A growing divide is occurring within the solar industry over how best to incentivize state-level solar programs. At issue is the role that solar renewable energy certificates (SRECs) should play in each market and what their impact will be on how -- and perhaps how many -- companies operate in states such as New Jersey, Maryland and Florida. There are also fears within the industry that SREC programs are benefiting a few large companies at the expense of many smaller companies.
On the surface, developments for solar on the state level are relatively positive: California is moving ahead with its solar initiative after a rocky start; New Jersey is restructuring solar incentives to encourage new market activity after a long slowdown; and states such as New York, Arizona and Ohio are developing Renewable Portfolio Standards (RPS) with significant solar “carve-outs” that require a portion of the RPS to come from solar.
But just beneath the encouraging headlines is a growing philosophical battle over where to take these up-and-coming solar markets: Should the industry rely on a floating market-based mechanism to incentivize projects? Or should states implement a long-term incentive that looks something like a feed-in tariff? While the answer isn't clear cut, it will surely have wide-reaching implications for the future of solar in the U.S.
The Background: Mid-Atlantic Markets in Transition
Shortly after December of 2005, when the New Jersey solar market came to a halt because of a lack of funds to cover up-front rebates, program administrators and industry professionals started looking for a new way to get projects moving again. Eventually, they decided on SRECs.
An SREC represents the value of one megawatt-hour (MWh) of clean electricity generated by a solar system and is traded on the clean power market. Under any RPS, utilities must accrue a certain amount of renewable energy credits to meet their renewable electricity procurement obligations.
An SREC-only program works like this: Instead of relying on up-front payments from the state, owners of solar systems will earn some of their money back by selling certificates to utilities or some other aggregator. From June 2007 through December 2007, the average SREC selling price ranged from US $200-$233. This means that on average, a 10-kilowatt (kW) system will generate an annual return of approximately US $2400, according to figures from the state's Clean Energy Program. New Jersey started a pilot program last March and is currently transitioning into a full SREC-only market, with a plan to completely phase out residential rebates by 2012.
Right now, though, the only new projects that are getting developed in New Jersey are large commercial systems. Rebates have dried up (all funds through 2008 had been spent by May of last year, effectively halting any new market activity) and smaller businesses are having trouble getting financing for projects under the new program because its current structure, with a fluctuating market price for SRECS, is considered too risky by lenders. As a result, many people in the industry expect the state to fall well short of its solar goals through 2009.
“In New Jersey there's a lot of concern that the residential sector, while it may not be completely shut out, is in big trouble,” says Lyle Rawlings, secretary of New Jersey at the Mid-Atlantic Solar Energy Industries Association. “We need to do better at creating a system where small businesses and small projects can play the game. That's not the case right now.”
Meanwhile in Maryland, a similar transition is taking place. Last year the legislature passed an SREC-only incentive structure to replace the floundering solar rebate program that was created in 2005. While New Jersey changed its rebate structure because of lack of money due to the program's popularity, Maryland faced the opposite problem: Its solar program wasn't popular enough. Maryland's rebates only covered about 20% of a system's cost as opposed to rebates in New Jersey that covered up to 60% of a system's cost.
When crafting the latest solar legislation, lawmakers in Maryland couldn't agree on funding levels for a residential program, so they opted for an SREC-only incentive structure for systems above 10 kW and left systems below 10 kW for another legislative session. Some smaller businesses in the state successfully restored the old grant program for residential projects, but the fund only has about $590,000 for 2008. According to Ted Middleton, managing member of the Maryland-based integration company Sun Net Zero, assuming each applicant takes the maximum benefit, that leaves room for about 59 installations in a state with 2 million rooftops.
“The small systems just got completely left off the table,” says Middleton. “The state just said, '[The SREC program is] too difficult, too risky for us to do, so we're not going to touch them.'”
It is expected that residential installations will be included in the Maryland SREC program starting in 2010. Until then, as is happening in New Jersey, the state is focusing mostly on the commercial sector. This has caused major unrest within the industry as small- to mid-sized businesses fear that the SREC incentive structure — as currently designed — is propping up large companies while threatening to eliminate many businesses in the residential sector.
