





































Solar Renewable Energy Credit Price Volatility and Investment Returns


COMMONWEALTH, Volume 19, Issue 1 (2017). © 2017 The Pennsylvania Political Science Association.  
ISSN 2469-7672 (online). http://dx.doi.org/10.15367/com.v19i1.135. All rights reserved.

Solar Renewable Energy Credit Price 
Volatility and Investment Returns

Have Policies Stranded Capital Investment?

SOMAYEH YOUSSEFI
University of Maryland

PATRICK L. GURIAN
Drexel University

Pennsylvania is one of a number of U.S. states that provide incentives for the 
generation of electricity by solar energy through Solar Renewal Energy Credits 
(SRECs). This article develops a return on investment model for solar energy 
generation in the PJM (mid- Atlantic) region of the United States. Model results 
indicate that SREC values of roughly $150 are needed for residential scale sys-
tems to break even over a 25- year project period at 3% interest. Market prices 
for SRECs in Pennsylvania have been well below this range from late 2011 
through the first half of 2016, indicating that previous capital investments in 
solar generation have been stranded as a result of steep declines in the value of 
SRECs. A simple conceptual supply and demand model is developed to explain 
the sharp decline in market prices for SRECs. Also discussed is a possible policy 
remedy that would add unsold SRECs in a given year to the SREC quota for the 
subsequent year.

Over the last decade, interest in generating green electricity has 
increased, however, renewable energy sources have high up- front 
costs. To incentivize renewable electricity generation, a number of 

U.S. states have developed renewable portfolio standards (RPS). Renewable 
Portfolio Standards require electricity companies to generate a growing 
quantity of their energy from renewables. Each state has developed renewable 



80 somayeh yoUsseFi anD patriCk l. GUrian

energy targets. The quantity of electricity generated from qualifying sources 
is tracked by renewable energy credits (REC), which are tradable commodities, 
allowing electricity utilities to meet their RPS requirements by purchasing 
power from generators using renewable sources.

In the United States, RPS policies have remarkably expanded the applica-
tion of wind energy (Menz and Vachon 2006). The reason for slower growth 
in solar electricity is the high initial investment required for photovoltaic 
(PV) systems. To alleviate the high capital cost of PV systems and make them 
competitive with other renewable technologies, most states with RPS laws 
have initiated set- asides for solar generation. A solar set- aside requires that 
a certain amount of electricity consumed in a state must be generated by PV 
facilities. If a utility provider fails to meet set- aside obligations, it must pay a 
penalty called the solar alternative compliance payment (SACP). These penal-
ties are aggregated by the government and invested on research to expand 
renewable energy usage (Holt and Wiser 2007).

RECs specified for solar energy are called solar renewable energy credits 
or certificates (SRECs). To trade SRECs some states have set up viable mar-
kets, which are in their initial stages. While a few studies of these markets 
have been undertaken (Burns and Kang 2012), the Pennsylvania SREC mar-
ket has not been studied in depth. In its initial years it grew considerably; 
however, its early success was not stable and was followed by a dramatic col-
lapse in SREC prices and its solar industry (Solar Foundation 2016). Explor-
ing Pennsylvania’s market in depth can provide insights into solar markets’ 
structure and help establish more functional markets. Thus, the objective of 
this article is to explore the Pennsylvania SREC market and effective returns 
on investment in solar electricity generation, given historical market fluctua-
tions in SREC value. The implications of proposed plans to strengthen the 
Pennsylvania market are also discussed.

The preceding introduction is followed by five main sections: (1) a back-
ground overview; (2) a history of the Pennsylvania SREC market, its cur-
rent status, and the challenges it faces; (3) the cost estimation and economic 
returns of a typical PV system; (4) the results of the analysis and strategies to 
improve the stability of the market; and (5) the Conclusion.

Background

Support mechanisms for renewable resources were first introduced in Europe 
through feed-i n- tariff programs in the 1980s. FIT programs incentivize vari-
ous energy production technologies according to their cost. Furthermore, 
the government ensures purchase of all produced green energy by signing 



Solar Renewable Energy Credit Price Volatility and Investment Returns 81

long- term contracts with producers. As a result solar electricity production, 
which is relatively expensive, is well supported in Europe (Lipp 2007; Duson-
chet and Telaretti 2010). In the United States, however, green energy produc-
tion is supported through RPS, which is implemented at the state level. There 
is no requirement for long- term contracts in the RPS program, although the 
requirement that a growing percentage of consumed electricity be produced 
from renewable resources should provide ongoing incentives over time. As 
of 2016, 29 states, the District of Columbia, and Puerto Rico have instituted 
a renewable portfolio standard (RPS). States are free to structure their RPS 
program according to their specific goals and associated characteristics. For 
instance, while New Jersey does not have any constraints on the capacity of 
the PV systems, Pennsylvania requires that PV systems be smaller than 50 kW 
to be eligible to register and trade their generated electricity in the market.

