Feed-in Tariffs or Solar Renewable Energy Credits — Which are Cheaper?

October 27th, 2011 by Stephen Lacey

A few years ago, a heated debate started within the U.S. solar industry about which was more cost-effective: Solar Renewable Energy Credits (SRECs) or Feed-in Tariffs (FITs).

Now that we’ve had more experience with both policies, the question is again being asked. Researchers at the Institute for Local Self Reliance attempted to answer this question, and released a report earlier this month concluding that long-term contracts for clean energy are more cost-competitive than tradeable credit markets.

NOTE: Some are now calling Feed-in Tariffs “CLEAN Contracts.” Since the report we’re writing about references CLEAN Contracts, we’ll use both terms in this post.

So what does that mean exactly? Considering that solar still has a long way to go before we reach the double-digit penetration, this kind of research helps us understand which solar policies are most effective.

Let’s start with the background on how these programs work.

Modern FITs were started in Germany in the 90′s and have spread to dozens of other countries around the world. The policy sets a price per kilowatt-hour that utilities must pay an owner of a renewable energy system over a certain period of time — typically 15 to 20 years. Those rates are stepped down over time as the cost of technologies come down. FITs also give a system owner priority access to the grid, meaning the utility must allow them to interconnect in a short period of time.

Although the policy is hailed as a simple, transparent way of promoting renewables, it has not gained traction in the U.S. like it has around the world.

Pure-play SREC Programs, which are uniquely American, are a relatively new mechanism. An SREC is a tradeable credit that represents the “environmental attribute” of one megawatt-hour of clean electricity. Under a Renewable Portfolio Standard, energy suppliers must purchase a certain number of SRECs in order to meet yearly targets. These suppliers can generate the credits by developing their own projects, or they can purchase them from customers.

SRECs are the exact opposite of CLEAN Contracts. Rather than provide a guaranteed long-term price, SRECs fluctuate in price based upon supply and demand. If there’s an oversupply of solar, SREC prices will drop; if there’s an under supply, they will rise. Some people believe these “floating” markets are opaque and create inefficiencies that ultimately make the program more expensive; proponents say an SREC system allows the market to realize the true price of solar.

However, as the ISLR report points out, CLEAN Contracts in Germany have more closely followed changes in solar system prices than market-based SRECs have:

According to the ILSR report, when factoring in program management, the cost of financing, and the ease of interconnection under both programs, CLEAN Contracts come in more than 3 cents cheaper per kilowatt-hour when comparing the levelized cost of energy from a theoretical solar project in New Jersey. (New Jersey has an SREC program, and state officials debated this exact issue when it was initially rolled out. In fact, a 2007 independent analysis showed that SRECs could be up to 50% more expensive due to higher transactional costs.)

Here’s more from the ILSR report, which also looked at small-scale systems in California:

This finding is reflected in a 2011 study that found the average cost of solar to be 30 percent higher for California ratepayers than German ones, accounting for the difference in solar resource intensity. Californians pay between $0.33 and $0.38 per kWh for solar power, in comparison to average CLEAN Contract rates of $0.24 per kWh in Germany. This fits with the findings from international energy consulting firm KEMA, which reported that, “studies have suggested that cost savings of 10-30% may be possible from maximizing investor certainty.

CLEAN Contracts have minimal transaction costs because the project developer is assured a long-term contract, grid interconnection, and fixed, transparent price for their electricity.

SRECs, however, create significant transaction costs. Solar projects in an SREC regime, particularly those that are larger than net metering thresholds, must participate in a utility bidding process for a contract. The contract must be negotiated and may include bundling the SRECs (and an additional If New Jersey solar developers operated in a low-risk environment like Germany, it would reduce the levelized cost of solar power by as much as 20 percent.

For the last five years, SREC programs have dominated state-level solar policy. But with price crashes in Pennsylvania and New Jersey, CLEAN Contract advocates are using the opportunity to point out the cost-effectiveness of long-term, transparent tariffs to support renewables. Will this help them make their case?

This post was originally published on Climate Progress and has been reposted with permission.

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Tags: clean contracts, FITs, ILSR, Institute for Local Self Reliance, solar energy policy, solar power policy, Solar Renewable Energy Credit, Solar Renewable Energy Credits, srec, SRECs

About the Author

Stephen Lacey is an editor at Greentech Media. Formerly, he was a reporter/blogger for Climate Progress, where he wrote about clean energy policy, technologies, and finance. Before joining CP, he was an editor/producer with RenewableEnergyWorld.com. He received his B.A. in journalism from Franklin Pierce University.

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http://www.srectrade.com Brad Bowery

The NJ SREC vs Feed-in Tariff (FiT) comparison in the second graph is very misleading. The NJ SREC data used by ISLR trends upward because he uses the weighted average price reported when the SRECs are transfered. This data does not show accurate prices because it does not account for when a contract was signed.

In 2009, the solar alternative compliance payment (SACP or ceiling price) was increased from $300 to $711 – leading to an immediate jump in market pricing. Over the past few years, the weighted average SREC price used by the author has been skewed downwards by contracts signed when the SACP was $300 (for example, a 5-year contract signed at $100 in 2008 is still transferring SRECs at $100 and being reflected in the data). As those contracts have rolled off, the weighted average price has gradually increased. Therefore, it is an inaccurate representation of what has happened in the market, where prices rose to $680 (spot) and $500 (forward) in 2009 and have since declined to $220 (spot) and $150 (forward).

Furthermore, NJ SREC prices over the past 3 years have not been set by the market, they have been set by the SACP. This is because in each of those years, New Jersey fell significantly short of the state’s RPS solar carve-out. In 2012 and 2013, there will be an oversupply of SRECs and pricing will be set by the market. We have already seen the beginning of a correction as prices have dropped from $640 to an extreme low of $140 in a short period of time. Since then, prices have risen back up to the low- to mid-$200s. We suspect that it may continue to correct upwards before settling into a true “market” price in the short-term. However, in the long-run, given the declining cost of installing solar, the SREC market will do what it is intended to do and phase out as SREC prices trend to zero. That long-term sustainability is precisely why SREC programs have proliferated while FiTs are going through a re-branding as “Clean Contracts”.