Several forums, including this one, covering residential solar developments have commented on the volatility of SREC markets in some states. But few have yet to note the potentially tremendous impact on solar leasing, and residential solar adoption in general, in those SREC states experiencing severe fluctuations in pricing. You may have read how the New Jersey and neighboring Pennsylvania SREC markets have declined in SREC prices. After a few years of trading above $600/SREC, New Jersey’s SREC market – which is largely responsible for making the Garden State a national leader in residential solar – plunged to prices between $200-$250 for the second half of 2011. Now, prices have started to drop further, and will continue well below that point for at least the next year or two (assuming no legislative action is taken). There is understandable frustration for the early adopters that expected a 3-5 year payback on their solar investment with an incoming cash flow based on high SREC prices (even though their system is still saving money on electricity bills and earning something for their SRECs). The unanticipated glut in the market has depressed prices as too many SRECs are being generated than the RPS law requires utility companies to buy.
But what does this mean for homeowners that want to go solar, but have yet to put together the finances? The answer to that question is not yet obvious, but the hunch is the volatility in SREC pricing in New Jersey, a state that has installed over 650 MW of solar (second only to California), will drive prospective solar customers away from owning their panels. The obvious alternative is a solar lease, which has an edge in this scenario of not being dependent on SREC revenues whatsoever. The question being posed now to prospective solar adopters is: Do I hedge my bets on volatile SREC markets, or on the predicted rise in electricity costs? Though there are many advantages to owning a system, and SREC prices will not necessarily remain low in all states, solar leasing seems to carry lower risk.
What’s particularly interesting, however is how this development could perpetuate itself in state like New Jersey that are susceptible to volatile SREC pricing. It’s not entirely clear how solar leasing companies like Sungevity and SolarCity monetize their SRECs from the systems they lease to homeowners. The likely scenario is they look for long-term contracts and settle for spot trades when possible. But either way, these large sales will drive down SREC prices, because solar lease companies do not depend on SREC revenues to make their margins, i.e., SRECs are just gravy at the end of the day for them.
Additionally, as solar leasing is tapping into a new income demographic, which is expanding the residential PV market, a greater supply of SRECs is expected to come online from systems that otherwise would not have been built. Even if these SRECs were not sold in the open market, speculative SREC pricing, which looks at potential supply of SRECs, will trend downward in anticipation of a prolonged oversupply. These self-perpetuating factors have yet to take hold on a large scale, but I’ll be curious to see if the markets pan out that way (and feel bad for the early adopters that hedged their bets on high SREC prices!)