Several researchers have discussed advantages and disadvantages of RPS 
programs and examined its potential to advance use of renewable energies 
(Agnolucci 2007; Bergek and Jacobsson 2010; Buckman 2011; Butler and 
Neuhoff 2008; Cory and Swezey 2007; Finon and Perez 2007; Kildegaard 2008; 
Lauber 2004; Lipp 2007; Michaels 2008; Midttun and Gautesen 2007; Mitch-
ell, Bauknecht, and Connor 2006; Pourhashem et al. 2013; Toke 2005; Wiser, 
Porter, Bolinger, et al. 2005; Wiser, Porter, and Grace 2005). Lauber (2004) 
compared RPS policies and feed- in- tariff models. He concluded that while 
RPS is beneficial, it does not contribute to the technological assortment and 
as indicated by Buckman (2011) it lacks “dynamic efficiency.” Similarly, Meyer 
and Koefoed (2003) found that most RPS policies do not differentiate between 
renewable resources, therefore, they do not provide much support for energy 
sources that are currently high cost but have potential to achieve economic 
competitiveness over time, such as PV. However, Langniss and Wiser (2003) 
reviewed RPS application in Texas and concluded that if an RPS is carefully 
designed and implemented, it can proliferate solar electricity generation at 
a low cost. Still, the success of RPS in Texas is primarily due to wind power, 
and solar electricity has a very small role in the success of Texas RPS policies.

To promote more expensive technologies such as PV and make them com-
petitive with other renewable technologies, RPS allows for dedicated support 
mechanisms. Credit multipliers and solar carve- out (or set- aside) are two 
common programs adopted by 16 states, as well as the District of Columbia. 
A solar set-a side obligates that a certain amount of electricity consumed in a 
state must be generated by PV facilities. However, credit multipliers encourage 
PV installation by devoting a higher credit to RECs generated by PV facilities 
compared with other renewable resources. As mentioned earlier, RECs speci-
fied for solar energy are called solar renewable energy credits or certificates 



82 somayeh yoUsseFi anD patriCk l. GUrian

(SRECs). An SREC is equal to one- megawatt hour of green electricity gener-
ated by utility companies, homeowners, or by any private entity, and it can 
be traded in a solar market. Unlike tax credit or cash rebates that compensate 
individual investment near the time of the PV installation SRECs shift the 
return on solar investment to the future. One major concern about SRECs is 
that they do not have a fixed value. Thus, changing prices makes financing 
projects supported by SRECs risky.

To date eight states (Delaware, Massachusetts, Maryland, North Caro-
lina, New Hampshire, New Jersey, Ohio, and Pennsylvania) and the District 
of Columbia have set up markets and associated tracking facilities to trade 
SRECs. In these markets, commercial solar energy generators, as well as indi-
vidual PV installers can sell their SRECs to utility providers. To be permitted 
to participate in such markets, generators are required to get a participa-
tion number and then register in an eligible market. Furthermore, they are 
required to install a monitoring device to allow counting of their generated 
SRECs. One drawback of such markets is that residential PV installers usu-
ally do not possess the knowledge to perform successfully in these markets. 
However, there are SREC brokers that can act as intermediaries. States with no 
SREC market (New York, Illinois, Indiana, Kentucky, Michigan, Tennessee, 
Virginia, Wisconsin, and West Virginia) can sell their SRECs in out- of- state 
eligible markets. For instance, solar investors in West Virginia are allowed to 
participate in the Pennsylvania market.

In addition to SRECs, there are other support mechanisms for PV instal-
lations. For example, the federal investment tax credit (ITC) is a nonrefund-
able personal tax credit that only residential PV owners can apply for. Since 
January 1, 2006, the federal government gives residential PV installers a credit 
equal to 30% of their PV systems’ expenditures up to $500 per 0.5 kW of 
power (DSIRE 2014a). The ITC will expire in December 2016. Furthermore, 
some states, like Massachusetts and North Carolina, offer PV installers tax 
credits, and cash rebates, which are a dollar amount paid per watt- capacity 
of the PV system. However, cash rebates usually suffer from lack of funding. 
They are offered on a first-c ome, first- served basis and are not guaranteed.

SREC markets are at their initial stages in the United States and few stud-
ies have been completed on them. Burns and Kang (2012) presented a short 
history of SREC markets and current regulations in eight U.S. states. They per-
formed a financial analysis for a residential case study to compare the returns 
on investment in existing SREC markets. However, they left Pennsylvania and 
North Carolina out of their economic analysis due to the high uncertainty of 
SREC markets there. Gual and Carely (2012) investigated the effectiveness 
of solar set- asides in North Carolina. They concluded that obscurity in the 



Solar Renewable Energy Credit Price Volatility and Investment Returns 83

SREC market and uncertainty associated with current and future SREC prices 
hinder the advancement of solar PV systems in North Carolina.

At the initial years of its SREC market, Pennsylvania had a secure solar 
market and achieved notable growth in its local solar industries. However, its 
early success was not stable and was followed by a dramatic collapse in SREC 
prices and its solar industry (Solar Foundation 2016). Therefore, exploring 
Pennsylvania’s market in depth can provide insights into solar markets’ struc-
ture and help establish more functional markets. Furthermore, the Pennsyl-
vania market has not been considered by either Gual and Carely or Burns 
and Kang.

The Pennsylvania SREC Market

The Pennsylvania RPS program is entitled Alternative Energy Portfolio Stan-
dard (AEPS) and was created by Senate Bill 1030 on November 30, 2004. The 
solar set-a side program took effect in 2007 as a result of Bill 1203. Pennsyl-
vania aims for 18% green electricity by 2021, and its solar set- aside is 0.5%. 
Pennsylvania established its solar market in 2009 with the Public Utility 
Commission and the Pennsylvania Department of Environmental Protection 
responsible for implementation of the AEPS act (DSIRE 2014a). SRECs gener-
ated in Pennsylvania are valid in the year generated and the next two years.

