Last fall, it was disclosed that renewable energy credit (REC) prices in the Colorado Solar Gardens program have turned negative -- that is, developers have submitted bids that require them to pay the utility to take the RECs generated by their projects.
How could this be?
Does it mean RECs fundamentally have no value? Or maybe that participating retail customers don’t value solar energy from community solar projects? No and no. Negative REC prices in the Solar Gardens program are a direct result of a complicated web of regulatory guidance and program design in Colorado that distorts REC pricing.
The Colorado Solar Gardens program meets many pro-solar policy goals simultaneously: it promotes small utility-scale projects, engages individual households and businesses that want to support solar but can’t install a system on their roof, and provides a market for third-party developers -- and it does all this while also helping investor-owned utilities meet the distributed generation carve-out portion of Colorado’s renewable portfolio standard (RPS).
When the program was originally set up in 2010, the market for solar was very different than it is today. In order to encourage rapid development of community-based projects, the program guaranteed compensation for the power at the full retail rate in Colorado. At the same time, Colorado’s RPS required utilities to purchase large amounts of renewable energy (in the form of RECs) from distributed solar. To address both of these issues, the program was designed so that the RECs from the participating community solar projects would be sold to utilities, providing an important revenue stream for the developers, and helping the utilities meet their RPS goal with RECs generated in-state. This structure, combined with above-average solar resources, meant that even small utility-scale projects of just a couple of megawatts had a decent chance of being economically viable. So a key benefit of this approach was that it quickly helped create a vibrant market for solar development in Colorado.
Unfortunately, this structure also had some disadvantages, not all of which were apparent at inception. One key problem: RECs embody the environmental attributes and claiming rights of renewable energy. By selling the REC to the utility instead of the participating retail customer, retail customers were not (and still aren’t) buying solar power or lowering their carbon footprint. If the RECs are going to the utility for its RPS requirements, then the RECs can’t help customers use renewable energy or lower their carbon footprint.
This is a difficult concept for even sophisticated commercial customers to understand, and it is unlikely that many (any?) residential retail customers get it. So, while the policy secured a secondary revenue stream from REC sales that allowed developers to offer the program to customers at a lower price point, there is a less-than-ideal lack of transparency and choice for customers that want to receive renewable energy.
Fast-forward five years. Community solar is booming in Colorado, and by the end of 2016, as much as 40 megawatts of capacity may be operating. These projects are creating a lot of RECs, and the utilities don’t need them all. Add to this another key development: the cost of solar has dropped significantly and continues to decline.
Now we have a situation where the utilities no longer need the RECs and developers are willing to propose projects without REC revenue. However, the policy still requires that the RECs from these projects be sold to the utility. As a result, developers bidding on new projects have started to assign zero or even negative value to the RECs in order to have the most financially attractive bid. The policy that was intended to encourage the solar market is now distorting it, and as a result, we see negative REC prices in Colorado.
So where do we go from here?
This dilemma can easily be fixed by changing program design such that retail customers can actually purchase solar energy when they sign up for Solar Gardens. This would entail the customer -- not the utility -- paying for the REC and then having it retired on their behalf. Many benefits would accrue from this policy change, including:
- Residential and small commercial customers could pay for and receive the solar power they almost certainly already believe they’re buying.
- Small commercial customers would be able to buy the renewable energy from the project and make renewable energy claims based on program participation. Added bonus: commercial customers could use the RECs to earn points for LEED certification or participate in the EPA Green Power Partnership.
- Customers could use their participation in the program to lower their carbon footprint.
Perhaps the biggest benefit for the renewables industry at large is that this change would increase transparency and choice -- always a good thing -- and prevent solar markets from being roiled by nonsensical negative REC pricing.
Adam Capage is the vice president of community solar at 3Degrees, a renewable energy services company.