SRECs: Understanding solar renewable energy credits

Solar renewable energy certificates (SRECs) can provide sizable income to solar power system owners living in eligible markets, but they can also be complicated to understand. Unlike popular solar incentives such as the federal solar tax credit (ITC), SRECs aren't available to everyone and vary by state and utility company.

The extra income you can earn from SRECs is just one example of how going solar can benefit you financially for years to come. When you invest in a solar energy system, you're signing up for additional monetary benefits like SRECs that go beyond saving on your monthly electric bill.

In this article, we'll help you understand everything you need to know about SRECs.

Solar renewable energy certificates (SRECs) are performance-based solar incentives that allow you to earn additional income from your home’s solar energy production. As a homeowner, you can earn one SREC for every megawatt-hour (MWh), or 1,000-kilowatt hours (kWh), of electricity your solar system generates. 

SRECs exist because of state regulations known as renewable portfolio standards (RPS), which require utilities to produce a specific percentage of their electricity from renewable energy sources. Utilities purchase renewable energy certificates (RECs), also known as renewable energy credits, to meet these RPS requirements. RECs prove that a utility has either produced renewable electricity or paid someone else who is producing renewable electricity for the right to count that electricity as part of the utility's own energy generation activities. SREC is simply the solar-specific version of a REC.

SRECs and RECs: what's the difference?

Just as you can buy and sell RECs to transfer the right to count renewable electricity, you can buy and sell SRECs to transfer the right to count solar electricity. 

SREC markets facilitate the sale of solar certificates, but they only exist in states with a solar carve-out. As the name suggests, this policy "carves out" a set portion of a state's renewable portfolio standard for solar technologies by mandating that electricity suppliers generate a certain amount of solar energy.

Because both RPS laws and solar carve-outs are state-specific policies, SRECs are not available everywhere. About 30 states have adopted an RPS, but fewer than 10 have a solar carve-out and an active SREC market.

If you live in a state with an SREC market, you typically won't sell your certificates to a utility directly; instead, you'll work with an SREC aggregator or broker (like SRECTrade or SolSystems) to monetize your SRECs. 

The value of an SREC varies from state to state and primarily depends on the following factors:

Supply and demand

Buying and selling SRECs is a lot like investing in the stock market. As with stocks, the price of an SREC changes over time depending on the supply and demand in your state's market. An oversupply of SRECs leads to lower prices, while an undersupply results in higher-value SRECs.

Alternative compliance payment

Utilities must buy RECs or SRECs to meet goals determined by a renewable portfolio standard – but how do states enforce that mandate? That’s where solar alternative compliance payments (ACPs) come into play. ACPs are payments that utility companies must make if they don't meet the specific renewable goals set by the state, including solar carve-outs.

The state sets ACP values and helps drive the market price for SRECs. Think of an ACP as a cap on SREC prices. Utilities are not incentivized to buy SRECs at a higher price than the ACP limit because they would be required to pay the ACP penalty price instead.

A 10 kilowatt (kW) solar panel system will produce on average about 10 to 13 MWh of electricity annually, which translates to 10 to 13 SRECs. As shown in the table below, this can drastically improve the financial return of solar in some areas, but mean less than $100 in savings in others.

*SREC price based on April 2023 selling values
**Annual earnings assume 10-13 certificates per year

Another option is pre-selling your SRECs. SREC brokers, solar installation companies, and solar financing companies often have options to pre-sell the rights to your SRECs for a lump sum. They can also offer a fixed pricing agreement to pay you an agreed-upon price for each SREC, regardless of what they sell for. When you enter into a fixed pricing agreement, the contracts typically last 3-15 years.

There are numerous benefits and drawbacks to pre-selling your SRECS. First, let's look at the benefits.

Budgeting

One benefit of pre-selling your SRECs or opting into fixed pricing is that you know exactly how much you'll earn ahead of time. Because of this guarantee, you can better manage the additional income and budget it toward other financial needs.

Paying down your solar loan

Another benefit of these SREC selling options is that you can use the guaranteed income to pay down any solar loan you took out to cover your system's upfront cost. This is particularly beneficial when it comes to pre-selling the rights to your SRECs. Some aggregators may give you a substantial lump sum that you can use to immediately pay down your balance. Many solar financiers also offer an option that lets you enter into a fixed pricing agreement that automatically pays off your monthly loan payments as they occur.

Peace of mind

Lastly, peace of mind is one of the most valuable benefits of pre-selling SRECs or selling your SRECs for a fixed price. With those options, you don't have to worry about what's happening with the market or whether an oversupply may result in a price drop. You’re protected against fluctuating prices – a benefit that people selling SRECs on the spot market don’t have.

Just be aware that peace of mind tends to come at the cost of lower financial returns, which is the biggest disadvantage of pre-selling SRECs or opting into a fixed pricing contract.

Disadvantages of pre-selling SRECs

Selling your SRECs on the market is like investing in stocks, while pre-selling your SRECs is more comparable to purchasing bonds. By pre-selling your SRECs, there's a good chance you'll earn less money for the sale of your SRECs than if you were to sell them over time. When financiers, SREC brokers, or solar installers offer you a specific price for your SRECs, it's usually because they believe they'll make a profit. 

Before you decide whether to sell or pre-sell your SRECs, it's important to understand your state's historical and current SREC market trends. To find information on the most recent SREC sales across markets, we recommend using SRECTrade orSolSystems. Ultimately, your decision comes down to how much risk you want to take on versus how much you want to earn.

Not every state has a renewable portfolio standard, and even those that do may not have a solar carve-out. Below is a list of states with active SREC markets:

• District of Columbia

• Delaware

• Illinois

• Maryland

• Massachusetts

• New Jersey

• Pennsylvania

• Ohio

• Virginia

Going solar can be confusing. At EnergySage, we do the heavy lifting for you so you can confidently go solar. The EnergySage Marketplace is a simple, transparent, and free service that delivers custom quotes from vetted installers in your area in minutes. From there, you can easily compare them to find a solar solution that meets your needs at the right price. Sign up today to start your solar journey!