SRECs, competitive strategies and the New Jersey solar market


The New Jersey solar market has grown from just 7.5 kilowatts of installed photovoltaics (PV) capacity in 2001 to over 200 megawatts today. This figure could triple in 2011, bringing the area’s total to over half a gigawatt. Considered to be the most successful PV market in the U.S. after California, the state has a thriving incentive scheme in place and a mature outlook to the future.

The nitty gritty

Speaking to Hahn, there is no doubt that the Solis Partners’ leader knows exactly what he’s talking about. Assertive, informed and passionate about his area, he tells pv magazine the company focuses specifically on the commercial PV rooftop market in New Jersey. However, ignoring the usual desire of company executives to launch straight into a promotional pitch, he dives headfirst into the nitty gritty of New Jersey’s solar incentive program, explaining how it has evolved since its inception.

One of the major changes, he states, is that New Jersey, along with other states like Pennsylvania and Massachusetts, now work in a 100 percent production-based environment. He says: "What happened is New Jersey, as an example, had been operating off a rebate program. Basically there was an allotment of a certain amount of money going into each calendar year that was supposed to be spread across many solar projects of varying sizes, from residential applications all the way through to very large commercial applications.

"However, it wasn’t a sustainable program, because as more and more people started moving forward with projects, and they started realizing that the economics were attractive and the return on investment was attractive, a lot of large commercial properties started looking to deploy solar. What ended up happening is they started bankrupting that rebate fund quicker and quicker each year. Therefore, you would get only a couple of months into the year and then the rebate fund would run out of money. So you had a whole queue of projects lined up, which didn’t know when they would be getting the rebate, and if there was going to be rebate money available by the time they were completed."

Consequently, it was felt that switching to a production-based environment would be the best solution – although unknown at the time, this decision turned out to be much better than anyone anticipated. As Hahn says: "It was a major change in the marketplace and it’s been very, very successful."

The biggest polluters

The move was based on the fact the utilities selling electricity to the state are considered to be the biggest polluters. Therefore, a program was formulated whereby incentives began to be driven by the utility companies and not through the taxable rebate fund. As Hahn explains: "What they [the state] ended up saying was ‘Ok, lets make a switch from the rebates to a market-based mechanism', which said that not only do you create the electricity, but for every 1,000 kilowatt hours of clean energy you produce, you generate the environmental benefit, which in New Jersey and the surrounding states is called a solar renewable energy certificate (SREC)."

He continues: "Now, the utilities operating in New Jersey have a renewable portfolio standard, which basically says that of your portfolio of electricity that you sell into the state, you’re going to have to have an increasing percentage of that come from renewable energy sources. They basically created a penalty schedule, so if you’re not meeting your state mandate in any given energy year, you have to pay a large penalty to the state. In lieu of paying the penalty, you have the ability to purchase these SRECs from entities that own solar and are generating clean energy in the state." The SRECs are generated as SREC income for the first 15 years that a solar system is operated.

Policy initiatives and monetization

The program, however, is not without its issues. Hahn mentions that the problem with relying on policy initiatives is that they typically bring uncertainties to the marketplace. "As in any new program, it’s going to take time for that program to mature," he says. "It’s only been going on for three years and we’ve seen vast improvements in the market – people now understand the SREC mechanism, and banks and financial institutions are starting to get comfortable with it."

He says though, that one of the biggest issues is how companies sell their SRECs. One way to do it, he believes, is to sell it on the annual spot market, the Mercantile exchange. "Right now you’re getting approximately USD$650 per SREC on the open market. The problem is what you need is longer term certainty. You need the ability to lock into a longer term, forward contract to sell those SRECs. The spot market is great – you’re getting the highest value, but you’re taking on the greatest amount of risk. If that market drops drastically in a year, you’re in a bad position where you might not have the cash flows from that system to service the debt. Instead of having USD$650 SRECs, what we would be better off having is a lower value, let’s say USD$400, but be able to get a ten year forward contract for USD$400, guaranteed for the next ten years."