There are several regional electricity transmission grids in the United 
States, and Pennsylvania is part of the PJM (mid- Atlantic) region. In addition 
to Pennsylvania, PJM Interconnection is responsible for Delaware, Illinois, 
Indiana, Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, 
Tennessee, Virginia, West Virginia, and the District of Columbia. Pennsyl-
vania’s SREC market is an open market, and any facility smaller than 50 kW 
that is located in the PJM region can register to trade its SRECs in Pennsyl-
vania’s market. However, Pennsylvania’s solar electricity generators can sell 
their SRECs only in Pennsylvania and Ohio. In the PJM region, New Jersey 
was the first state to initiate an SREC market (in 2005) and has the highest 
solar target (> 4 GW by 2025). Although Pennsylvania almost has the highest 
electricity consumption (24%) in the PJM region, it has the smallest target for 
solar electricity (0.5% by 2021; see Figure 1) and its SREC’s requirement is the 
smallest in the region.

As noted earlier, SACP is a support mechanism to stabilize SREC prices. 
SACP can act as a price ceiling, and if it is high enough, it could increase 
the SREC demand and stimulate PV installment. To benefit from SACP sup-
portive potentials, many states have defined a long- term schedule for SACP 
values. However, Pennsylvania does not have a pre- fixed value for the SACP. 



84 somayeh yoUsseFi anD patriCk l. GUrian

It is calculated at the end of the compliance year (June 1 to May 31), and it is 
approximately twice the average SAEC (SREC) price traded during that year. 
Therefore, it is very difficult to predict SREC prices in Pennsylvania.

SREC price trends for markets in the PJM region are shown in Figure 
2. In 2011, SREC values in the Pennsylvania market began to decrease and 
dropped from an average of $290 to $10. The Pennsylvania House of Repre-
sentatives reacted and Rep. Chris Ross introduced House Bill 1580 on October 
3, 2011, to strengthen the Pennsylvania SREC market. The amendment would 
have modified the eligibility criteria and not allowed out-o f-s tate SRECs to 
be traded in Pennsylvania. Furthermore, the bill required an increase in the 
state’s solar carve-o ut for the period from 2012 to 2015 in order to stabilize 
the SREC market and resolve the oversupply issue (SRECTrade 2016d). The 
bill’s implementation would have increased electricity prices and would have 
imposed approximately $120 million in costs distributed among all residen-
tial and commercial power users in Pennsylvania. However, this increase 
would not have exceeded fourteen cents per Pennsylvanian homeowner over 
five years (Gaul and Carley 2012). Still, utility providers did not support the 
bill and it failed, as did a similar bill, Senate Bill 1350, also in the 2011–2012 

  

   1.20E+09   1.20E+06  

)h
W

M 1.00E+09   1.00E+06     ( )   hnoit 8.00E+08   8.00E+05   W

p M

m (  

usn 6.00E+08   6.00E+05  

dna

o mc   eyti 4.00E+08   4.00E+05   d  Cci Ert Rcel 2.00E+08   2.00E+05   S

E

0.00E+00   0.00E+00  
MD   NJ   PA   DC   OH   DE  

Electricity  consumption   SREC  demand  

Figure 1. Electricity Consumption and SREC Demands in PJM Region. Pennsylvania has 
approximately the highest electricity consumption in the mid-A tlantic region, but it has a very 
small solar market and it aims for 0.5% solar electricity by 2021. To find electricity consumption 
for each state, electricity consumption per capita is multiplied by its population. Note that 
scales of the two axes are not similar. (H. K. Trabish, “Which State Has the Best Solar REC 
Market? GreenTech Solar,” 2012, available at www.greentechmedia.com/articles/read/Which-State
-Has-the-Best-Solar-REC-Market. Electricity consumption per capita from U.S. Energy Information 
Administration, “Total Energy Consumed Per Capita,” 2016, available at www.eia.gov/state/
rankings/?sid=PA#series/12. State population from U.S. Census Bureau, available at www.census
.gov/popest/data/national/totals/2015/index.html.)

There are several regional transmission organizations in the US and Pennsylvania is 129	
  

part of the PJM (Mid-Atlantic) region.  In addition to Pennsylvania, PJM 130	
  

Interconnection is responsible to provide electricity in Delaware, Illinois, Indiana, 131	
  

Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, Tennessee, 132	
  

Virginia, West Virginia, and the District of Columbia. Pennsylvania s SREC market 133	
  

is an open market and any facility smaller than 50 kW that is located in the PJM 134	
  

region can register to trade its SRECs in Pennsylvania s market. However, 135	
  

Pennsylvania s solar electricity can sell theirs SRECs merely in Pennsylvania and 136	
  

Ohio. In the PJM region, New Jersey was the first state to initiate an SREC market 137	
  

