How do SRECs Work?

In Massachusetts, New Jersey, Pennsylvania and most of the east-coast and Mid-Atlantic solar markets, the main incentives driving the solar market are SRECs, which stands for Solar Renewable Energy Credits. If you’re looking to get into the industry or expand your current business, you need to know how they work, how to communicate their use to customers and where you can find more information if you really want to dig deep.

We’ve had a lot of people asking about them, and though the large developers have them figured out, we want to make sure the small guys are getting in on the action, too.

What are SRECs?

An SREC is a solar renewable energy credit. One is created for every megawatt hour (MWh) of electricity produced by a solar generator. Keep in mind that SRECs are sold separately from the electricity they produce. This means a customer with a solar array on their roof can use the electricity on-site and then sell the SRECs off to another buyer. The buyers are the utilities.

How are SRECs created?

Here is a simple chain of how SREC’s are created and regulated:
The Government → Public Utilities Commission→ Utilities → Solar Array Owners

The government sets a renewable portfolio standard with legislation that establishes how much power generation within a state must be from renewables and solar. The Public Utilities Commission, or the PUC, requires all utilities to provide proof that a certain percentage of electricity that they have provied to rate payers has come from solar. The utilities do this by purchasing SRECs. SRECs are created from solar arrays producing solar power into the grid. Each time a MW is produced by a solar array, another SREC enters the market.

Who buys SRECs?

In order to meet a state’s renewable portfolio standard, or RPS, electricic utilities must buy SRECs. If they do not purchase SRECs, they must instead pay an Alternative Compliance Payment of $550 per MWh; thus, these companies will pay up to $550 for an SREC.

How is the Price of an SREC Set?

The government establishes a price for the SRECs in two ways. First, they set the ceiling price by creating an Alternative Compliance Payment for utilities. In other words, if the utilities can’t show they have purchased enough SRECs, they must pay a fee. This means that a utility would rather pay the fee than purchase an SREC for greater than that fee cost, setting the ceiling for the price. The floor is also set by the government. They do this by not allowing any SRECs to be traded below a certain amount per MWh. They can do this because they run the “market” where SRECs are traded.

To determine the price of a KWh instead of a MWh, 1MWh is divided by 1,000 to get a price per KWh.

Keep in mind that selling SRECs and using the electricity is separate, so solar can offset an electric bill and then a homeowner can go on to sell the credit. This is a key point for sales! If a customers is paying $.15 per KWh, this means each KWh produced by solar is going to be worth, at the very least, $.45 cents on the SREC market. That is determined by adding the $.15 for the offset of the power to the floor of $.30 for the SREC value.

How do Your Customers Sell SRECs?

Utilities want to minimize their costs, so they want to purchase SRECS from the least number of sellers as possible. This means they will sometimes purchase power from large developers with MW size fields, but they will rarely buy from homeowners. Homeowners will typically sell their SRECS to an aggregator, like SRECTrade, on a long-term contract, and then that aggregator will bundle and sell their SRECs directly to the utility.

For more information on SRECs

Massachusetts DOER
SREC Trade
New Jersey Clean Energy Program