Solar incentives exist in many forms. There are federal and state tax deductions and rebates that are granted with a solar purchase, but there are also programs that provide additional revenue to system owners based on power generation. There are two main types of these programs right now. Both have similar goals, but how do they work and which is better?
Feed-in-Tariffs, or FITs, consist of a price per kilowatt hour that utilities must pay to the owner of a renewable energy system, usually over a period of 15-20 years. The rate is decreased over time as the cost of renewable technologies falls, but FITs represent a steady long-term flow of cash to a system owner.
Solar Renewable Energy Credits, or SRECs, are a US based credit system that lets owners of solar systems generate tradable credits for every 1000 kilowatt hours of production. Since SRECs are traded in open markets, their prices fluctuate with supply and demand. SRECs are regulated on a state level and prices tend to vary greatly from state to state.
Both FITs and SRECs share the same goals: encouraging investment in solar power to drive economies of scale, helping to directly reduce the costs of solar ownership, and promoting solar as a viable alternative source of electricity. However, there are advantages and disadvantages to both types of incentive.
SRECs are based on supply and demand. For now, while solar technology is relatively costly and market saturation is relatively low, SREC supply will be lower and prices will tend to be higher. Higher SREC prices will help to drive development and investment in solar.
When the overall cost of solar technology comes down, SREC supply will increase as solar installations increase. This will mean that SRECs will likely be worth less in the future, which will arguably give solar developers an incentive to drive their costs down so their profit margin does not decline.
SRECs can be potentially be worth more to a system owner in the short term, but it depends on the market. In a state with high SREC demand and prices, SRECs create competition between solar developers who bid on projects, which can also help to drive costs down. However, in states where SREC demand and prices are low, there is less of an incentive towards the development of new projects.
The main advantage of FITs is that they provide a stable, predictable cash flow and minimize risk to developers. FITs have been successful in Germany and Canada, but have yet to see much light in the US. However, as FITs are only valuable in the long-term, they do not create the same competition among developers that SRECs do. But on a macro scale they do incentivise investment in solar since they do reduce the cost of solar ownership.
FITs are also dependent on the government regulations that set their present and future values, rather than being set by market forces. Arguably, this could mean that they are less efficient. But in practice, FITs tend to be set at levels where they encourage solar investment without over-subsidizing costs. And while SRECs, due to their tradable nature, result in a certain amount of value being lost in transaction costs, FITs provide value directly to system owners.
In any case, all forms of incentives are good for the solar industry. By encouraging investments in solar power, technology will continue to be improved and costs will continue to decline. Now is a good time to take advantage of these incentives, as they are worth more right now as they will be in the future.