As SREC Markets Form, Concerns Over Market Concentration Grow
The current SREC markets in New Jersey and Maryland are “floating,” meaning there is no floor price or other method to securitize a certificate. Many industry professionals — while careful not to blame any person or organization in particular — say this type of system is shortsighted, non-transparent and too complicated.
“I commend the New Jersey Board of Public Utilities (BPU) for the steps they are taking. But the market, without some way to securitize the RECs, is fundamentally flawed. It's like setting off Wall Street without the SEC [Securities and Exchange Commission]. That's what they're in the process of doing,” says Bill Hoey, President of NJ Solar Power, a commercial and residential installation company based in Beachwood, New Jersey.
Proponents of a floating SREC incentive structure say that a free market-based mechanism puts every company on a level playing field. If a company doesn't have a competitive business model and can't meet the commodity price for solar, it probably doesn't belong in the market, says Chris Cook, senior vice president of regulatory affairs and new markets for SunEdison, the largest provider of power purchase agreements in North America. Right now, he says, large commercial solar is most cost-effective, so it makes sense that states would put a heavier focus on that sector.
“If a residential system is 20% more expensive to install in totality than a competing commercial, well then it goes back to the residential customer. The expectation would be that, like anything else, it's more expensive to put anything on residential than it is on commercial. You're expected to pay more for it,” says Cook. “Why would we prop up one sector if it's not cost-competitive?”
No one disagrees that residential solar is more expensive than commercial; economies of scale will always dictate that. But the idea that these two sectors should compete head-to-head with one another is making many people apprehensive about “unhealthy market concentration” in states with floating SRECs, says Sun Net Zero's Middleton.
“Everybody's lumped into one category. You've got Wal-Mart and Harry Homeowner all sitting in the same camp,” he says. “Well, Wal-Mart's going to win that argument every single time. So you've got to distinguish customers by categories, otherwise the better, faster, cheaper rule will always apply across the board, which is that the Big Box Integrators are going to just take the whole market...Some people believe there is potential for gaming the system.”
MSEIA's Rawlings hears the same concerns. He says that a lot of businesses in New Jersey are worried about the emergence of "solar utilities."
"There may be some benefit in the short-term. But if there is unhealthy control over the market then the benefits of competition are out the window and you can lose the ability of using competition to continue lowering the price," he says.
This past January, SunEdison announced a deal with Constellation Energy — Maryland's biggest utility — to provide 30% of the utility's needed RECs in 2008 and 60% of its RECs in 2009. (Because SunEdison arranges power purchase agreements, it owns and operates the systems it installs, and therefore owns the SRECs). Due to the volume of SRECS that SunEdison can generate, the company can aggregate those RECs and potentially sell them at a much lower price than other companies. Many onlookers in the industry point to the deal with Constellation Energy as direct evidence that the market may be creating a solar monopoly or oligopoly. But SunEdison's Cook says that's just plain false.
“I don't think we're better placed than anyone else. We've simply tried to make our business model work in whatever market we're involved in. I think those concerns [about monopolization] are coming from people with rigid business models who can't adapt to the changing markets,” Cook says. “We work with what we have.”
Moving Forward: What Should the Market Look Like?
The dispute over the structure of these solar markets highlights two starkly different philosophies on how to build the industry: One side believes in a “top down” approach by focusing on the commercial sector and eventually passing savings on to residential customers, while the other side believes in a “bottom up” approach, by which incentives are structured to encourage growth in all sectors and thus create a more diverse, distributed industry.
As cash-strapped governments look to reduce their financial responsibility to solar and other renewable energy programs, the push for SRECs has gotten stronger. But there's another policy option gaining ground that takes the state's fiscal role off the table: feed-in tariffs (FITs). Indeed, many of the recent calls for a FIT have come from businesses concerned about SREC-dependent markets.
