2025 PA AEPS Report: Record Compliance Costs, Tier II Price Surge, and What It Means for Your Projects

The Pennsylvania Public Utility Commission, in coordination with the Department of Environmental Protection, has released its annual report on the Alternative Energy Portfolio Standards Act for the 2025 compliance year (June 1, 2024 through May 31, 2025). The report paints a picture of a program that has achieved its compliance targets — but at rapidly escalating cost. Total AEPS compliance expenditures reached approximately $702 million, driven overwhelmingly by surging Tier II alternative energy credit prices. For building owners and energy efficiency project developers, the findings confirm what the market has been signaling: Pennsylvania's Tier II REC opportunity is stronger than ever, and the window to capitalize is wide open.

The headline number is staggering. Electric Distribution Companies and Electric Generation Suppliers collectively retired 24,975,510 alternative energy credits during the 2025 compliance year at a combined cost of $701,874,446. This represents a dramatic escalation from just a few years ago — Tier II compliance costs alone reached $367.6 million, up from just $3.6 million in 2020. The weighted average price for Tier II credits settled at $26.92 per MWh, while Tier I credits averaged $29.29 and Solar credits averaged $33.20. All EDCs and all but four EGSs met their compliance obligations, with three EGSs achieving compliance through Alternative Compliance Payments and one filing for bankruptcy.

The Tier II compliance requirement for the 2025 reporting year was set at 10% of all retail electricity sales — the largest single compliance tier in the AEPS program. A total of 13,654,235 Tier II credits were retired to meet this obligation. Critically, 100% of these credits originated from facilities located within Pennsylvania, a direct result of Act 114 of 2020, which restricted Tier II compliance to in-state resources. This stands in contrast to Tier I, where only 48.9% of retired credits came from Pennsylvania, with the remainder sourced from other PJM states. The in-state requirement for Tier II has fundamentally reshaped the supply-demand dynamic and is the primary driver of the extraordinary price appreciation seen over the past five years.

The composition of Tier II supply reveals both the current market structure and the enormous untapped opportunity for energy efficiency projects. According to the report, waste coal facilities accounted for 50.5% of all Tier II credits retired in 2025, followed by pumped storage hydropower at 24.5%, conventional hydropower at 11.6%, municipal solid waste at 7.0%, blast furnace gas at 3.3%, combined heat and power at 1.4%, other gas at 1.2%, and energy efficiency at just 0.5%. Waste heat contributed a mere 0.1%. The dominance of waste coal is notable because these aging facilities continue to retire, steadily removing supply from the market.

The report's discussion of energy efficiency as a Tier II resource is particularly revealing. The PUC explicitly notes that 'there are relatively few such projects that have sought AEPS certification, presumably due to a lack of awareness of recent market changes.' The report goes on to recommend that 'a concerted marketing effort by aggregators and project installers, similar to what exists for small solar projects, could dramatically benefit the marketplace by providing a greater supply of credits.' At just 0.5% of total Tier II supply, energy efficiency represents a massively underutilized qualifying resource — one that could help address the looming supply shortfall while generating significant revenue for building owners.

The financial trajectory of Tier II pricing tells a remarkable story. The report documents that the weighted average Tier II credit price has risen from approximately $0.10 per MWh in 2016 to $26.92 in 2025 — a more than 26,000% increase over nine years. Even the five-year trajectory is extraordinary: from $1.92 in 2020 to $26.92 in 2025, a 1,300% gain. The report attributes this surge to the combined effects of Act 114's in-state requirement, the retirement of waste coal generation facilities, and growing compliance obligations. With the Alternative Compliance Payment set at $45 per MWh, there remains significant headroom for further price appreciation.

Perhaps the most consequential finding in the report is the Commission's supply outlook. The PUC states that it 'estimates that adequate Solar, Tier I, and Tier II supply exists to meet compliance obligations through 2027' but projects 'a likely shortfall in the supply of available Tier II credits beginning in 2028.' This projected shortfall is driven by the continuing retirement of waste coal facilities — which currently supply over half of all Tier II credits — combined with the 10% compliance obligation that must be met entirely from in-state resources. As demand remains constant or grows with increasing electricity sales, and legacy supply sources decline, the supply-demand imbalance is expected to tighten further.

The implications of a projected 2028 shortfall cannot be overstated. If Tier II credit supply falls below the compliance obligation, credit prices will be pushed toward the $45 ACP ceiling — the price at which EDCs and EGSs can pay a penalty rather than procure credits. This represents a potential 67% increase from current price levels. For project owners generating Tier II RECs, this means the value of each credit could increase substantially over the next several years. Projects registered today will be generating credits through the period of tightest supply.

