Solar Renewable Energy Certificates (SRECs)

Solar Renewable Energy Certificates (SRECs) are a mechanism designed by policymakers to ensure that a certain amount of solar energy capacity is installed in a designated area.  One solar REC is created for every one MWh of solar energy produced.  Some sort of compliance mechanism is generally established to ensure that producers or generators of power are encouraged to install solar and produce RECs rather than pay the pre-determined penalty.

To take a closer look at how solar Renewable Energy Certificates (REC) markets work, we’ll use the great state of New Jersey as a case study.  In the late 1990s, New Jersey deregulated the electricity market in order to secure a greater diversity in the electricity supply and lower the cost of electricity by spurring competition.  To ensure that competition did not drive electricity suppliers to purchase cheaper and more polluting supplies of power, the legislature set up the rules and regulations for net metering practices and categorized sources of renewable energy.

• Class I is defined as power from solar, wind, fuel cells, geothermal, ocean, and methane gas from landfills or a biomass facility.
• Class II includes mostly hydropower facilities.  When the state created the renewable portfolio standard (RPS) in 2004, solar energy gained a special percentage carve-out of 2.12% of generation.  This remains one of the most aggressive targets for solar PV generation in the country.

So how can such targets be obtained?  In order to prove generation, suppliers and providers are required to earn or purchase Renewable Energy Certificates.  In the New Jersey REC market, certificates are broken down into three distinct categories corresponding to renewable energy types: Class I RECs, Class II RECs, and Solar RECs. Solar RECs are the most valuable in the sense that they can be used to meet any renewable energy category requirement set out by the RPS, whereas Class II RECs can only be used to meet Class II requirements.  As stated in the law, all RPS compliance will be submitted in the form of RECs.  Suppliers and providers that do not actually construct renewable energy plants can avoid installation and operation costs by simply buying credits from those who do pursue the renewable energy construction route.

Policymakers, aware that some would not only reject self-generation but also avoid submitting RECs altogether, provided guidelines for compliance.  If RECs are not earned or purchased, then a fine known as the Solar Alternative Compliance Payment (SACP) must be submitted in its place.  The SACP is a higher fine for non-compliance than the standard ACP for other renewable energy sources.  In addition, all monies gathered from the SACP will fund renewable energy and solar energy projects in the New Jersey Clean Energy Program. This financial structure is intended to ensure that if targets are missed and RECs are not purchased, a net positive outcome will result due to the growth in the Clean Energy Program.

Since its inception, the New Jersey RPS has been amended several times in order to both increase target percentages and ensure that the price of non-compliance will be higher than buying or generating a REC.  New Jersey’s solar REC market determines price based on the supply and demand of RECs.  Most importantly, however, it appears to have shifted the driving force of scaling solar away from a rebate-based program.  Such a shift has been accused of favoring large-scale producers of solar over residential users.  This is something we will be sure to keep our eyes on as the solar REC market in New Jersey continues to develop.

While REC markets have existed in the States for several years, the higher value placed on solar RECs in New Jersey is the first of its kind and can indeed scale installed capacity in the state if compliance mechanisms are  effective.  Only time will tell!  As of August 2009, over 90MW of solar was installed statewide.  At GetSolar, we’ll continue to check out New Jersey’s Solar REC market and similar REC mechanisms nationwide.