The other day, I was trying to explain the merits of rooftop solar to a friend, recognizing the quirks of the market in the District of Columbia. Unlike most residential rooftop solar investments around the country (and the world), DC is unique in that the core revenue stream is a policy mechanism known as a Renewable Energy Certificate (REC). RECs are commonly marketed on a statewide basis in the United States and have served as a market tool to drive investment in Europe and parts of Latin America.
DC, however, is one of few jurisdictions to have a “solar carve-out,” which creates a separate market for solar RECs (SRECs) that have a market demand from energy suppliers needing to meet annual renewable targets. While DC is part of the expansive PJM transmission network—a regional transmission organization that also coordinates the movement of wholesale electricity in all or parts of 13 states plus the District—the only way for the District to viably create its own renewable sources is through solar; there is simply not enough landmass to install wind farms. DC aims to procure 100 percent renewables by 2032, 94.5 percent of which would come from wind generation elsewhere in the PJM.
While small compared to the overall source of renewables, the solar targets are highly ambitious (10 percent solar by 2041 up from about 2 percent today) and—as such—SRECs in DC have historically been and are projected to be highly priced (5–10 times more expensive than most other states). Because of this, the predominant source of cash flow for solar projects is not the sale of electricity, but rather the sale of SRECs. The high SREC prices allow developers and policy makers to offer low-cost (and sometimes no-cost) energy to project beneficiaries through dedicated programs, including those that focus on reducing the energy bill for low- and middle-income households. While the dual source of cash flow is a boon for developers’ equity, policy uncertainty makes it challenging for project owners to enter into long-term SREC purchase agreements.
In an admittedly cursory fashion, we have now established that the DC solar market is ripe for investment. However, many technically savvy but thinly capitalized developers have limited options to access long-term financing to truly scale up their business.
I’ll stop there for a moment. One might wonder what all of this local U.S. market jargon is doing in a World Bank blog post. For 11 years, I hung my hat in various IFC offices including New Delhi, Singapore, and HQ in DC. I began that journey with the PPP Transaction Advisory team where I worked with South Asian state and national policymakers to support private sector investment in infrastructure. I then moved to IFC’s Infrastructure Investment Department, where I resided for most of my IFC tenure, developing and implementing complex debt, equity, and mezzanine instruments across Asia, Latin America, and Europe.
Last year, I took up an external assignment leading the investment program of DC’s newly formed clean energy financing vehicle, DC Green Bank, shifting my purview from emerging markets to my own backyard. As one of the 21 members of the American Green Bank Consortium, DC Green Bank’s role is to catalyze private investment in sustainable infrastructure with a mandate to focus on low- and middle-income segments of the District. While the deal sizes tend to have 1–2 less zeros in the dollar amounts and the investable geography is not so much four continents but rather the four quadrants of DC’s 177 square kilometers, the goals of the two institutions are quite similar. I often find myself explaining DCGB’s role as a tailored finance solution provider to address gaps in the market and actively serve communities, sectors, and markets that are not yet fully understood by commercial financing markets. Such a description is consistent with how I would describe much of IFC’s role in developing country projects.
So, about those SRECs in DC. In 2018, IFC Global Power Manager, Sumeet Thakur, tasked Tonci Bakovic, William Meunier, and myself to author an internal white paper that we published, illustrating IFC’s positive and negative experience financing merchant power projects dating back to the early 1990s. From that experience and working first-hand on assessing merchant risk and the value of clean energy certificates in Mexico’s renewable energy market, I was able to draw up novel underwriting standards for DC solar projects to allow our team to provide local developers with access to long-term financing.
If DC Green Bank influences other local financiers to adopt a similar financing approach, we will have played a role in creating a new market to accelerate the path for DC, the seat of World Bank Group’s headquarters, to achieve its ambitious renewable energy targets—a developmental impact close to home. And while small compared to energy markets in neighboring states, DC has an opportunity to serve as a pioneer of distributed generation financing in other areas of the United States and globally.
So, DC residents contemplating solar investment on your roof – what are you waiting for? For more information on residential solar in DC, please visit DC’s Department of Energy and Environment website.
Disclaimer: The content of this blog does not necessarily reflect the views of the World Bank Group, its Board of Executive Directors, staff, or the governments it represents. The World Bank Group does not guarantee the accuracy of the data, findings, or analysis in this post.
The author is writing in his personal capacity and the views and information expressed do not necessarily represent those held by DC Green Bank, its Board of Directors, or the District of Columbia government.
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