“I applied for an ITC rather than a PTC and my neighbor has a PPA, but we both get SRECs that our utility can purchase to fulfill the state’s RPS…”
What did you just say?
For those who are new to the world of clean energy, the plethora of acronyms that are thrown around when discussing solar can be intimidating. But given how many people are deciding to go solar, it’s important we take a closer look at the industry’s language.
That’s why we’re here — to break down some of the most common acronyms you’ll encounter in the world of solar finance.
Financial Terms Involved in Owning or Leasing Solar
- PPA (power purchase agreement): a financial arrangement in which a third-party developer owns, operates, and maintains the photovoltaic (PV) system on your roof (or another site), and you purchase the system’s electricity for a predetermined period. With PPAs, you avoid the high upfront costs of installing solar and pay a monthly rate that is at a discount to the utility’s rate. This arrangement is similar to a solar lease, but instead of paying for the actual solar panels, you pay for the system’s electricity.
- ITC (investment tax credit): the federal ITC is a way to support the deployment of solar energy in the United States, similar to how the mortgage interest tax deduction helps to incentivize people to buy homes. The ITC is a 30 percent tax credit for solar systems on residential or commercial properties. Property-owners can apply this credit to their tax bill in the following spring. Most individuals do not have a large enough tax liability to take advantage of this incentive, which is why mostly private companies and high net-worth individuals typically utilize the ITC.
- PTC (production tax credit): the federal PTC is a per-kilowatt-hour tax credit for generating electricity throughout a certain period of the solar system’s operation. If you want to go solar, you can choose between applying for either an ITC or a PTC.
- UFI (upfront incentive): another incentive for going solar, this payment is an upfront lump-sum payment based on expected performance of the solar system.
- PBI (performance based incentive): a payment or rebate based on the solar system’s actual performance over a period of time. The payment is made in cents per kWh.
- NEG & NEM (net energy generation & net energy metering): with home solar, you can end up generating more or less electricity than you use. NEG is the total electricity your panels produce minus the electricity you use from the grid. NEM allows a customer-generator to receive a financial credit for power generated by their onsite system and fed back to the utility. The credit is used to offset the customer’s electricity bill. NEM is beneficial for those who want to stay connected to the grid but also benefit from generating their own renewable energy.
- PACE (property assessed clean energy): a program that some cities offer that basically is a way to finance solar systems or energy efficiency retrofits, where the city offers you a loan, and you pay it back through your property tax bills over 15 to 20 years with interest. The first PACE program was implemented in Berkeley, CA, and has since spread to other cities.
Policies and Mechanisms that Develop Solar
- RPS (renewable portfolio standard): an RPS provides states with a way to increase the generation of renewable energy using a market-based approach. It requires utilities and energy providers to supply a certain percentage of their electricity from renewable sources. Right now, states with RPS requirements require between 4 and 33 percent of electricity to be generated by a specified date. Utilities that have to comply with RPS requirements can provide an alternative payment called an alternative compliance payment (ACP) to meet their state’s goals.
- SREC (solar renewable energy certificate): an SREC is the property right to the environmental benefits associated with generating solar electricity. Homeowners who generate solar electricity are credited with one SREC for every MWh of electricity they produce. Utilities that have to fulfill an RPS requirement can purchase these SRECs on the open market, but only some states allow the trading of SRECs.
- CREB (clean energy renewable bond): a new way state and local governments encourage renewable energy development. Public power systems and municipal utilities have never been eligible for the PTC because it was designed to benefit large investor-owned utilities, but CREBs are tax credit bonds with an interest-free finance rate that are only available to them. The entire interest on the bond is paid by the U.S. Treasury in the form of a tax credit.
- SBC (societal benefits charge): utilities can include funding for programs in their rates that provide benefits to society, such as low-income, energy efficiency, and renewable energy programs.
Whether you’re looking to go solar on your own roof, you’re thinking about working in the solar industry, or you’re just downright confused when it comes to all these fancy terms and their abbreviations, we hope we’ve made the basics of financing and incentivizing solar projects easier to understand. There are certainly more acronyms used in the solar industry, but these are good ones to get started with.
We’d hate for people to shy away from going solar or learning more about the industry just because the terminology seems too complicated. Besides, it’s not really that complex, and hopefully now you won’t feel like you’re hearing a different language as you discuss our inevitable transition to clean energy at the dinner table.
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