(in 2005) and has the highest solar target (>4 GW by 2025). Although Pennsylvania 138	
  

almost has the highest electricity consumption (24%) in the PJM region, it has the 139	
  

smallest target for solar electricity (0.5% by 2021; see Figure 1) and its SREC s 140	
  

requirement is of the smallest in the region.  141	
  

 142	
  
Figure 1. Electricity consumptions and SREC demands in PJM region 143	
  
(Trabish, 2012). Pennsylvania has approximately the highest electricity 144	
  
consumption in the Mid-Atlantic region. But it has a very small solar market 145	
  
and it aims for 0.5% solar electricity by 2021. To find electricity 146	
  
consumption for each state, its electricity consumption per capita (U.S. 147	
  



Solar Renewable Energy Credit Price Volatility and Investment Returns 85

session. Consequently, Pennsylvania’s SREC prices continued to decrease and 
reached $15 by the end of 2012. For energy year 2013 (June 2012 to May 2013), 
SRECs generally fluctuated between $10 and $20. There was a rally in early 
2014 with prices in the $50–$60 range in the first half of the year but fall-
ing into the $30–$40 range in the later part of the year and into early 2015. 
Prices eroded over the course of 2015 and were at or near $10 for the first half 
of 2016 (Flettexchange 2016; SRECTrade 2016a). House Bill 100, which had 
been introduced in the 2013–2014 session and the 2015–2016 session, would 
also increase the SREC requirements for Pennsylvania (Pennsylvania General 
Assembly 2016; Noucas 2013).

One of the reasons for the Pennsylvania market oversupply is the coin-
cident emergence of different incentive programs. In 2009, when the Penn-
sylvania SREC market was instituted, there were two other major support 
programs incentivizing PV installations: the federal investment tax credit 
(ITC) and the Pennsylvania Sunshine Program. The ITC returns PV installers 
30% of their initial investment in the form of a tax credit. The Pennsylvania 
Sunshine Program was initiated in 2009, and it returns 35% of the PV system 
installation cost in the form of rebate (DSIRE 2014b). The overlapping of these 
generous incentive programs as well as high SREC prices jump- started the 
PV installation, which caused too many SRECs to be generated, resulting in 
eventual oversupply of the market.

  

Figure 2. SREC Price Trends in PJM Region. (From Flettexchange, available at www.markets
.flettexchange.com/pennsylvania- srec/; SRECTrade, “PA Market Update,” available at www
.srectrade.com/blog/tag/pa- srec.)



86 somayeh yoUsseFi anD patriCk l. GUrian

Furthermore, Pennsylvania’s RPS requirement for PV installation is very 
small, and as is shown in Figure 3, the capacity of PV systems installed greatly 
exceeded the RPS mandated capacity for 2015. By the end of 2016, increases 
in the RPS requirement were forecast to slightly exceed installed capacity but 
only if no new capacity were built. The prevailing SREC price of $7 at the 
close of 2016 indicated that the market was still oversupplied (SRECTrade 
2017). Given that Pennsylvania has the smallest SREC requirement in the PJM 
region and allows out- of-s tate SRECs to be used to meet the Pennsylvania 
requirement, its market is very sensitive to oversupply. 

When the generation capacity for SREC exceeded what the RPS law 
required utility companies to buy, there was a dramatic drop in SREC prices. 
This may be understood by considering the shape of the supply and demand 
curves for SRECs. As shown in Figure 4, utilities will pay p* (where p* is the 

Figure 3. Pennsylvania Solar RPS Requirement (SRECTrade 2016c) and Current Installation 
Capacity (SRECTrade 2016b, 2016e, 2016f, 2016g, 2016h). The overlapping of generous 
incentive programs (the federal tax credit and Solar Sunshine rebate program) and high SREC 
prices caused a short- term boom in PV system installation. (From SRECTrade, “Pennsylvania,” 
available at www.srectrade.com/srec_markets/pennsylvania; SRECTrade, “PA Market Update,” 
available at www.srectrade.com/blog/tag/pa- srec; SRECTrade, “SREC Markets Report: February 
2013,” available at www.srectrade.com/blog/capacity- summary/srectrade- srec- markets- report
-f ebruary- 2013; SRECTrade, “SRECTrade SREC Markets Report,” available at www.srectrade.com/
blog/2015/12; SRECTrade, “Pennsylvania Update: SRECTrade Markets Report,” available at www
.srectrade.com/blog/2015/12; SRECTrade, “Pennsylvania Update: SRECTrade Markets Report,” 
available at www.srectrade.com/blog/2014/12.)

600	

500	

400	

Ca
pa

ci
ty

	(M
W

)	

300	

200	

100	

0	
2009	 2010	 2011	 2012	 2013	 2014	 2015	 2016	 2017	 2018	 2019	 2020	 2021	

The	excess	capacity	of	installed	PV		

The	required	capacity	of	PV	installaKon	



Solar Renewable Energy Credit Price Volatility and Investment Returns 87

SACP value, the legislated penalty for failing to obtain sufficient SRECs) for 
quantities up to Q* (where Q* is the legislated mandatory quantity of SRECs 
to purchase). Given that the marginal costs of generation electricity from PV 
panels is essentially zero (once the panels have been installed), once PV facili-
ties are built, the generators are essentially price- takers and generate their 
maximum capacity, regardless of price. This leads to a stable price p* until 
capacity exceeds Q*, at which point the price collapses to zero. A legislative 
mandate increasing Q* can restore price stability (at the expense of higher 
electricity costs) at least until installed capacity grows further.

There is a great deal of volatility and risk associated with the SREC mar-
ket. Such volatility creates a risk of stranded capital in which an investment is 
made under conditions conducive to a positive return but subsequent market 
changes erode the return on investment. In this article we conduct an eco-
nomic analysis to determine whether SREC prices have created a problem of 
stranded capital for investors.

