Despite a robust RPS and the threat of non-compliance fines above $550, the Pennsylvania SREC market has been slow to develop. We take a quick look at some of the factors that influence this market and hopefully provide some insight as to why the Pennsylvania SREC demand has been low.
Demand Issues: For starters, the PA RPS is expected to ramp up as described on our Pennsylvania Page. Based on current electricity sales into Pennsylvania, we project the demand for SRECs to be as follows:
According to this projection, approximately 20,000 SRECs need to be purchased in Pennsylvania for generation through May 31, 2010. However, the reality is a bit more complex. Electricity markets are composed of three types of companies: electricity generators who supply the power, electricity transmitters responsible for transmission and electricity distributors responsible for the delivery of the retail electricity. It is important to know that although the distribution companies (EDCs) or retail utilities are most commonly associated with state RPS goals, it is actually the numerous electricity suppliers who are responsible for purchasing the SRECs to meet the RPS. The Pennsylvania electricity market is comprised of 11 Electricity Distribution Companies (EDCs). Behind each EDC are the many suppliers providing power to them. When the PA RPS was passed, the suppliers for several EDCs were exempted for the first few years. According to the DSIRE website, these EDCs were exempted because they were under rate freezes or still recovering from costs associated with restructuring. In all, 5 of the 11 EDCs are exempt. The exemption ended this January of 2010 for one of the EDCs and the exemption for the other 4 will expire in January of 2011. More significantly, these EDCs represent over 85% of the total electricity market exempt through January of 2010 and 70% exempt through January of 2011! With that said, this changes the outlook for SREC demand in Pennsylvania substantially in 2010 and 2011:
As a result, the actual demand for PA SRECs in the 2009-10 Energy Year drops from nearly 20,000 SRECs to under 5,000 SRECs – 25% of what was initially projected. In 2010-11, the demand drops from an initial projection of 33,000 SRECs down to 21,000 SRECs – about 60% of initial projections!
Procurement Issues: In addition to a decreased demand in the early years of the PA market, the state also has some constraints in place that have created challenges for buyers and sellers to connect in this market. For the first time in history, home and business owners are entering electricity markets as generators. These markets are geared towards large corporations that produce significant amounts of power, and as a result, the approach many companies have taken to procuring SRECs is geared towards large companies (as an aside, this is why GATS is such a cumbersome platform for solar owners). In addition, since most of these companies are heavily regulated, protections are put in place to ensure a competitive process. Unfortunately, these protections are also geared towards large companies. The end result is that the Pennsylvania Public Utilities Commission (PUC) requires buyers to use a competitive RFP process.
Well, the problem is that most solar owners don’t even know what an RFP is, let alone have the requirements in place to be eligible. This explains why most RFPs for SRECs are severely under-prescribed and why in late 2009, PPL successfully petitioned the PUC to lessen the credit requirements necessary to bid in their RFP. Instead of being required to have a credit rating and listing with an accredited credit agency, you now only needed to put up a letter of credit to bid on the opportunity to sell SRECs in minimum bundles of 500!
Fortunately, it seems that the PUC continues to re-evaluate this process and the constraints they have placed on the suppliers. Most recently, they have proposed a change to their policy to allow suppliers to enter into a restricted volume of bi-lateral contracts that are also restricted in value by the average value of SRECs procured in the adjacent RFPs. You can read the proposal and we encourage you to submit your comments. While this is a step forward, we still believe that this will likely incentivize the same companies bidding on RFPs to just enter into the bi-lateral contracts, squeezing out the rest of the market. We setup our auction to ensure a competitive process that is accessible to all market participants and hope that future iterations of PUC policy changes will better address the entire SREC market and allow more compliance buyers to enter into auctions like SRECTrade without having to jump through legal hoops in order to do so.
Conclusion: The Pennsylvania SREC market has an extremely promising future and all signs are pointing in the right direction. We believe that this is an iterative process. Looking back at the lead taken by New Jersey, their SREC program has been amended several times and it is now inspiring a prolific SREC market. Pennsylvania will continue to tweak its program until the market truly is more efficient and effective in promoting solar. Until then, we at SRECTrade are doing everything we can to bring buyers to the market, as well as set up other means for selling SRECs for our clients. The great news is that most facilities eligible in Pennsylvania are also likely to be eligible in DC and Ohio where in the short-term, SREC prices will be better. If you have any questions, as always, feel free to contact us.
