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
Great summary Brian. Your pieces are always full of insight and easy to digest. Thanks!
Brian,
What are the SREC’S selling for in Conn?
There is a bill before our state, that will increase the SREC’S pricing. Do you know what the increase is going to be?
Rick
Rich,
I don’t know SREC pricing. SRECs by nature have a fluctuating price that is determined by the market. Companies will typically sell them on the spot market (one at a time) or a long term contract. Can you share the link regarding changing of the SREC pricing in CT? I’m assuming they’re either changing the ACP or floor.
Brian
Very clear and concise explanation of how this works. I have one question. Each time a system generates 1MW of power, does that generate an SREC “certificate” or is the SREC determined at the time the system is configured and installed. For example a 40Mw system is worth 40 SRECs. Your response will be appreciated. Regards
Rich,
The SRECs are only created once the system has actually produced power. The reason for this is that it encourages people to maximize output. If it was based on nominal output of the panels they could be put in a place that did have any sun and still be paid.
Hope this helps,
Brian
Brian,
Great info and concise. Do integrators find that customers are savvy about wanting their systems to be less than 10Kw so as not to loose MA incentives? Maybe that size is rarely installed due to cost and roof size so the issue doesn’t come up but as one gets into ground mounts, small commercial building rooftops etc. it could impact one’s sales approach.
Jo,
I’d say only a small fraction of customers are well read on incentives and understand the difference ranges between different size. Most of the time the limitations are simply roof size or budget or on commercial roofs the structural integrity. MA is looking to phase out all non – SREC based incentives shortly (there’s only a small amount left I believe) so the size will no longer be an issue.
Chris
thx for info, I’m in NJ and I’m aware of the ceiling, but wasn’t aware that there was a regulated “bottom” of 300. I can’t find this in any other websites or documentation- does this bottom apply to NJ as well?
thx Steve
Steve,
There is no floor in the NJ market as far as I know, only in the MA market. If I wrote it incorrectly, my apologies.
Chris
[…] trying to sell that array to a customer, difficult if not impossible to achieve. What the SREC (Solar Renewable Energy Credit) has done for the solar power industry is akin to what Ford did for the automobile industry almost a […]
[…] the past, we’ve written on the basics of SRECs but I wanted to get a more in-depth perspective on what an SREC is, how the markets are developed […]
Really enjoyed the article, Chris– THANKS. Two questions: a) you mentioned Massachusetts, New Jersey, Pennsylvania and most of the east-coast and Mid-Atlantic solar markets for SRECs– how about the West Coast? Anything similar in CA, OR, NV, WA, AZ, CO? And 2nd question: b) what term or the SRECs purchased for? In other words, if you put a 20-25 year system on the roof, is there any agreement by the utilities that they’ll purchase the SRECs for the entire lifespan, or is their purchase agreement year to year, or is another arrangement (i.e., correlating to the lifespan of the government mandate) in place? THANKS!
Excited to learn more about SREC ~