A FIT — which most people know as the mechanism that started Germany's solar boom — offers anyone with a solar system (or any renewable energy system) a fixed payment for the electricity generated by that system. The incentive is designed to provide the system owner a “reasonable rate of return.” Instead of relying on the state, utilities provide the incentives by charging all ratepayers a few extra dollars on their monthly bills. Supporters of FITs say they provide long-term stability, which in turn reduces capital costs and allows for a much more diverse group of companies and individuals to invest in solar.
Over the past year, a number of states have passed or considered FITs, including California, Delaware, Hawaii, Illinois and Michigan. In March, Washington-state Congressman Jay Inslee proposed a national feed law, called the “Clean Energy Buy Back Act.” And over the last month, a large group of companies and two industry associations have come out in support of FITs for both the national and state levels.
No one believes that FITs are still possible in New Jersey and Maryland. Those states are firmly committed to an SREC market. But as the industry focuses its attention on Florida, Pennsylvania and other states where SREC markets are being crafted, FIT supporters hope to influence the policy debate and move solar programs in a different direction.
“We're seeing many people in the industry agreeing that a short-term commodity-driven SREC won't work — at least how it is currently being developed,” says John Burges, an energy investor based in Florida who has closely watched the SREC market debate in his state. “Now there's a real push to change course and try to build a more simple, stable, democratic approach to developing solar and other renewables.”
Not everyone is convinced. Jim Torpey, director of market development for SunPower Corporation, thinks that it would be a mistake to push for FITs in the U.S. One of the main reasons, he says, is that in order to have a FIT that works, the incentive level must be far above retail electricity prices. If they are too low, there won't be much development at all.
“There's a different political climate in Europe than in the United States. In the U.S., because of a lot of push back from other interest groups, you may end up getting a rate that's too low and you may not be able to get projects built,” says Torpey. “Anyone who's gone on a state by state basis and had to deal with an intervention in a [utility] rate case knows it's a very labor intensive process.”
The beauty of the SREC market, say proponents, is that it adapts immediately to reflect factors such as market demand and technology improvements, with no government meddling needed.
Instead of jumping to FITs, there are a number of issues that can be resolved within the REC markets that would level the playing field for smaller businesses, says Torpey. That could include guaranteed long-term contracts, setting up a state-wide aggregator to bundle SRECs from smaller systems, and getting rid of financially burdensome metering requirements for systems under 10 kW. But even with those mechanisms in place, he concedes that it may be more beneficial for states to start with a simple rebate program.
“Are SREC markets always the way to go? No. There are still plenty of kinks to be worked out. But I think they are an excellent way to incentivize the market at a reduced cost to the state. Sometimes it may just be better to nudge the market with a rebate program,” says Torpey.
Some critics of SREC markets say they are too complicated. Rather than adding more convoluted fixes to the system, implementing a FIT — or something like it — will provide payback options as simple as rebates and develop the commerical and residential markets rapidly, they say.
The idea behind the current transition in certain states is to build a solar market with as little financial assistance from the government as possible. The broken rebate programs in New Jersey and Maryland illustrate the need to move beyond such methods. So as the industry figures out the best way to change course, these two very different policies — SRECs and FITs — will be at the center of the conversation.
Of course, there are many other payback options for solar on the table. The reality is much more nuanced than a pure FIT law versus a pure SREC law. But the two policies are a metaphor for the growing divide in perception within the industry over how some states are developing their solar markets: Some people would say democratically, other people would say autocratically.
Whatever the solution to the issue, says Middleton, the Maryland-based integrator, a good solar policy should benefit all types of businesses, create more jobs and encourage a wide range of economic activity. That's what the industry has promised; but he doesn't believe that is being done today.
“Maryland's law right now is built for very, very big solar integrators and no one short of that,” he says. “I think the overriding goal is to build an industry full of companies from front to back, little to big,” he says. “After all, small businesses are the country's largest provider of jobs.”
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"I commend the New Jersey Board of Public Utilities (BPU) for the steps they are taking. But the market, without some way to securitize the RECs, is fundamentally flawed. It's like setting off Wall Street without the SEC [Securities and Exchange Commission]. That's what they're in the process of doing." -- Bill Hoey, President, NJ Solar Power, a commercial and residential installation company based in Beachwood, New Jersey.