Solar Renewable Energy Credits Versus Feed-in Tariffs

The Solar Renewable Energy Credits Versus Feed in Tariffs Debate

One of the most critical elements to solar financing is how the system is generating revenue. This happens in two parts: First, power generated from the system is sold by the terms of the PPA. Second, solar renewable energy credits (SRECs) that the system produces are sold. The east coast of the U.S. is mainly an SREC driven market, except for Rhode Island which has just passed a feed-in tariff system. This article is meant to provide some useful information about SRECs. If you're curious about some basics of the SREC market, watch this interview with Sam Rust from SRECTrade "The Development of the US SREC Market". 

Now enter: Sam Rust of SRECTrade. 

So what are these SREC and FIT programs anyway? 

In the absence of a national renewable portfolio standard (RPS), individual states have created their own renewable energy requirements. Renewable portfolio standards require electricity power suppliers to use renewable energy credits to account for how much renewable energy they have in their generation portfolios. States with solar-specific RPS requirements traditionally opt to either incentivize decentralized solar installations with solar renewable energy credits (SRECs) or a feed-in tariff (FIT) system. The SREC market is a uniquely American concept, whereas FIT incentives are modeled after programs in Europe. As of July 2011, there are nine states have SREC programs (including the District of Columbia), and five states have solar-specific FIT programs.

Solar Renewable Energy Credits (SRECs)

In SREC markets, the environmental and social attributes of generating solar power are traded separately from the electricity a solar system produces. State-level RPS programs require electricity generators to purchase a fixed- or percentage-based amount of SRECs per year based on their electricity load. In several states, utility companies must pay a penalty for each SREC they fail to purchase. This penalty is commonly referred to as a solar alternative compliance payment (SACP).

An RPS creates a market for SRECs by setting a minimum fixed demand for SRECs and a price ceiling (SACP). SRECs are differentiated from RECs in that they are designed to be worth more than renewable energy credits from other renewable energy sources like wind, biomass and hydropower.

The price of SRECs adjusts to market forces of supply and demand, so that as the supply of SRECs approaches the requirements for a given year, the price drops and the cost of the incentive for each increment of new solar power decreases. State RPS standards typically increase SREC requirements annually while scaling down the SACP over time. 

Not all states are well-suited to support an efficient SREC market. SREC programs are typically designed in states with deregulated electricity markets and a large pool of electricity generators. 

States with SREC Programs

*Lists the 2011 SACP. Most state RPS implement a declining SACP over time. For more information on SACP schedules and individual market requirements visit www.srectrade.com. 

**The Distributed Generation Amendment Act of 2011 (DC B19-10) passed the DC Council unanimously on 7/12/11 and will increase the solar carve-out to 2.5% ending in 2023, starting at a revised carve-out of .4% for 2011. 

†18 MW – 52 MW(double check these numbers on SRECTrade.com, I changed it to account for 1.13 instead of 1.2 production factor) capacity of solar required from 2010 – 2011, with increasing targets each year. The SREC program will end once the 400 MW goal is reached. The SACP started at $600 and can be reduced by 10% each year by the state Department of Energy Resources. 

° The SACP adjusts at 200% of each year’s average SREC price. 

Feed-in Tariffs (FITs)

A feed-in tariff is a subsidy that pays solar system owners a guaranteed rate for the power, usually over an extended period of time (sometimes up to 20 years). The electricity payments are set above the market rate for power from “dirty” systems, providing a competitive advantage for investing in and producing solar energy. The added incentive, or the difference the payment to solar system owners and the market rate for electricity, is paid with the delivery of electricity.  Well-designed FIT programs have a cap on the amount of solar that they incentivize in order to prevent unsustainable solar development. FITs can be dependent or independent of market prices for electricity. 

Independent FITs

An independent FIT sets a constant incentive above market prices. For example, if market prices for electricity increase from $.08/kWh to $.10/kWh, an independent FIT of $.05/kWh will yield an increased payment of $.13/kWh to $.15/kWh. 

Dependent FITs

A dependent FIT sets a schedule of payments per unit of electricity that is anticipated to be above market prices. However, the added incentive adjusts to market prices for electricity. For example, a guaranteed rate of $.24/kWh pays the solar system owner that rate regardless of changes in market prices for electricity, so the additional incentive is dependent on the electricity market. Most FITs in the United States are market-dependent FITs, where solar system owners receive a fixed payment over a set period of time. 

States with FIT Programs 

 *Gainesville only

The Argument for SRECs

SREC programs can provide greater cost savings per unit of solar electricity than FITs because the price paid for the incentive is subject to market forces of supply and demand to achieve a set level of solar-based power in an energy portfolio. Conversely, FITs increase the burden of cost with every kW, and this burden of cost must be paid out for several years or even decades. This is particularly problematic as costs of production for solar power decline. Because the incentive is constant in a FIT scheme, system owners can enjoy guaranteed profits. Alternatively, in SREC markets, deregulated utility companies pay a varying market rate for the cost of solar power that decreases as milestone solar goals are met. SREC markets by definition create uncertainty for solar system owners and investors, but they are a relatively low-cost subsidy compared to traditional FITs. 

This is the second article in the "Beginners Guide to Financing Solar Projects" series that we're publishing. The series is focused on helping small- and medium-size solar installers understand financing to help grow their businesses. The first was on "How to Create a PPA" by Heather South of One Globe Renewables. If you're a solar installer that has been focused on installing residential systems and other systems that have been paid for in cash but are interested in expanding into light commercial and commercial work that require financing our "Beginners Guide to Financing Solar" is written for you. 

Chris Williams is the Chief Marketing Officer at HeatSpring Learning Institute and writes about solar and geothermal marketing, sales, design and installation. You can find more interviews with industry experts at HeatSpring TV or contact him @topherwilliams or cwilliams@heatspring.com