Methods

This section first describes briefly the assumptions we made to estimate the 
capital cost for a PV system. Then, it offers a cost- benefit analysis for the 
system. Also, breakeven point analysis is done to determine the SREC floor 
price. The PV system design and the cost estimation model are described fully 
in the supplement.

Short term supply curve 
 * above RPS mandated Q* 

Q
 yti Short term supply curve 

t below RPS mandated Q* nau
Q

P* 

Price 
Figure 4. SREC Demand Curve. The solid line indicates the SREC demand curve. Utilities are 
willing to pay the SACP, P*, up to the mandated minimum quantity Q*. Above Q*, willingness to 
pay declines to zero. When the short-t erm supply curve (shown by the dashed line) for SRECs 
is below Q*, the equilibrium price is P*. When the short- term supply curve exceeds Q*, the 
price collapses to zero. 

  

failing to obtain sufficient SRECs) for quantities up to Q* (where Q* is the 205	
  

legislated mandatory quantity of SRECs to purchase). Given that the marginal costs 206	
  

of generation electricity from PV panels is essentially zero (once the panels have 207	
  

been installed), the generators are essentially price-takers and generate their 208	
  

maximum capacity, regardless of price. This leads to a stable price p* until capacity 209	
  

exceeds Q*, at which point the price collapses to zero. A legislative mandate 210	
  

increasing Q* can restore price stability (at the expense of higher electricity costs) 211	
  

at least until installed capacity grows further.  212	
  

 213	
  
Figure 4. SREC demand curve. The solid line indicates the SREC demand 214	
  
curve. Utilities are willing to pay the SACP, P*, up to the mandated 215	
  
minimum quantity Q*. Above Q* willingness to pay declines to zero. 216	
  
When the short-term supply curve (shown by the dashed line) for SRECs 217	
  
is below Q*, the equilibrium price is P*. When the short-term supply 218	
  
curve exceeds Q*, the price collapses to zero. 219	
  

 220	
  

According to Figure 3, based on the present installed PV capacity, Pennsylvania s 221	
  

market will be oversupplied until 2015. It can be inferred that in order to stabilize 222	
  

the SREC market, PV installation must be controlled. Since, Pennsylvania has the 223	
  

smallest SREC requirement in the PJM region, and it allows out-of-state SRECs to 224	
  

be used to meet PA SREC requirements, its market is very sensitive to oversupply.  225	
  

Figure X. The solid line indicates the SREC demand curve. Utilities are willing to pay the SACP, 
P*, up to the mandated minimum quantity Q*. Above Q* willingness to pay declines to zero. 

When the short term supply curve (shown by the dashed line) for SRECs is below Q* the 
equilibrium price is P*. When the short term supply curve exceeds Q* the price collapses to zero. 



88 somayeh yoUsseFi anD patriCk l. GUrian

Cost Estimation Model

Residential PV systems usually have power between 2 and 10 kWp (Burns and 
Kang 2012). We have assumed the mean value of 6 kWp for the PV array size. 
Furthermore, it is assumed that the PV system is connected to the electric 
grid. Therefore, there is no need for storage batteries and the system can ben-
efit from the net metering. On sunny days when generated electricity exceeds 
the building’s demand, surplus energy can be fed to the grid, and on cloudy 
days when the amount of energy produced does not meet the building’s elec-
tricity requirement, grid electricity will be used.

Economic Analysis

The objectives of the economic analysis are 1) to find out if the asset’s ben-
efits would outweigh the costs during the lifetime of the PV system and 2) to 
determine the required SREC value to allow investors to recoup their costs. 
Financial criteria used in this study are net present value (NPV) and time 
to achieve zero project balance. A positive NPV indicates that a PV system 
project’s discounted cash inflows during the PV system’s lifetime exceed the 
discounted cash outflows. Time to achieve zero project balance is the duration 
needed for an investor to gain back their initial investment. The shorter this 
time is, the more profitable the project is.

To find NPV, the annual cash f low of the system must be calculated. 
Annual cash flow is the difference between the cash inflows and outflows 
during any year. The SREC revenue, electricity savings, and incentives are 
the inflows to the system. Depending on the location, different incentives are 
available. In this study we consider the federal investment tax credit. However, 
we ignore state- level programs such as rebates, grants, and loans because they 
are not always available. During the lifetime of a PV system, it requires main-
tenance and insurance, which are outflows and are negative. The PV system 
annual cash flows can be estimated as follows:

V
CFn = SREC * Ep

1000
+ VE * Ep + FTC + STC – CM – CI Eq.(1)

Where CFn is the cash flows in year n, VSREC is the annual average price 
of SREC in $/Mwh in year n, EP is the amount of produced electricity in kWh 
in year n and VE is the electricity price per kWh in year n. FTC is the federal 
tax credit in dollars (as a percentage of the initial cost) assumed to be paid 
at the end of the first year. STC is the state tax credit if it is available. Only 



Solar Renewable Energy Credit Price Volatility and Investment Returns 89

Maryland has a tax credit for PV installers. It gives $0.0085/kWh for the pro-
duced electricity for the first five years of PV system (DSIRE 2014c). CM and 
CI are the annual maintenance and insurance fees, and they are 0.5% of the 
PV system capital cost (Burns and Kang 2012). Electricity price is not constant 
and is based on a 20- year average escalation rate reported by Burns and Kang 
(2012). SREC, electricity prices, and the electricity escalation rates are shown 
in Table 1.

