A shadow over solarPa.'s open credit market, heavy use of state incentives fueling industry concerns
Infused by a heap of government incentives, a budding solar industry blossomed in Pennsylvania over the last two years.
New solar arrays went up at a feverish pace, established installation companies forayed into Pennsylvania, contractors and electrical companies expanded their repertoire to include alternative energy services, and some leaped into business for themselves.
Lamar and Karen Erdman got in just ahead of the boom, launching Maximus Solar out of their Schuylkill County home in 2008.
"We thought that the solar business would become very strong for a period of time and then would taper off to a slower, but sustainable business," Lamar said of the state offering $100 million in 2009 through the popular Sunshine solar rebate program.
That same year, the American Reinvestment and Recovery Act, or federal stimulus bill, offered businesses and homeowners the option of receiving an uncapped 30 percent federal tax credit on solar.
The Erdmans' solar retail and whole distribution operation took off and the couple saw potential in serving a larger commercial and residential clientele. In July 2009, they expanded into Cumberland County, opening a second office at the Murata Business Center in Carlisle.
Coming off a busy fourth quarter in 2010, where one in four proposals led to signed contracts, Maximus Solar added a third office in Sullivan County in January.
That's when the bottom started to fall out.
The popularity of the Sunshine program resulted in an oversupply of Solar Renewable Energy Credits, or SRECs, making it more challenging for installers to book new projects.
SRECs are credits that individuals and businesses earn by generating power: 1,000 kilowatt-hours earns one SREC. Utilities buy SRECs to help meet green-energy mandates set by Act 213, the state's renewable energy portfolio law passed in 2004.
The credits can also be traded on the open market in Pennsylvania, which is compounding the problem, according to government officials and industry leaders. Other states have closed their borders.
"All of the cash incentive money for homeowners and small businesses was a great boon for the solar industry. But, it diluted Act 213," said Jeff Georg, vice president of Dover Township-based ASCOM Inc. "It did so by infusing so much solar into the market that SREC prices fell. There is a greater supply than is demanded."
Pennsylvania SRECs were trading for about $300 per credit in September 2010, according to San Francisco-based SRECTrade Inc.
By October, they dropped to about $250, where the price stayed through January. They fell to $200 in February and have been averaging $80 in May, according to SRECTrade.
Many installation projects have been put on hold, Erdman said, because prospective clients can't realize the payback quick enough.
When credits were worth a few hundred dollars, the return on investment was about five years for a business and six to eight years for a homeowner, Erdman said. Low SREC prices could mean 15-year payback periods, he said.
"The bottom line is that Pennsylvania has pushed this green initiative program and given out hundreds of millions in various grants," said Erdman, who quit a secure job as a maintenance manager at a cogeneration company. "They got this system so close that it's almost self-sustaining. They need to stabilize SREC prices at fair value."
For the Carlisle Area School District, where a one-megawatt system became operational last October, the price of the SRECs doesn't matter so much.
The $5 million system, installed by Montgomery County-based construction firm Henkels & McCoy, was funded by $2.45 million in federal and state grants, according to Tom Longenecker, the district's director of finance. The rest was covered by school reserves.
With a budgeted price per credit of $240, the local payback was slated for four years, Longenecker said. However, with the dismal prices, it may take five or six years, he said.
"A lot of people who built based it on SREC revenue," he said. "Even if I got zero for the SRECs, there would be a full payback in nine years from the electricity savings."
Since the fall launch, the district has saved $76,000 on its electric bills. Revenue from SREC sales is being saved for additional utility-lowering projects, Longenecker said.
In recent months, several letters have been sent to state lawmakers, in hopes of sparking Act 213 changes.
"Pennsylvania is losing tons of money because all the money utility companies are paying for SRECs is going out of state," said Anthony Amadure, business development specialist at Cumberland County Economic Development. "We are losing jobs and companies."
Act 213 requires that 8 percent of the electricity sold at retail in Pennsylvania come from renewable sources by 2021, including one half of one percent from solar.
Industry leaders say that is way too low compared with other states. Delaware has a 3.5 percent solar requirement by 2025, Maryland will require 2 percent by 2022 and New Jersey is pushing 4 percent by 2021.
Georg said he would like to see 5 percent in Pennsylvania. The Erdmans said even 2.5 percent isn't "really asking a whole lot."
Extending Act 213 beyond 2021 — to maybe 2030 — and closing Pennsylvania's borders to SREC trading could have a positive impact on the industry and hold down electricity prices in the long term, Georg said.
State Rep. Chris Ross, R-Chester, is working to address some of the concerns. He has been circulating a new piece of legislation, House Bill 1580, for co-sponsorship.
"The price of credits is crashing, which is no longer sufficient to support development of new installations," he said.
If nothing is done, the deteriorating SREC market will likely continue for three or four years, said Ross, one of the state lawmakers who crafted the original alternative energy requirements.
"All of the people in this business in Pennsylvania are now looking at no business," Ross said by phone. "Some local people are running the risk of closing down and going into other operations. The bigger companies are relocating to other states where it's more stable and balanced."
Backed by the Pennsylvania Solar Energy Industries Association, HB 1580 proposes to adjust the number of SRECs for years 2012-13, 2013-14 and 2014-15 to bring the demand back in line with expected supply.
The bill also would close Pennsylvania's borders to SREC trading, Ross said.
"It would be nice if everyone had their borders open, but they don't," he said. "If that is the standard, we ought to get in line with it."
A similar bill, HB 2405, was proposed last session, but it was taken off the table in September 2010.
If the legislation doesn't go through this session, Ron Celentano, president of the PASEIA, said he also expects many in the solar industry will close shop. Companies that expanded into solar will have to mothball those services, while others will follow the work to neighboring states, he said.
"We were concerned it could grow too fast," he said, referring to the incentives.
Pennsylvania ranked sixth in the country last year for solar panel installations with 46.8 megawatts, according to the Solar Energy Industries Association.
Ross said he is hopeful his bill will straighten out the market in the short term. Over the long term, solar should be sustainable as costs continue to come down, he said, while other forms of generation gradually get more expensive.
"At some point in the future, maybe between 2015 and 2020, we should be in a position where we no longer need additional incentives," he said. "Solar will be competitive."