Feed-in Tariffs (FITs) have been a major buzz phrase in solar policy
circles in recent years. While dozens of countries and provinces have implemented
FITs outside the U.S., they have yet to make major headway in America. Instead,
a number of states have crafted markets based around the trading of Solar
Renewable Energy Credits, known as SRECs.
SRECs are tradable credits that represent one megawatt-hour of solar electricity.
In states like Delaware, Massachusetts, Maryland, New Jersey, Ohio and Pennsylvania,
energy suppliers are required to accumulate a certain number of SRECs to
meet a mandated generation target. Power providers can generate the credits
themselves by investing directly in projects, or purchase the credits from
project owners, brokers or aggregators.
The value of credits is based upon supply and demand: If there's a shortage
of solar electricity in a given state, SREC prices will be high, thus stimulating
more development. If there's an oversupply of solar, SREC prices will drop.
Prices are capped by a penalty that power providers pay if they can't meet
Theoretically, the “free” market (some dispute calling it a
free market because the parameters are so closely monitored by regulatory
agencies) will find the right incentive price for solar electricity far more
efficiently than policymakers or regulators.
The policy is the opposite of a FIT, which requires utilities to sign long-term
contracts for renewable electricity at a premium price, usually determined
by a legislature. Except in a few cases with FITs, both types of programs
are funded by ratepayers.
The two policies are often compared side-by-side because they represent
different ends of the philosophical (and perhaps ideological) spectrum over
how best to incentivize solar.
The idea for an SREC-only market was born in New Jersey in 2004-2005, when
the state started running out of money for rebates. Due to continued problems
funding the popular program, the state has phased out rebates for all but
a limited number of residential projects. During the transition, the state
looked at both FITs and SRECs, but eventually decided that SRECs were a more
suitable way to create a market.
In an effort to build a solar industry without being budget dependent while
also appealing to politicians who are more inclined to support a free-market
approach, numerous states have followed New Jersey's lead. In the last few
years, six states and the District of Columbia have implemented comprehensive
SREC programs for financing solar.
Because these programs are still so new, their effectiveness over the long
term is unclear. Some installers – many of whom are advocates of FITs – believe
the programs create too much volatility and favor larger commercial and industrial-scale
All the major emerging SREC markets are in deregulated states. Under deregulation,
energy suppliers are short-term players in the market. Thus, they have been
unwilling to sign contracts for longer than five years in states like New
Jersey and Maryland. (In Maryland's case, there is a requirement that SREC
generators bid for 15-year contracts, but energy suppliers have been more
willing to pay the penalty than enter into such long agreements). Thus, a
number of installers have found it difficult to finance projects with a 30-year
lifetime based upon contracts for five years or less.
At the same time, large project developers who may be generating thousands
of SRECs each year are able to negotiate contracts directly with energy suppliers,
securing far more favorable terms and pricing than smaller players. Some
are worried that this could limit diversity in the market.
To address this problem, a slew of new businesses have emerged to help residential
and small commercial project owners register, track and sell their SRECs
to energy suppliers. Financing and aggregation companies like Sol Systems,
SRECTrade and Flett Exchange have seen business explode as SREC markets have
There's been a steady drumbeat of concerns over the complexity and effectiveness
of floating SRECs over the years. But they are only now being tested as the
New Jersey is the only state with enough experience to gauge success. After
a couple years of missing solar targets during the program transition, the
industry is finally catching up – driven by the high prices of SRECs
due to limited supply. The average market price for an SREC has been about
$570, or $0.57 per kilowatt-hour. That's well above the cost of generating
The high SREC prices have driven a flurry of new development in the state.
However, if the industry overshoots its targets for 2011 and there's an oversupply
of SRECs in the market, prices could drop substantially and hurt the financial
viability of projects. Some are worried that it could put some installers
out of business.
A number of fixes to these issues have been proposed: Some want to see required
long-term contracts to provide security; some are hoping to create a hybrid
structure where FITs target the smaller end of the market and SRECs are used
for large projects; and a few people are even proposing that states with
SREC markets start from scratch and implement pure-play FITs. (The likelihood
of that is very slim).
While SRECs are certainly gaining traction and will likely be an important
part of American solar policy, it may be another year or two before we know
how effective they are. Depending on how these emerging markets perform,
there may be a lot more experimentation ahead.
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