Pennsylvania’s SREC Fix Hits A Snag

Last fall, Pennsylvania lawmakers set out to fix a problem with the state’s 2004 Alternative Energy Portfolio Standards Act (AEPS).

No, the problem they took on with Act 40 of 2017 was not the weakness of the renewable energy targets in the AEPS. (Those targets still have not been updated since 2004). Act 40 addressed the “oversupplied” state of Pennsylvania’s Solar Renewable Energy Credits (SREC) market. Before Act 40, the AEPS gave solar projects located throughout the PJM region (which stretches as far west as Illinois and as far south as North Carolina) the unqualified right to sell SRECs in Pennsylvania. The resulting glut of SRECs led to depressed SREC prices, which has made solar development less economical in the state. Act 40’s fix was to establish new, more restrictive SREC eligibility criteria in order to spur more in-state solar photovoltaic (PV) development, and thereby deliver more clean air benefits to Pennsylvanians.

So far, so good. But in December 2017, the Pennsylvania Public Utility Commission (PUC), which will administer Act 40, proposed an interpretation of the law that would completely undermine its purpose. As a legal matter, the PUC’s interpretation is mistaken. Practically speaking, the controversy over Act 40’s construction underscores the need for Pennsylvania to strengthen the solar (and other renewables) targets in the AEPS. If they were stronger, Act 40 might not be needed at all.

The solar PV target in the AEPS is 0.5% of retail electricity sales in 2020, a goal that Pennsylvania has been slowly inching toward since 2006.

Electricity distribution companies (i.e., utilities) and electricity generation suppliers (EGS) meet these targets by buying SRECs generated by qualified solar projects. (Each SREC represents 1 MWh of electricity). Between the smallness of the solar PV targets in the AEPS and the large number of SRECs that have poured into Pennsylvania’s Alternative Energy Credit market (in 2017, more than 60% of all the SRECs purchased for AEPS compliance came from outside Pennsylvania), the market is “oversupplied” – i.e., there are more SRECs for sale than utilities and EGS need to buy.

As a result, SREC prices have plunged from more than $300.00/MWh in 2010 to less than $5.00/MWh today. These low prices make solar development in Pennsylvania harder, because solar projects are financed partly through the revenue stream their SRECs will generate.

Act 40’s Fix

Act 40’s solution to this problem was to establish more restrictive criteria for solar PV projects to sell SRECs in the Pennsylvania market. Under Act 40, a solar project must (1) deliver electricity to the customer of a Pennsylvania electric utility, (2) be connected to an electricity distribution system operated by a Pennsylvania utility, a Pennsylvania municipal electric system, or a Pennsylvania electric cooperative, or (3) be connected to a transmission system located within the service area of a Pennsylvania utility.

According to State Sen. Mario Scavello, R-40, the author of Act 40’s solar provisions, the intent of the law is that “out-of-state systems will no longer qualify” to sell SRECs in Pennsylvania’s market, so that “[e]lectric distributors will now have to purchase their credits from within the commonwealth.” Similarly, Gov. Tom Wolf, D-Pa., touted his signing of Act 40 as a way of “making sure that the benefits of increased renewable jobs, a cleaner environment, and a growing renewable economy will be felt in the commonwealth.” Expanding solar energy, the governor added, “is incredibly important to Pennsylvania’s carbon footprint and demonstrates our state’s commitment to leadership on the most important environmental issue confronting the world.”

The PUC’s Misinterpretation of Act 40 (and an Alternative Interpretation)

Although the clear intent of Act 40 is to exclude out-of-state solar PV systems from Pennsylvania’s SREC market, the PUC’s Tentative Implementation Order (TIO) for Act 40 proposed to “grandfather” such systems into the market because of the following language:

Nothing under this section … shall affect … a certification originating within the geographical boundaries of this Commonwealth … of a solar photovoltaic energy generator as a qualifying alternative energy source eligible to meet the solar photovoltaic share of [the AEPS].

According to the TIO, this section requires the grandfathering of all solar PV systems previously “certified” for Pennsylvania’s SREC market – regardless of location – on the grounds that the administrative act of certifying them took place inside the state. But as comments submitted by us at the Natural Resources Defense Council (NRDC) and several other environmental organizations point out, the TIO’s interpretation is untenable, among other reasons because it ignores legislative intent and strips the phrase “within the geographical boundaries” or any meaning.

Fortunately, PUC Chairwoman Gladys Brown and Vice Chair Andrew Place have proposed an alternative reading of this language. Recognizing that Act 40 does not define “certification” and acknowledging the clear intent of the General Assembly, Brown and Place would read a certification as originating in Pennsylvania only when the solar system being certified is located in Pennsylvania. NRDC, as well as Senator Scavello and other legislators, have urged the full PUC to embrace this interpretation, which would grandfather only Pennsylvania solar systems.

What’s Next?

The PUC’s public comment period on the TIO and the alternative interpretation offered by Chairwoman Brown and Vice Chair Place ends on Feb. 5. After that, the PUC will issue a final Implementation Order. If the PUC interprets Act 40 consistent with legislative intent, it will provide Pennsylvania with an economic and environmental boost, especially if the General Assembly and Governor Wolf go one step further and strengthen the state’s clean energy standards.

Meanwhile, whatever the content of the final order, the other factor driving low SREC prices in Pennsylvania – tepid demand, due to the AEPS’ weak renewable goals – remains. Pennsylvania’s renewable energy industry today supports nearly 10,000 jobs, and the state is home to more than 500 solar businesses. These businesses are helping homes and businesses meet their electricity needs without harmful greenhouse-gas emissions. With the AEPS set to plateau in 2021, the state needs to set more aggressive, long-term targets to realize the economic and environmental potential of solar energy in Pennsylvania.


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