To calculate the net present value of the PV system, annual cash flows dur-
ing the lifetime of the PV system are first discounted, then they are summed, 
and finally the initial investment, C0, is subtracted as illustrated in Eq.(2).

NPV =
CFn

1 + i n

N

– C0  Eq.(2)
n = 1

The discount rate is i and N is the project lifespan, which is 25 years. The 
discount rate used in this study is 3% (Burns and Kang 2012). Project balance 
at early years of the PV system is negative due to the substantial initial invest-
ment. It gradually increases because of savings of electricity production and 

table 1. electricity prices, escalation rates, and sreC prices Used in this study; 
pV Capital Costs; npVs; and payback times for a pV system with a Capacity of 
6 kW located in Different states 

state

electricity 
pricea  
($/kWh)

electricity 
escalation 
ratea

sreC 
priceb

($/mWh)

pV Capital 
Cost  
($/watt) npV ($)

time to zero 
project Balance 
(year)

DC 0.1401 0.002807 480 5.88 60920 7

DE 0.1380 0.002199  25 5.62 –5102 Not within project 
lifetime

MD 0.1432 0.002329 140 5.9 –4517 Not within project 
lifetime

NJ 0.1657 0.001778 131 5.94 32031 10

OH 0.1132 0.000178  16 5.87 –18282 Not within project 
lifetime

PA 0.1270 0.000735  10.75 5.99 –11596 Not within project 
lifetime

a Source: J. E. Burns and J. S. Kang, “Comparative Economic Analysis of Supporting Policies for 
Residential Solar PV in the United States: Solar Renewable Energy Credit (SREC) Potential,” Energy 
Policy 44 (2012): 217–225.

b Source: SRECTrade, Historical SREC prices and historical price charts, 2016, available at www 
.srectrade.com/srec_markets/, accessed June 17, 2016.



90 somayeh yoUsseFi anD patriCk l. GUrian

SREC generation. Time to zero project balance, pb, is the first time when the 
project balance becomes equal or bigger than zero:

CFn

1 + i n

pb

– C0 = 0 Eq.(3) 
n = 1

Also, in order to find the required SREC value to allow investors to recoup 
their costs in different states, a breakeven point analysis is done. This thresh-
old is the minimum SREC price required to make the net present value greater 
than zero at the end of the PV system’s lifetime, 25 years. Any factor in Eq.(1) 
that affects the NPV can affect the breakeven point value: the capital cost, 
electricity price, the amount of produced electricity, maintenance and insur-
ance fees, federal and state tax credits. One factor that affects the SREC break-
even point and is not apparent in Eq.(1) is the PV system size: the smaller a PV 
system is, the higher initial investment per watt ($/watt) it requires. To find 
SREC floors, we first estimated the capital cost of PV systems with capacities 
between 2–10 kWp using the model developed in this article. We then calcu-
lated the NPV with ascending values of SREC and recorded the value where 
NPV became positive.

Results and Discussion

Table 1 outlines the capital cost of the system, NPV and time to achieve zero 
project balance (discounted payback time) for each of the states. Also, elec-
tricity price, electricity escalation rates, and SREC prices used in economic 
analysis are illustrated in Table 1. The project balance of the system over time 
for each state is shown in Figure 5. Unlike the analysis of Burn and Kang 
(2012), which found that the initial investment would be recovered in all states 
approximately within 15 years, our study shows that in four states (Delaware, 
Maryland, Ohio, and Pennsylvania) current market prices do not allow for 
positive return on investment. Only in the District of Columbia and New Jer-
sey the returns on investment happen within 7 and 10 years respectively. Con-
sequently, there is a concern that past PV investments have become stranded 
capital in the other four states.

NPV calculations are based on SREC prices in June 2016, and it is assumed 
that they will be constant and equal to the values reported in Table 1 during 
the lifetime of the PV system. PV installation is economically beneficial only 
in the District of Columbia and New Jersey. The reason for the success of the 
District of Columbia, and New Jersey is the higher value of SRECs ($480 and 
$279.50, respectively) in these markets compared with other states. This is 



Solar Renewable Energy Credit Price Volatility and Investment Returns 91

an indication of the important role of SREC in PV system cost recovery. As 
illustrated in Figure 5, Pennsylvania and Ohio are the worst states for PV 
installation. They are both severely oversupplied, and there is a high risk of 
stranded capital.

Pennsylvania and Ohio cannot recover their initial investments due to the 
oversupplied market and low SREC prices. One reason for the severe oversup-
ply in these states is that their SREC markets are both open and accept SRECs 
from out- of- state facilities. However, Ohio accepts out- of- state SRECs at a 
lower price than in-s tate SRECs. Until November 2015, a total of 523.3 MW 
PV systems were certified in Pennsylvania. A considerable percentage, 58% 
(301.9 MW), of the total Pennsylvania certifications were from out-o f-s tate 
facilities (SRECTrade 2016h). This percentage has increased from the similar 
period in 2014 and 2013 where 43% (160.5 MW out of a total of 370.4 MW) 
and 41% (126.6 out of 311.9 MW) of the certifications were for facilities out-
side of Pennsylvania. Apparently, Pennsylvania is attracting out-o f-s tate PV 
installation rather than supporting local solar industry. Therefore, one way 
to support Pennsylvania’s oversupplied market could be to ban out-o f-s tate 
SREC transactions in the Pennsylvania market. However, Senate Bill 1350 
would have continued to allow out- of- state SRECs certification.

