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New Jersey’s SREC Based Solar Energy Projects are DOA!

August 16, 2011

It is dishearten to see the death throes of New Jersey solar projects that were primarily based on the sale of Solar Renewable Energy Certificates (“SRECs”). Like the 49’ers who stormed into California looking to make it rich, the modern day solar developers in Jersey saw gold in legislated numbers such as Renewable Portfolio Standards (“RPS”), SRECs and Solar Alternate Compliance Payments (“SACP”)

The goal of renewable energy legislation, performance-based renewable energy credit (“REC”) markets and solar carve-outs is to help the nascent industry grow and reach economies of scale in both manufacturing and installation so that renewable and solar energy becomes cost competitive with polluting fossil fuels.

New Jersey’s RPS mandates 20.38% for Class I and Class II renewables by compliance year 2020-2021 + 5,316 GWh solar-electric by compliance year 2025-2026, see following table.

Energy Year

Solar Carve-Out

Class I

Class II

Total

EY 2005

0.0100%

0.740%

2.5%

3.24%

EY 2006

0.0170%

0.983%

2.5%

3.48%

EY 2007

0.0393%

2.037%

2.5%

4.54%

EY 2008

0.0817%

2.924%

2.5%

5.42%

EY 2009

0.1600%

3.840%

2.5%

6.34%

EY 2010

0.2210%

4.685%

2.5%

7.19%

EY 2011

306 GWh

5.492%

2.5%

7.99%

EY 2012

442 GWh

6.320%

2.5%

8.82%

EY 2013

596 GWh

7.143%

2.5%

9.64%

EY 2014

772 GWh

7.977%

2.5%

10.48%

EY 2015

965 GWh

8.807%

2.5%

11.31%

EY 2016

1,150 GWh

9.649%

2.5%

12.15%

EY 2017

1,357 GWh

10.485%

2.5%

12.99%

EY 2018

1,591 GWh

12.325%

2.5%

14.83%

EY 2019

1,858 GWh

14.175%

2.5%

16.68%

EY 2020

2,164 GWh

16.029%

2.5%

18.53%

EY 2021

2,518 GWh

17.880%

2.5%

20.38%

Note:
“Class I” renewable energy is defined as electricity derived from solar energy, wind energy, wave or tidal action, geothermal energy, landfill gas, anaerobic digestion, and fuel cells using renewable fuels. “Class II” renewable energy is defined as electricity generated by hydropower facilities no greater than 30 megawatts (MW), and resource-recovery facilities (i.e., municipal solid waste or MSW).

The fallacy with developing an SREC based revenue stream is fourfold:
1. NJ SREC prices are subject to supply-demand market forces, where the value of an SREC can be no greater than the legislated SACP. As installed solar generation capacity increases to meet the state’s rolling RPS benchmark, the spot market prices of SRECs will drop until it reaches Zero when actual = mandated. Buyers only exist when the SACP penalty exceeds the price of SREC.

New Jersey’s SACP is one of the highest in the country and currently determined according to the following rolling eight-year set schedule:
• EY 2009: $711 per MWh
• EY 2010: $693 per MWh
• EY 2011: $675 per MWh
• EY 2012 :$658 per MWh
• EY 2013: $641 per MWh
• EY 2014: $625 per MWh
• EY 2015: $609 per MWh
• EY 2016: $594 per MWh

Energy suppliers subject to the SACP can avoid paying these expensive penalties by developing their own solar plants or purchasing solar-generated energy from large solar farms in the form of SRECs, which are simply the environmental attributes associated with 1 megawatt hour of solar electricity.

2. Basing a business case sole on the price of an attribute (SREC) rather than the value of the primary product (electrons) itself is a poor business practice. As a compliance commodity, SRECs have no intrinsic value, i.e., if there is no buyer for the SREC, it is worthless.

3. Inability of SREC sellers to generate long-term sales contracts. The development of solar plants will continue as long as the investment returns are good, but the more solar plants there are, the lower the returns will be. As installed capacity satisfies the RPS, suppliers will no longer pay alternative compliance penalties and the value of SRECs will diminish. Therefore to manage risk, the load service entities have few reasons to justify long-term contracts.

4. Legislation changes and can be modified to reflect current social and economic conditions. As demonstrated time-and-time again on the local, state and federal level, long-term legislation are always in danger of being rescinded or relaxed to support the needs of the community.

According to FlettExchange, NJ SREC 2012 Settlement Prices for Energy Year 2012, June 2011 to May 2012 production, declined 68% to $160 on August 15, 2011 from $500 on June 2, 2011. In addition to the reasons stated above and long-term support for solar energy by New Jersey’s evolving Energy Master Plan, this big plunge in SREC prices is hardly a surprise.

Source: Flett Exchange

In closing, the only salvation is the potential for lower “All-In” capital costs for small and utility-scale solar farms. Investor wanting to acquire the assets (land agreements, permits, PPA, interconnect agreements, etc.) to build NJ solar projects, with future revenues generated primarily on the sale of SREC, were confronted with greedy developers wanting an unrealistic buyout of up to $500,000 per MW. Hopefully, realism will set in with developer’s exceptions south of $100,000 per MW and business plans primarily based on the sale of electrons, the true commodity.

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2 Comments leave one →
  1. September 9, 2011 8:27 AM

    In other words, New Jersey’s renewable portfolio standards, (the driving force behind a utility’s requirement to acquire SREC’s), are too low.

    If New Jersey’s goal is to develop a thriving renewables market, and SREC demand has brought us where we are today, allowing the SREC market to collapse is the same as saying the targets are met. As a model for the country, we should have higher ambitions than the current RPS mandates.

    In point #4 you say, “Legislation changes and can be modified…” I’d like to see an article on the forces at play and what those of us who’s business relies on continuation of the momentum brought about by RPS supported SREC pricing can do to encourage upgraded renewable standards.

    Victor Wahby
    CEO New Jersey Solar Consulting, LLC

  2. September 14, 2011 7:48 AM

    Victor,

    Bravo! Will work on a pice reagarding your suggestion with #4.

    Many Thanks,
    Barry

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