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Solar Renewable Energy Credits: The Key To Understanding Your ROI

Solar Renewable Energy CreditsThe decision to purchase a solar system for your home or business requires careful consideration of many factors.  For many people, one of the most important factors is the cost of the system and the amount of time it will take to recoup your investment.

When evaluating the payback of a solar system investment, there are a number of elements involved, some are more easily quantified than others.  The 30% Investment Tax Credit (ITC) is among the more straightforward allowing a system owner to recoup 30% of the cost of their system through direct tax savings when they file their income tax return for the year in which the system was installed.  Businesses may also take advantage of accelerated depreciation to reduce their taxable income for further tax savings.  The State of Maryland provides a grant for residential systems of $1,000 which is usually processed and paid within a few months of system completion.

Other incentives are a bit harder to evaluate.  Some counties permit system owners to apply for a tax credit on their property tax bill, although annual limitations on the amount of revenue impacts these credits. Actual savings may not be received by the property owner until several years after they have installed and paid for their system.

In addition, the value of the electricity the system produces will vary depending on the retail cost of utility-provided power. Historically, utility prices have tended to increase significantly over time, but no one can predict the exact path prices will take in the future.

Understanding Solar Renewable Energy Credits

But of all the financial aspects of a solar system purchase few, if any, incentives are more complicated to evaluate and understand than the value of the Solar Renewable Energy Credits that system owners in some states are entitled to earn.

A Solar Renewable Energy Credit (SREC) is a tradable commodity representing the non-polluting value of 1,000-kilowatt hours (kWh) of electricity produced by a solar energy system.  The SREC is separate from the value of the electricity itself and permits the owner or purchaser to claim the benefits of clean energy production and effectively subsidize the cost of the installed system. SRECs can be traded or sold for cash. The value of Solar Renewable Energy Credits fluctuates, and each state has its own standards that affect the value.

It All Depends On State Requirements

More than half of the U.S. plus the District of Columbia have enacted Renewable Portfolio Standards (RPS) legislation that require electric utilities, electricity suppliers and/or electric distribution companies to produce a certain amount of renewable energy. Several states, including Maryland and DC, also incorporate a “solar carve-out” requiring a specific percentage for solar production within the RPS.  Any company in these jurisdictions that sells electricity must either produce the required amount of solar electricity from its own assets, purchase SRECs from PV system owners or pay an Alternative Compliance Fee (ACP) into a fund that will be used to support the construction of solar systems in the jurisdiction.

Maryland’s solar requirement took effect in 2008 requiring approximately 2,500-megawatt hours of solar electric production or 2,500 Solar Renewable Energy Credits.  In 2017, the requirement increased to approximately 570,000 SRECs and requirements will continue to steadily increase each year until 2020, at which time solar electricity will account for a full 2% of all the electricity consumed in Maryland—representing more than 1 million MWh (and SRECs) per year.

The maximum value of an SREC depends on the Alternative Compliance Payment (ACP) established in the Renewable Portfolio Standards law.  Each state with a solar carve-out has taken a different approach and SREC values vary depending on both the ACP and the supply/demand dynamics in each jurisdiction.

The ACP represents the amount that an electricity supplier subject to the RPS must pay if they do not produce the amount of solar energy required in a given year or purchase the equivalent number of SRECs from other system owners.  Thus, the ACP effectively represents a cap on the value of an SREC—a supplier can simply pay the fee rather than purchase an SREC.  As a practical matter the value of an SREC on the open market will always be less than the ACP.  How much less depends on the supply and demand dynamic in that state.

Supply And Demand

The single most important factor in determining the value of an SREC is the number of SRECs available for purchase by suppliers in any given compliance year.  The “demand” for SRECs is established by the RPS but the “supply” depends on the number and type of systems installed throughout the state.

Currently, Maryland SREC prices are at historic lows because the market supply is substantially greater than the requirements.  Although SREC prices were as high as $180 as recently as 2015, current values are around $20 each.  Systems currently operating in the state are likely to generate more than 800,000 SRECs in 2017 compared to the current requirement of about 570,000 SRECs for this year.

The Maryland legislature is currently considering amendments to the RPS which may help absorb this supply, but it remains unclear whether enough systems will be developed to create an even greater oversupply of SRECs later in 2017 and beyond.  Unless the legislature chooses to provide some support by increasing the requirements or limiting systems that can participate fully in the program, prices may remain depressed for some time.  Even so, SRECs earned in 2017 have a useful life of 3 years which means that increased prices may well be possible before their expiration in 2020 when current law requires that buyers procure 1,200,000 or 50% more than are currently being produced by solar systems active in the state.

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Author Bio: Fred Ugast founded USPV in 2007 to develop a new market for solar renewable energy credits to facilitate the adoption of solar photovoltaic systems by small businesses and homeowners in Maryland and other mid-Atlantic states. One of the first SREC aggregators, USPV has developed a client base of more than 2,500 solar systems in residential, business and government sectors. Ugast is Co-Founder and President of TimberRock Advanced Energy LLC, and the Smart Energy Co-Op of Maryland (SECO-MD) an early-stage energy services company.