Figure 5. Project Balance of PV System Investments by Jurisdiction.

80000	

60000	

	)$

40000	

te
m
	(

sy
e	
s

h 20000	

f	t
ce
	o

nala 0	

B

-20000	

Year	

-40000	
2016	 2021	 2026	 2031	 2036	 2041	

PA	

NJ	

MD	

DC	

DE	

OH	



92 somayeh yoUsseFi anD patriCk l. GUrian

While Maryland, Ohio, and Delaware have predetermined values for 
SACP, SREC markets in these states are still oversupplied. Therefore, it can 
be concluded that the SACP mechanism is not enough to stabilize SREC 
markets at a reasonable price that assures investment return (as would be 
expected from Figure 1, pushing the vertical portion of the demand curve to 
the right does not avoid the sharp drop to zero above the mandated minimum 
quantity). According to the historical SREC prices shown in Figure 2, SREC 
prices have been falling continually in all of the states except the District of 
Columbia and New Jersey. Prices in the District of Columbia have been stable 
since 2013, and the reason for its high prices is that it is the only undersup-
plied SREC market. Its 2015 RPS requirement was approximately 66 MW of 
which only 37.9 MW have been fulfilled (SRECTrade 2016i). New Jersey has 
the oldest and largest SREC market in the PJM region, and it also supports 
PV installation by defining a pre- fixed SACP. It can be concluded that setting 
aggressive solar carve- out, which prevents oversupply of the market, promotes 
PV installation.

As mentioned earlier, another means to provide price stability would be to 
mandate a lower limit on the SREC price. To find the minimum SREC value 
that allows investors to recoup their costs in different states, a breakeven point 
analysis was done and the chart of the breakeven points versus system size 
for different states is illustrated in Figure 6. As the PV system size decreases, 
the installation cost per watt ($/watt) increases and higher SREC prices are 
needed. The difference in SREC breakeven prices for different states is due to 
the different hours of sunshine in each state and also different energy prices. 
For a system of a certain size, the more sunshine hours a state has, the more 
electricity will be generated. Consequently more SRECs are generated and 
a lower SREC price is needed to recover the upfront costs. Also, states with 
higher electricity prices are better suited for PV systems, because they gain 
more cash inflows from selling electricity to the grid and consequently they 
require less incentive to recover the initial investment. As can be seen in Fig-
ure 6, in Pennsylvania, if the SREC price falls under $195/MWh, PV systems 
with small capacities of 2kWp (the low end of the residential size range) will 
not be able to recover their capital investments. Even systems at the high end 
of the residential size range (10 kWp) require around $150/SREC to break even 
in Pennsylvania and Ohio, while more favorable insolation and electricity 
costs reduce this to roughly $75–$100/SREC in Maryland, New Jersey, Wash-
ington DC, and Delaware. All these breakeven prices are far above the early 
2016 market price of about $10/MWh in Pennsylvania.

As noted earlier, the failed Senate Bill 1350 defined an SACP of $285 per 
SREC until 2019 and then decreases this value by 2% annually. Over 25 years 



Solar Renewable Energy Credit Price Volatility and Investment Returns 93

(a PV system’s lifetime), the average value of SACP will be $248 per SREC, and 
this alternative compliance value is higher than the breakeven point of $195/
SREC. The breakeven analysis above suggests that the SACP is high enough 
to stimulate investment in solar PV systems. However, taking into account 
the Pennsylvania oversupplied SREC market (in which generation capacity is 
three times greater than the RPS requirement) and the absence of incentive 
to purchase SRECs beyond the mandated minimum (Figure 1), prices may 
not recover until the RPS mandate reaches current capacity in 2016. At that 
point SREC prices should recover, potentially providing incentive for further 
PV system installation. This might lead to a subsequent oversupply and price 
collapse. The collapse could be mitigated by providing a series of increasing 
RPS goals that take into account the performance of the solar market in previ-
ous years. This would provide the market with price signals that demand is 
saturated while continuing to provide some level of price support once initial 
RPS goals are met.

Experiences in other states may provide some guidance as to how Penn-
sylvania might address this situation. Like Pennsylvania, the Massachusetts 
market was oversupplied in 2012 and 2013. The Massachusetts Department 
of Energy Resources (DOER) created the SREC market in January 2010, and 
only in- state solar photovoltaic installations smaller than 60 kW are eligible 

  

Figure 6. SREC Price Breakeven Values as a Function of the System Size.

250	
  
	
  ) 200	
  h

W
M/$ 150	
  (	
  ecirp	
   100	
  CERS 50	
  

0	
  
0	
   2	
   4	
   6	
   8	
   10	
   12	
  

PV	
  system	
  power	
  (kWp)	
  

PA	
   OH	
   NJ	
   DE	
   DC	
   MD	
  

their capital investments. This SREC price is far above the late 2013 market price of 379	
  

$19/MWh. 380	
  

 381	
  
Figure 6. SREC price breakeven values as a function of the system size. 382	
  

	
  383	
  

The new senate bill (SB 1350) will allow solar thermal facilities to register for 384	
  

SREC tracking in Pennsylvania. This merits further discussion.  According to the 385	
  

