SREC Market Effects of New Jersey’s S1925
On June 25th, 2012, both the New Jersey Assembly and Senate passed S1925/A2966 which contains an amended schedule for increasing the solar carve-out for the Renewable Portfolio Standard (RPS) and moves to decrease the Solar Alternative Compliance Payment (ACP) beginning in 2014. The highlights of the bill are as follows:
- Starting in 2014, the RPS requirement will shift from a fixed megawatt hour requirement to a percentage-based requirement.
- The ACP starting in the 2014 Compliance Year (CY) will drop to $339 per Solar Renewable Energy Credit (SREC).
- A portion of the market will have an 80 MW cap on capacity for compliance years 2014-2016 with a 10 MW maximum capacity for a single project.
- SRECs shall be eligible for use in Renewable Energy Portfolio Standards compliance in the energy year in which they are generated, and for the following four energy years.
The increase of the RPS over the next 14 years should help stabilize the New Jersey market. As seen in Figure 1 below, the Proposed Carve Out starting in CY 2014 will more than double the current RPS of 772 MW, by increasing the demand to 1,664, 642 MW or 2.05%.
The SREC supply and demand model on SRECPrices.com predicts there will be a short in the New Jersey market of nearly 300,000 SRECs for CY 2014, which is expected to continue until CY 2017 (note this simple calculation does not take into consideration the carryover of older SRECs or the addition of large projects; however, SRECPrices.com allows the user to input estimated solar energy capacity build broken down by residential, commercial and utility sectors). The model estimates that an additional 293 MW of capacity would need to come online for supply and demand to remain in balance in CY 2014.
Figure 1. Estimated Market Dynamics
In addition to SRECPrices.com’s robust supply and demand model, the tool can also be used to estimate SREC prices. Using a provided set of assumptions, Sol Systems expects spot prices to trade at $118/SREC for CY 2016 with 3 year and 5 year fixed price contracts trading at $89/SREC and $75/SREC respectively. As for current market conditions, CY 2012 SRECs in New Jersey jumped from $140 to $165/$175 (bid/offered) immediately following the passage of the legislation, while NJ 2013-2015 fixed price contracts (“strips”) increased from $140 up to $160/$190 (bid/offered).
Figure 2. Estimated SREC Prices
Through the passage of the new bill, New Jersey has elected to shift from a fixed megawatt-hour requirement to a percentage-based requirement. The “Proposed RPS” schedule in Figure 3 below has been calculated using the proposed carve-out percentage and New Jersey’s regulated retail sales for the next 8 years. Switching to a percentage-based requirement will provide utilities with greater flexibility in how they balance their SREC requirement each year with their energy load.
Figure 3. Current vs. Proposed RPS
Figure 4 below shows that the ACP will be reduced from $625 to $339 starting in CY 2014 as a compromise and will continue to decrease every year until 2028. With a reduction in the ACP, in case of an SREC undersupply, utilities will not be forced to pay the significantly higher original ACP values. This reduction will cushion the potential impact of a higher ACP and reduce the impact on the ratepayer, which was an important compromise because utilities tend to pass costs onto the ratepayers.
Figure 4. Current vs. Proposed ACP
In addition, the bill changes the “shelf-life” of SRECs. Going forward, SRECs will be eligible for use towards compliance in the energy year they are generated, and for the following four energy years. This is noteworthy because the current legislation only provides 3 years of shelf-life for SRECs. The extension should prove fruitful for developers who have seen marks drop from the $600 level to below $100 and back to $175, as they will have the opportunity to sell their oversupply.
Finally, SB 1925 has an 80 MW cap for certain projects that want to qualify as “connected to the distribution network.” This is New Jersey’s way of closing the market to outside projects. In order for projects to automatically qualify, they must meet one of the following criteria:
- Net metered projects
- On-site generation facility
- Qualified for [virtual] net metering aggregation
- Certified as being located on a brownfield
- Certified as being located on an existing or proposed commercial, retail, industrial, municipal, professional, recreational, transit, commuter, entertainment complex, multi-use, or mixed-use parking lot with a capacity to park 350 or more vehicles where the area to be utilized for the facility is paved, or is an impervious surface pursuant to subsection x of the legislation.
If the project does not meet one of the five criteria listed above, an application must be filed with the Board of Public Utilities for approval. There is an 80 MW cap on the capacity of systems that will be able to qualify for an exception; and within the 80 MW limit for exceptions, there is a 10 MW threshold on individual projects.
The application process requires the following:
- A notice escrow of $40,000 must be filed.
- There is a 90 day window in which the Board must approved the project (if not, the escrow is returned).
- The project must enter commercial operation within 2 years, or else it loses its qualification and also its $40,000 deposit
- The application must also include:
- The nameplate capacity
- The estimated energy
- The estimated number of SRECs to be produced and sold per year
- The estimated annual rate impact on ratepayers
- The estimated capacity of the generator as defined by PJM for sale in the PJM capacity market
- The point of interconnection as well as the total project acreage and location
- The current land use designation of the property
- The type of solar technology to be used
- Such other information as the board shall require
In summary, the S1925/A2966 bill, and the expediency with which it was passed will help correct the New Jersey SREC market. The shift from a fixed megawatt-hour requirement to a percentage-based requirement will effectively balance the energy output with the carve-out for each respective compliance year. The bill also appeases the ratepayers by reducing the ACP by nearly 50%, starting in CY 2014. The section of the bill that aims to restrict project builds may be modestly helpful in reducing the rate of capacity projected to come online. From CY 2014 until CY 2017, the market is expected to be short on an absolute basis; however, if you take into account the carryover of older SREC vintages and consider that the SRECs will now be eligible for five compliance years instead of three years, the new legislation should be successful in stabilizing marks over the next five years. However, the days of $600 per SREC are long behind us.
About Sol Systems
Sol Systems is a solar finance firm and a leader in financial innovation in the renewable energy industry. Since its inception in 2008, Sol Systems has partnered with 350 installers and developers to bring over 3,000 solar projects from conception to completion by offering innovative financing solutions for residential, commercial, and utility-scale projects.
Sol Systems’ financing programs catalyze investments for a broad set of solar projects by simplifying the origination, diligence, and financing processes. Developers seeking financing for projects can access over $2.5 billion in capital through the Sol Systems investor network.
In addition to providing financing, Sol Systems also offers project due diligence, deal structuring, and asset management services – all designed to reduce overhead and transaction costs and quicken project development timelines.
For more information, please visit www.solsystemscompany.com.