Severe Volatility Illustrates the Risks of Using Solar RECs

Date: 8 Sep 2011 | posted in: Energy, Energy Self Reliant States | 0 Facebooktwitterredditmail

This is a little taste of a project I’m doing comparing solar renewable energy credits (SRECs) with a state solar mandate to Clean Contracts (a.k.a. feed-in tariffs).  One metric for comparison is the risk created by market uncertainty, and there’s no better illustration of the risk and uncertainty in SREC markets that this chart.  In the past 9 months, SREC prices have tumbled in nearly every market in the U.S.

Chart of Solar Renewable Energy Credits in Seven U.S. States August 2009 to 2011

The cause is the same everywhere – the solar industry met the state mandate, cratering demand for SRECs.  Prices won’t recover until the market slows down.

From an Econ 101 standpoint, SRECs beautifully price market demand and are a powerful indicator of when the state-created market is saturated.  From an industry standpoint, however, they represent a real roller coaster.  It’s hard to be a solar installer when your entire market dries up for 9 months waiting for next year’s quota to roll in (in NJ and PA, legislation is being considered to accelerate the state mandate to solve the problem).

Clean contracts (if uncapped) solve the problem, because the market doesn’t bust (of course, a solar mandate that can keep ahead of supply would also work).

But rather than pricing market demand (as SRECs do), Clean contracts attempt to price the cost of solar.  It’s one reason why they tend to deliver lower cost solar to market than SREC markets or mandates.  And as you can see in this chart from a previous post, even Germany’s Clean contract (feed-in tariff) program more closely approximates the cost of solar in New Jersey that New Jersey’s SREC price.

It’s a serious question for policy makers to consider when creating a market for solar.  Is an SREC market that depends on a state solar mandate any more “market-based” than Clean contracts that simply provide a standard offer to solar developers?  And if the latter means cheaper solar for ratepayers, then shouldn’t that trump considerations of “markets”?

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John Farrell

John Farrell directs the Energy Democracy initiative at the Institute for Local Self-Reliance and he develops tools that allow communities to take charge of their energy future, and pursue the maximum economic benefits of the transition to 100% renewable power.