NREL report of Nov 2010, the levelized cost of energy (LCOE) for solar thermal 386	
  

facilities in 2015 is predicted to be $181/MWh while LCOE for PV systems will be 387	
  

$270/MWh (Tidball et al., 2010). LCOE is the investment required to install a 388	
  

renewable energy system divided by its expected energy output during its lifetime. 389	
  

The initial capital cost, discounted rate and maintenance cost are included in LCOE.  390	
  

Since the cost of energy production for solar thermal facilities is considerably 391	
  

smaller than PV systems, investing in solar thermal is favored over PV modules. 392	
  

This may cause another boom in SRECs generation and flood the SREC market 393	
  

with thermally generated SRECs, while past investments in PV remain stranded. If 394	
  

thermal facilities are intended to participate in the SREC market, it is essential to 395	
  



94 somayeh yoUsseFi anD patriCk l. GUrian

to register in the Massachusetts market (DSIRE 2014d). Massachusetts has a 
unique method to define its solar set- aside, which helps it maintain its solar 
market balance. At the end of the year, if there are still unsold SRECs in the 
market, they are deposited in the Solar Credit Clearinghouse Auction (SCCA). 
The SCCA encompasses three rounds of auctions with prices fixed at $300/
SREC minus a 5% administrative fee. If at the end of the third round, the auc-
tion is not cleared, then the DOER increases the solar carve- out for the com-
ing compliance year by the amount of unsold SRECs (Greentech Solar 2014). 
This is a very intelligent way of controlling the market balance: by adjusting 
the next year’s solar requirement based on the previous year’s market perfor-
mance, it is guaranteed that the SREC demand in the market is high enough 
to maintain the prices and also stimulate new PV installations.

Conclusion

This study explored the developments within Pennsylvania’s solar industry 
following the RPS solar set- aside implementation. Pennsylvania has almost 
the highest electricity consumption in the mid-A tlantic region; however, it 
has the smallest target for solar electricity. The Pennsylvania market remained 
oversupplied at the close of 2016/start of 2017, based on the SREC market price 
of $7 noted above. The current support mechanisms, including SACP, have 
not been successful in establishing a stable market in Pennsylvania.

One reason for the Pennsylvania market oversupply is the overlapping of 
different up- front incentive programs that caused a boom in solar installation 
and saturated the market. Therefore, to maintain a stable solar market, it is 
important to coordinate up- front incentives with prospective SREC revenues. 
Furthermore, Pennsylvania’s solar market is an open market and an increas-
ing percentage of SRECs retired in Pennsylvania come from out- of- state 
facilities. However, the planned modifications to support the solar market 
still allow out- of- state facilities to register in Pennsylvania. To strengthen the 
Pennsylvania market, it may be necessary to consider banning out- of- state 
SRECs or adopt mechanisms that encourage utility companies to buy from 
in- state solar electricity generators rather than out of state generators.

This study proposed a simple conceptual supply and demand model in 
which suppliers are price- takers and demand is completely inelastic until the 
required RPS quota is met, at which point SREC demand collapses. This sim-
ple conceptual model accounts for the observed trends of SREC oversupply 
and price collapse. We developed an economic model that suggests returns 
are negative for investments in PV in four of the six jurisdictions considered, 
given market prices for SRECs in early 2016.



Solar Renewable Energy Credit Price Volatility and Investment Returns 95

Our analysis shows that the current SREC market in Pennsylvania has not 
been successful. The SREC market is not stable and PV installers are at the 
risk of losing their investment. To encourage solar electricity, it is important 
to provide a secure SREC price throughout the life span of the PV system. 
Regulations could mandate that utility companies sign long- term contracts 
with SREC producers to provide them with guaranteed SREC prices.

One solution to the market’s oversupply is to increase the solar target. 
Planned increases in the RPS quotas offer the prospect of restoring prices to 
profitable levels as the proposed SACP values exceed the breakeven values 
needed for PV investors. However, without some minimum price support or 
limits on the quantity of installations, the problem may simply be repeated. 
We could again witness a completely inelastic demand followed by a price col-
lapse once the mandated RPS quota is met. To establish a stable market, solar 
set- aside is better determined annually by taking into account the previous 
year’s market performance.

Furthermore, to define a minimum price support for SREC, mechanisms 
similar to the Massachusetts auction can be adopted. At the end of the year, 
unsold SRECs can be deposited to the auction. It is important that the auction 
prices be higher than the breakeven point value to assure the return of the 
investment to the solar electricity generators. If there are still unsold SRECs, 
they would be added to the next year solar set-a side quota.

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somayeh youssefi, PhD, is a postdoctoral researcher in the School of Public Health at the 
University of Maryland. She has a PhD in environmental engineering, and her research 
interests include environmental issues, renewable energies, aerosols, bioaerosols, and 
exhaled-breath biomarkers. Her recent study involves design and development of a sam-
pler to collect exhaled-breath aerosols. These aerosols, which originate from the lung and 
respiratory tract, contain various biomarkers that can inform us about an individual’s 
health, as well as his or her environmental exposures. 

patrick l. Gurian, PhD, is an associate professor in the Department of Civil, Architec-
tural, and Environmental Engineering at Drexel University. His research involves the 
application of mathematical models to evaluate alternative regulatory frameworks and 
resource management strategies. His recent work includes the development of a report 
for the City of Philadelphia’s Office of Sustainability that identifies strategies for reducing 
the city’s greenhouse gas emissions.




