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Solar Power 101: What the Heck Is An SREC?

If you've noodled around on the Web looking for information on residential solar energy systems, you may have come across something called a "Solar Renewable Energy Credit" -- or SREC (pronounced "S wreck") for short. Since SRECs help make solar panels a great investment in some states, we figured it might be helpful to explain what these credits are and how they work.

We'll start with the textbook definition: An SREC is a certificate representing the "green attributes" of one megawatt-hour (MWh) of electricity generated from solar energy.

What does this mean in practice? If you install solar panels on your home, you roof will, in effect, start generating kilowatt-hours (kWh). As these kWhs add up, you'll be on your way to making one SREC -- which, as noted above, is the equivalent of one MWh, or 1,000 kWh.

How many SRECs does a system produce? It depends generally on the size of the system and the amount of sunshine available. By way of example, check out the current financial profile of your home or business with our solar cost calculator

Now comes the good part. Once you've accumulated an SREC (or two or three), you'll be able to sell your credits. Exact SREC prices vary from state to state, but the highest price recorded so far has been around $680 in New Jersey. At this price, SRECs would generate $5,440 in annual revenue for our hypothetical 7-kW solar array in Somerset County. Put differently, we would earn $0.68 for every kWh that our system produces -- this in a state where the average residential price of electricity is around 16 cents. Clearly, SRECs in New Jersey provide a generous incentive!

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To be fair, SRECs are traded actively in only a handful of states -- but that number is growing. Also, it's important to note that the going price of an SREC tends to fluctuate, and that $680 levels are likely the exception, not the rule. Finally, in some states, like Colorado, utilities offer an upfront payment for all the SRECs a given system is expected to generate -- rather than buying them over time.

How did all this SREC business get started? Many states have passed a Renewable Portfolio Standard (RPS), legislation requiring them to produce a certain percentage of their electricity from renewable resources by a certain year. For example, New Jersey's requires the state to produce 22.5 percent of its electricity from renewable resources by 2020. State requirements vary based on their political support, baseline level of renewable electricity in use, and level of public investment. An RPS almost always includes a policy plan to incentivize renewable energy development and installation within their state. In the residential sector, this is most traditionally done though subsidies awarded based on the number of watts of renewable energy installed. California's solar rebate programs, for example, award a per-watt payment to homeowners who install solar panels.

Many states include a provision specifically for solar energy, requiring a smaller percentage of total renewable energy to be met by solar photovoltaics. Each electricity provider that does not meet this percentage must purchase SRECs to correct their deficit, and non-compliance means a hefty fine. As a result, SRECs are sold for prices determined strictly by the market for RPS compliance. It's a simple case of supply and demand: fewer solar installations means higher prices for available SRECs, creating an incentive for future solar installations.

So far, Delaware, Maryland, Massachusetts, New Jersey, North Carolina, Ohio, and Pennsylvania, have funded and implemented SRECs to promote the level of solar energy development that their policies demand. To see how SRECs might affect your solar system, check out our solar cost calculator. Or, if you've got burning questions, post them below!

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