Marvin Cunningham is the President and 6th generation owner of Long-Stanton Manufacturing in Fairfield, Ohio and is responsible for a business whose history stretches back to 1835. He has spent most of his life and career around machines, production schedules, utility bills, and the kind of decisions that determine whether a manufacturing company succeeds or struggles. It’s a generational view, one that he hopes to one day pass on to his daughter. Companies like Long-Stanton do not stay in business for nearly 200 years by chasing trends; they survive by paying attention to what works and ignoring what does not.
That is one reason solar caught his attention in the first place. Electricity is not getting cheaper, and his manufacturing equipment uses a lot of power. Utility bills have a habit of showing up every month, whether business is good or bad. Solar looked like something worth evaluating.
When Marvin reviewed the financial projections, most of the numbers were easy to understand. The projected electric savings made sense, the federal tax credit made sense, the depreciation made sense. However, there was another category called SREC Revenue. He saw it in the proposal and he understood that it had something to do with solar, but he didn’t spend much time thinking about it.
What are SRECs?
At the time, that reaction was completely reasonable. Most business owners in Ohio would have done the same thing.
To understand why Marvin eventually changed his mind, it helps to understand what an SREC actually is. SREC stands for Solar Renewable Energy Credit. The name sounds more complicated than the concept. Every time a solar system produces 1,000 kilowatt hours of electricity, one SREC is created. The electricity itself powers equipment, lights, offices, production lines, or whatever else the facility needs. The SREC is simply a record that the electricity was produced by a solar system.
Think about it this way: Once electricity enters the grid, nobody can tell where a particular electron came from. A utility cannot point to a specific electron and say, “you came from a solar panel” or, “you came from a coal fired power plant,” or, “this electron looks like the product of a natural gas facility.” The SREC is the accounting system that tracks renewable energy generation and documents that a certain amount of solar energy was produced and delivered. Think of SREC’s as the “paternity test” for electrons.
That raises another question: Why would anybody pay money for a certificate tied to electricity that has already been generated? The answer has less to do with solar owners and more to do with state energy policies.
Many states require utilities to obtain part of their electricity from renewable sources. Some states require a certain amount of that renewable energy to come from solar. Some utilities build solar projects themselves (which, shameless plug, Melink Solar also builds), but they can also buy credits from owners of solar systems…many times from commercial solar systems (which Melink Solar also builds). Those credits help them satisfy their obligations, and that creates a market where when demand is strong and supply is limited, prices increase. Then when there are more credits available than buyers need, prices fall. Basic supply and demand and scales of economy stuff.
For years, Ohio had a stronger market than it does today. At one point, Ohio SRECs sold for hundreds of dollars, but those days are gone. Changes to state policy reduced demand, and prices eventually followed wherein today, Ohio SRECs trade for a small fraction of their former value. When Marvin first learned that, it confirmed what he already suspected.
So, What Changed?
What changed? A conversation about where those credits could actually be sold. Like many business owners, Marvin assumed an Ohio solar project would participate in Ohio’s market, a totally logical assumption. Because the system is in Ohio, the company is in Ohio, why would the credits end up anywhere else? You don’t see the electron hitchhikers on the roadside leaving the state?! Well, the answer starts with PJM, the regional transmission organization that manages the electric grid across Ohio and much of the surrounding region. PJM includes Pennsylvania, Indiana, Michigan, Kentucky, West Virginia, and several other states. Solar systems throughout the PJM region can be tracked through a system called PJM-GATS.
(show pricing for PJM-GATS in some sort of chart?)x
In many cases, a solar system located in Ohio can register through PJM-GATS and sell credits into Pennsylvania’s market instead of relying exclusively on Ohio pricing. The solar array doesn’t change, the electricity production doesn’t change, the roof doesn’t change. The market changes. And when Marvin first saw the difference in value, it got his attention.
That was the point where SRECs stopped feeling like a small footnote buried in a proposal and started feeling like something worth understanding.
There are Options
Once a system is producing SRECs, owners generally have several options:
- Some choose to sell them as they are generated, and the value of their SRECs rises and falls with the market.
- Others prefer a fixed-price agreement that provides predictable revenue over a period of years.
- Some owners take an upfront payment in exchange for future SREC production, which can provide a meaningful injection of cash near the beginning of a project.
- Others decide not to sell them at all. Instead, they retire the credits and keep the saved utility spend, and environmental claims associated with the solar their facility generates.
There is no single right answer. Different organizations have different priorities. While some want certainty, some want flexibility, some want immediate cash. Some care more about sustainability reporting than revenue. The important point is that there are choices, and many owners never realize those choices exist because nobody takes the time to explain them.
The details become even more important when looking across the Midwest because every state handles solar incentives differently. For instance, Illinois has one of the strongest incentive structures in the region. Michigan and Indiana rely much more heavily on electricity savings, tax incentives, and depreciation benefits. New York follows a completely different framework that does not operate like a traditional SREC market. That is one reason broad statements about SREC values can be misleading! A number that is accurate for one project may have very little relevance for another project a few hundred miles away.
The right question is not whether SRECs are valuable, the right question is how valuable they are for your specific project?
In Retrospect
Looking back, Marvin’s biggest lesson was not that SRECs are the reason manufacturers should install solar; they’re not! Electricity savings still matters the most. Plus, the federal tax credit still matters, the depreciation still matters, etc. Savings, incentives, and depreciation are usually responsible for the majority of a solar project’s economic value. What changed for Marvin was realizing that he had nearly dismissed something before fully understanding it.
That may end up being the biggest takeaway for other business owners. If solar is on your radar, ask questions about SRECs. Ask where they will be registered, ask what markets are available, ask what assumptions are built into the proposal. Because…
You may discover the answers do not change your decision at all, OR you may discover there is more value on the table than you realized!