The Master of the Solar Energy Industry . . .

. . . is the project finance industry.  With the complexities of the PV industry, it’s easy to lose track of this fact while focusing on other issues, which are important but completely subservient to the finance issue. While subsidies, module efficiencies and other individual solar energy project lines are highly important, what matters most are the project pro forma’s NPV and IRR and long-term viability for project finance entities. That is their bottom line.

U.S SREC Programs Source: SRECTrade

So it’s surprising to me that the debate around Solar Renewable Energy Credits (SREC’s) vs. Feed In Tariff (FIT) is so hotly contested.  An SREC is a certificate representing the “green attributes” of one megawatt-hour (MWh) of electricity generated from solar energy. SREC’s can be sold into trading pools that have buyers (usually utility operators) who need the credits to comply with Renewable Portfolio Standard mandates set by a few states.  The price for an SREC can vary widely based on demand and legislative policy and a host of other factors. A good review of the SREC program can be found here.

A FIT program is a government legislated policy mechanism, which encourages generation of solar energy and other renewable energy.  FIT programs usually require utilities, under long term contracts, to pay a premium for renewable energy generation with the objective of avoiding building new fossil fuel generation facilities with attendant pollution costs. The overall goal is to foster renewable energy uptake where the kWh price of clean energy is reduced and reaches grid parity.

Energy subsidy programs are highly complex and devil is in the detail. But the basic differentiator is that a FIT is a fixed priced mechanism and an SREC is a variable priced mechanism based on demand from un-regulated trading pools. FIT’s provide a long term energy purchase price that give a solar project pro forma long term certainty for solar project financing entities. SREC’s create a difficult situation for solar project owners who are trying to forecast revenue in the near and distant future, an “SREC forward curve” in solar project developer parlance.

FIT = Rapid Adoption of PV

Most SREC proponents claim that it creates the most competitive environment and puts pressure on the solar industry to innovate to lower installed cost. FIT programs, when structured properly, have auction provisions, which achieve the same outcome. The recent Renewable Auction Mechanism (RAM) program by the California Public Utility Corporation is great example of this type of FIT.  The India Nehru Solar Mission is another recent FIT program that selects lowest tariff bids.

Neither the SREC or FIT programs are perfect solutions for stimulating renewable energy demand.  Both have their challenges in implementation due to the highly fractured regulatory environment at both the state and federal level. And FIT programs can lead to a severely overheated marketplace where the program is eventually withdrawn. But a FIT, when designed and implemented properly, will create the lowest risk option for project financing entities and create the steepest solar adoption curve.

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