Solar Energy Credits Point to a Slowdown

 | Oct 24, 2011 | 4:00 PM EDT  | Comments
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FSLR SPWRA TSL LDK YGE

Solar renewable energy credits (SRECs) are the primary incentive to finance solar power facilities. They are the single most important incentive for investors and bankers to finance new projects. But these credits are not fetching high enough prices to encourage development of new solar projects.

SRECs are not provided by the federal government; they are offered by individual states. Of course, the federal government also offers incentives to build solar facilities. While those incentives are necessary, they are not sufficient for project financing. Most federal incentives are front-ended in order to make solar facilities easier to build. They are not enough to encourage investors to own new solar facilities once they are built.

States offer financial help to own and operate solar facilities. However, each state offers different programs, and many states offer a series of programs to make renewable and energy-efficient projects an attractive proposition. States' financial incentives may provide any combination of personal tax adjustments, corporate tax adjustments, sales tax immunities, property tax adjustments, rebates, grants, loans, industry support, bonds and performance-based incentives (renewable energy credits). According to the U.S. Department of Energy, every state, including the District of Columbia, offers a program, and no two states offer identical programs.

In the solar industry, the SRECs are top-line revenue generators. In many cases, SRECs are ultimately paid by energy consumers, not the state. Many SREC programs are market based, and values are determined by demand and supply. If the SRECs are high enough, developers will flock to the state and build megawatts worth of solar facilities. So the key is to know SREC prices and understand the other incentives offered by states.

Flett Exchange provides an online trading platform for SRECs. Like all good markets, Flett Exchange brings transparency, price discovery and liquidity to the nation's SREC markets.

Currently, Flett Exchange is reporting SREC values for seven markets. Some of the markets are disappointing. For example, Delaware fell from slightly under $250 per megawatt-hour last February to $100 today. Maryland fell from $280 last March to $175 today. Massachusetts has remained flat at $525.10 for the calendar year. New Jersey fell from $500 last May to $225 today. Ohio began the year at $300 and is currently $325. Pennsylvania dropped from $150 last March to $45 today. Washington, D.C., jumped from $230 last March to $250 today.

In many cases, the market value of SRECs declined because developers responded to the market and supply met demand. Secondarily, many states designed small mandates and provided minimal overall demand; it was easy for developers to meet statewide demand.

Depending on the state, developers need more than $300 per megawatt-hour to make solar work. Only Massachusetts and Ohio are currently above $300. Because of their poor insolation values (solar radiation energy), even these states may not be offering high enough SREC values to spur solar development.

This is not to say there aren't any new solar programs in the U.S. Some states offer small, targeted and closed programs to incent their regulated utilities to build new solar facilities. These programs are not market-based and may have limited mandates.

Nevertheless, low prices on the Flett Exchange are suggesting that an overall slowdown in solar development is coming. No developer will build a facility if they cannot find financing and no bank will finance a money-losing project. Current SREC prices are so low that they are discouraging new investment in solar power in any form. Until SREC prices regain their footing, solar projects will be postponed or shelved.

Falling SREC prices suggest that a slowdown is coming for equipment providers. Companies that rely on domestic sales, such as First Solar (FSLR) and SunPower (SPWRA) may experience revenue challenges. Low prices may even affect Chinese companies such as Trina Solar (TSL), LDK Solar (LDK) and Yingli Green Energy (YGE) if a significant amount of their forward earnings depends on U.S. markets.

At least one state is concerned about falling SREC prices. New Jersey is considering adjusting its mandate upward to make sure developers stay and continue building solar facilities. New Jersey is considering a bill that would increase the mandate, with the intention of creating more demand for SRECs and increasing SREC values.

In New Jersey's case, SRECs are ultimately paid by consumers, not the state. Consumers' consumption of solar power has the effect of reducing retail rates (solar power displaces natural gas and therefore reduces the market-clearing price of electricity). While consumers may ultimately pay for SRECs, their utility charges for energy will decline.

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