The report also provides valuable context on Pennsylvania's broader energy landscape. Total in-state electricity generation during the 2025 compliance year was approximately 249,221,000 MWh. Natural gas dominated at 59.2%, followed by nuclear at 30.3%, coal at 5.9%, renewables at 4.4%, and other sources at 0.2%. Pennsylvania remains one of the largest net exporters of electricity in the country, a factor that distinguishes its AEPS program from other state renewable portfolio standards.

On the solar front, the report shows continued strong growth. Approximately 468.6 MWac of solar capacity was installed during the compliance year, bringing total in-state capacity to 2,013.4 MWac. The solar industry has invested $6.3 billion in Pennsylvania to date, including $993 million in 2024 alone. Franklin County leads the state with 398 MWac of installed solar capacity. Nearly 99% of Solar AECs retired for compliance now originate in Pennsylvania, reflecting the full impact of Act 40 of 2017.

The economic impact section highlights that nearly 100,704 Pennsylvanians are employed in clean energy jobs, with roughly 72% of those positions pertaining to energy efficiency — itself a Tier II qualifying resource. The DEP's 2023 Pennsylvania Energy Efficiency Workforce Needs report identifies HVAC mechanics and installers as the fastest-growing employment sector, with projected demand of 2,045 additional workers annually over the next decade. These workforce trends underscore both the scale of energy efficiency activity occurring in the state and the corresponding volume of potential Tier II REC generation that remains uncaptured.

The PUC's recommendations section contains several proposals with direct implications for the Tier II market. Most significantly, the Commission recommends that the legislature 'amend Tier II Provisions of AEPS,' noting that Act 114 has 'significantly altered the supply and demand outlook for Tier II AECs, resulting in an increase in compliance costs.' The PUC suggests this could be addressed by 'revising Tier II resource qualification criteria, such as adding new resources or amending geographic qualifications.' Any expansion of qualifying resources or relaxation of the in-state requirement could affect long-term pricing dynamics, though legislative action on energy policy typically moves slowly.

Other notable PUC recommendations include support for community solar legislation, modifications to net metering structure to address cost-shifting concerns from merchant generator projects, increased support for energy storage, and elimination of the quarterly Tier I adjustment provision. The DEP separately recommends pursuing a net zero carbon electricity grid and has proposed the Pennsylvania Reliable Energy Sustainability Standard (PRESS) and the Pennsylvania Climate Emissions Reduction Act (PACER) as pathways to modernize the state's energy portfolio requirements.

The report's interconnection data reveals continued strong demand for distributed energy resources. EDCs received 20,202 interconnection requests during the compliance year — a 9% increase over the prior year — with total requested capacity exceeding 4 GW. Cumulatively, Pennsylvania now has approximately 100,000 customer-generator systems interconnected. Meanwhile, the PJM planning queue shows 8,600 MW of proposed renewable capacity for Pennsylvania, including 5,757 MW of solar and 2,406 MW of wind.

For commercial and industrial building owners, the 2025 AEPS report reinforces several key takeaways. First, Tier II REC prices remain near historic highs at $26.92/MWh, with strong fundamentals supporting continued appreciation. Second, energy efficiency projects represent a dramatically underrepresented share of Tier II supply at just 0.5% — meaning thousands of qualifying projects across Pennsylvania are generating zero REC revenue. Third, the projected 2028 supply shortfall suggests that credits generated in the coming years will be increasingly valuable. Fourth, the PUC itself has identified the need for greater aggregator and installer engagement to bring energy efficiency projects into the AEPS certification pipeline.

The math for building owners is compelling. A facility that has completed an LED retrofit, HVAC upgrade, or VFD installation generating 500 MWh of annual savings would produce approximately $13,460 in annual REC revenue at current prices. If prices approach the $45 ACP as supply tightens, that same project generates $22,500 per year. Over a 10-year equipment life, cumulative REC income ranges from $134,600 to $225,000 — from a single building, from improvements already completed. Every month a qualifying project goes unregistered represents permanently lost revenue.

The 2025 AEPS report makes clear that Pennsylvania's alternative energy credit market has entered a new phase defined by constrained supply, record costs, and an urgent need for new qualifying resources — particularly energy efficiency. Building owners and project developers who act now to register their efficiency improvements will be positioned to capture maximum value during what the PUC itself acknowledges is a tightening market heading toward potential shortfall.