development costs continue to decrease and the number of solar energy projects increases, the supply of SRECs on the market can quickly outpace the demand created by SREC Alternative Compliance Payments which would cause the floor price of SRECs to fall. For example, in Massachusetts the floor price is currently determined by the Clearinghouse Auction price of $285.00. In the event an energy supplier could broker with project owners to secure SRECs at a value below $285.00, the Clearinghouse Auction would freeze up and the market would find a new bottom.

We think one of the reasons investors often favor long-term SREC contracts instead of spot market transactions is precisely because there is certainty about the SREC floor price. Aggregators like Sol Systems, who manage a portfolio of SRECs through long-term contracts with energy suppliers, provide both a stable cash flow for the project developer as well as security against the intended consequence of a successful SREC market and Renewable Portfolio Standard. And, herein lies the paradox: a successful and vibrant SREC market creates exponential solar development, which drives down SREC values and leads to a mature solar market that does not require an SREC market.

Share

Tags: , , , , , , ,
Posted in Uncategorized | Comments Off

An Installer’s Guide to SREC Sale Strategies

Monday, August 23rd, 2010

by George Ashton

As a residential solar installer, you have without question been challenged by prospective customers regarding the high price tag of solar; a typical residential system (3kW in size) can cost between $18,000 and $24,000. Luckily, there are a number of incentives available at the federal, state, and local levels that you can present to your customers to help them realize that solar can be more affordable than often perceived. Federal and state incentives are relatively easy and straightforward to explain. The concept of selling SRECs, however, is more allusive and harder for customers to grasp.

Because SREC income can significantly improve a project’s economics (reducing costs by 20-40% depending on location) and can increase a customer’s return on investment, ensuring that customers understand their SREC options and take advantage of the sale options available will assist your business with closing more sales. This article provides an overview of SRECs and explains the pros and cons of different SREC sale options.

What Are SRECs?
An SREC is a tradable credit that represents the clean energy benefits of electricity generated from a solar energy system. Each time a solar system generates 1000 kWh (1 MWh) of electricity, an SREC is issued which can be sold or traded separately from the power. SRECs have high value in some states where there is legislation called a Renewable Portfolio Standard (RPS). An RPS requires energy suppliers to either produce solar energy from their own projects or purchase credits from individuals or businesses that own solar energy systems.

How Are SREC Prices Determined?
RPS Compliance fee schedules dictate how much energy suppliers must pay for each SREC they fail to produce or acquire. As a result, SREC prices usually trade at or below the dollar amount of these compliance fees. In some states, the fee remains the same dollar amount year over year while in other states, like New Jersey and Ohio, the fee decreases over time which will result in a decrease of the price for SRECs over time.

SREC Supply
SREC supply will increase in the coming years. As solar panel prices fall, solar will become more affordable and more popular. As more solar systems are installed, more SRECs will be available on the market. Additionally, as credit markets continue to improve, more large projects will become financeable and built, resulting in more SRECs. Both of these trends will put downward pressure on SREC prices.

SREC Demand
SREC demand will also increase in the coming years. The demand for SRECs in a given state is set by RPS legislation that determines the overall number of SRECs energy suppliers are required to acquire each year, and this number quickly increases year over year in every state with an RPS. Because SRECs are a compliance commodity, if there are more SRECs supplied than demanded in a given state market, the pricing for excess SRECs will likely be equivalent to pricing seen on voluntary SREC markets, which today trade at $15-$30 per credit.

What are the Options for Selling SRECs and the Risks of Each Option?
Selling SRECs on the open market is analogous to day trading in the stock market. Your customers may make good money, but there is no certainty with regards to their long-term profitability. If SREC prices fall for any of the reasons mentioned above, they will receive a lot less for their SRECs. This option is best recommended for SREC sellers who do not rely on SREC proceeds to pay for the cost of a solar energy system and have a little extra time on their hands to monitor the market.

Selling SRECs into a long-term contract can be a strategy that provides adequate returns, but with less risk than selling on the open market. A typical long-term contract offers a fixed price per SREC for a 3-5 year term. By choosing this option, your customers will know exactly how much income they will receive over the contract term. However, the true value of a long-term SREC offer depends heavily on what supports that offer.

The most secure offers come directly from energy suppliers as they are the ultimate purchasers of all compliance eligible SRECs. However, very few energy suppliers offer contracts directly to non-commercial system owners. The next best offer is a contract from a select few SREC companies that back up their promises to purchase SRECs with their own long-term contracts to sell those SRECs to energy suppliers. These SREC companies have negotiated to sell your SRECs to energy suppliers at a specific price for 3-10 years at a time and can pass that guarantee on to you. Beware of SREC companies offering long-term contracts that have not negotiated fixed price long-term contracts to sell SRECs. If they have nothing to support their promises, and the market price falls, it will be difficult for them to honor your customer’s contracts.

Selling your SRECs for an upfront, lump sum payment is the SREC market’s version of a risk free investment; the return is a noticeably lower than the other options, but there is absolutely no risk. With this option, you will sell the rights to your future SRECs in exchange for a discounted one-time payment received close to the date of installation. You keep that money regardless of what happens to SREC markets. This option is recommended for solar energy system owners that are risk averse or having trouble with accessing financing through banks.

Educating your customers on all three SREC sale options and helping them evaluate their risk tolerance and financial needs will be a key strategy to selling more solar energy systems. The metrics presented in this article should help you identify the best route for your customers. Regardless of which option a customer chooses, monetizing their SRECs will play a critical role in financing their solar energy system.

George Ashton is Vice President and CFO of Sol Systems, a solar energy finance company located in Washington DC.

Share

Tags: , , , , , , ,
Posted in Uncategorized | Comments Off