Future Energy Fellows post

All renewable energy is not created equal. The same is true of the policies of states where alternative power sources are deployed. At its core, New Jersey is a prime example of how policy and economics manifest themselves into complex renewable energy realities, requiring a sophisticated understanding of an industry designed to leverage the world around us – using natural resources, geography, and physics to more cleanly power our lives. 

In the U.S., few renewable power sources have received as much attention as Solar Photovoltaic (PV) systems. Solar technology makes the underlying economics highly scalable across residential, commercial and industrial rooftops. To those familiar with the topic, it’s no surprise that California is leading the way in installed Solar PV capacity; the state boasts several of the major corporate drivers of the solar revolution—SolarCity, Sunrun, Sungevity, just to name a few.

What may come as a surprise, though, is that New Jersey ranks number two in installed Solar PV capacity as measured by the National Renewable Energy Laboratory (NREL). Unlike California, New Jersey does not offer a feed-in tariff or carry quite as “green” of a reputation, despite being known as the Garden State. So what drove the frenzy in New Jersey? As with so many things in the U.S., the Federal Government had its hand in the mix, proclaiming, “Let there be renewables,” and so there were.

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Prior to 2012, the “1603 Grant,” well known among the renewable energy community, enabled Solar PV and other renewable energy project investors to directly recoup up to 30% of their investments through a check from Uncle Sam’s Treasury Department. Further, a number of provisions were made for “safe harboring” renewable power-generation equipment, like Solar PV systems that could be built and commissioned at later dates, while still being afforded the earlier benefits. Since the end of 2011 however, the policies around renewable energy investment have changed, and rather significantly.

In hindsight, if the 1603 Grant helped fuel the fire for the nation’s renewable investment craze, then in New Jersey, the spark igniting the boom came through the Solar Renewable Energy Credit (SREC) market. There, as in a number of other states like Massachusetts and Pennsylvania, an SREC is a certificate attributed to one megawatt hour of electricity generated from a registered Solar PV system. SRECs are commodities that trade in their own marketplaces and can be bought or sold separately from the electricity produced.

SRECs (and all RECs in general) emerged from state-level Renewable Portfolio Standards (RPS). The RECs themselves are nothing more than policy-driven, market-based tools which enable buyers and sellers to place additional value on renewable power beyond the electricity itself. In doing so, they create an additional revenue stream for a Solar PV system. SRECs, so long as their sales prices remain in line with the estimates upon which investment decisions were made, give system owners another means of paying back costly investments. Ignoring or misunderstanding the importance of SRECs as a factor underlying the economics of Solar PV in New Jersey led a number of developers and investors down a bumpy road.

In the early years of the New Jersey SREC program, SRECs were in high demand and relatively low supply. The upward price pressure increased until spot market prices for SRECs neared “ceiling price” level—a price above which purchasing SRECs would become more costly than paying the Alternative Compliance Penalty. The purpose of this relatively high penalty price was to encourage solar development. In 2009 SREC prices reached almost $700 per SREC. At the same time, what put New Jersey in such a unique situation was the fact that long-term futures contracts for SRECs were being structured at relative discounts to spot market prices. Yet even at these discounts, the prices being contracted were high enough to ensure that new projects being planned were still financeable. In 2011, SRECs were trading in the $600 range with 3 to 5 year futures contracts clearing $400.

The problem for New Jersey solar investors stemmed from the assumption that these SREC prices, on which many investment decisions were made, would remain at such steady levels over the life of the investment. By the summer of 2012, prices for New Jersey SRECs were as low as $75 and have since clawed their way back into the mid $100s through the summer of 2013.

Just as power project investments made without Power Purchase Agreements (PPAs) or sales contracts for the physical power are considered to be the most high-risk projects, Solar PV projects in New Jersey (given the market dynamics there), built without hedged or structured SREC off-take agreements, were actually much riskier than they initially appeared. Many aggressive developers in the state rushed in to act fast, overlooking the need to hedge SREC risk. Over time, and as a result of declining SREC values, a number of these New Jersey system owners have found themselves in over their heads trying to manage systems’ SRECs to recoup investments.

A number of owners are now evaluating offers to sell their systems to buyers who can offer them a PPA for the electricity or offer lease financing for the equipment, while leaving the monetization of the SRECs to a more dedicated market participant. As shown by the price volatility of SRECs in New Jersey, it’s clear that many may have misjudged what they originally thought were great opportunities. 

All things considered, investments in Solar PV and renewable energy in general are incredibly complex due to the high transaction costs, the intricate tax structures, and the growing emphasis that system owners must place on the management of their RECs and SRECs.