When asked if he is confident this will happen in the future, his answer is affirmative. He cites New Jersey’s Board of Public Utilities (BPU) – the state’s regulatory authority, which has developed a mechanism where utilities now have to come up with what’s considered an SREC finance program – as an example. He explains: "The way that works is that they run a quarterly auction. So, if you have a project that you’re going to build, you have the ability to put in a bid to this auction to say ‘We’re building this system, at this size and we would like to get either a ten or a 15 year forward contract with a utility, and we want this value for the SRECs for this term'."

Lowering the cost of solar

While this is positive progress, there is a cap on the system size. Previously it was 500 kilowatts, but this has since been changed, on January 3, to two megawatts. "It’s a start," says Hahn, "because if you don’t go through that program and you just go to the open market and get a forward contract through other utilities or investment companies that want to buy these SRECs, you’re only able to really achieve, typically, a three year or five year forward contract. A lower value, but guaranteed for ten years, provides more certainty. When you have more certainty in the market, that’s going to lower the return requirements on the capital that’s coming into that marketplace – you lower the risk, you lower the return requirements. By doing that, that will allow more competitive capital into the market to compete for these projects and, ultimately, it will do what we’re looking to do: to lower the overall cost of solar moving forward."


These forward contracts are good news for the New Jersey solar market, but Hahn still believes more transparency is needed in the future. He explains that the penalty schedule imposed on the utilities – the solar alternative compliance payment (SACP) – puts a ceiling on the value of solar assets, which then typically trade at a percentage below the SACP value. "The BPU has set this and legislated it through the year 2016," says Hahn. "The problem now is that you don’t know where it’s going to go from 2017 and beyond. The BPU is due to come out with the SACP schedule for 2017 through to the year 2026, but that hasn’t happened yet. Once there’s more transparency as to where the legislators are looking to go with this through to 2026, you’ve then got 15 year transparency in the marketplace."

Another issue is to get the banks at a level where they are comfortable lending money based on a company’s solar assets, as opposed to just looking at their business cash flows.

European versus U.S. incentive schemes

In Hahn’s eyes, the New Jersey solar incentive scheme – SRECs – is a lucrative one. However, as he points out, the U.S. lacks a unified program. "The feed-in tariff structure is so much more simplified [in Europe] versus the U.S. In the U.S., you have federal subsidies – the 30 percent investment tax credit or treasury grant program that was just extended for another year (…) Then you have the ability to depreciate at the federal level the investment over a five year accelerated depreciation schedule. But the problem is at the state level – every single state has a different program."

Does he then believe the U.S. needs to implement a nationwide incentive scheme? "Absolutely," he states. He goes on to illustrate the differences that exist in installing solar projects in the different states. For example, he says a project that is economically viable in New Jersey – which "today has the richest solar incentives in the entire of the U.S." – would not be feasible in the state of New York, which is still operating under a rebate program for solar projects up to 50 kilowatts. "There’s such vast differences that projects are just not viable in some states and they’re very attractive in others."

In his opinion, Hahn says that a nationwide SREC market "would work and be very successful".

However, he doesn’t believe anything will change in the near future. "Unfortunately I don’t think it’s going to happen any time very soon, but again with the politics in Washington DC, it’s very hard to gauge nowadays what direction they’re going to go in. I think it’s imperative that in Washington they actually implement a true energy policy for once, which is long overdue, and through that energy policy develop a program on renewables that standardizes some form of incentive program nationwide."

Staying competitive

The solar industry is becoming increasingly competitive. Not only do changes in incentive schemes often make it hard for solar companies to predict how the market is going to evolve, but the threat of new companies starting up, or established brands entering new regions, is a constant one. In light of this, how does Solis view its competitive position in a market, which is expected to grow significantly in the next few years? According to Hahn, it is important to keep expanding, both in terms of project capacity and new employees. To prove his point, he says the company has commissioned 4,870 kilowatts of commercial rooftop PV installations this year, and is looking to employ "many new hires". He adds that it will become much harder for new solar companies to enter the market, especially when there are established names like Solis, which have a long track record and solid project portfolio. Additionally, he says his company is in a strong financial position, with "significant" investment and financial partners.

"It’s a very capital intensive business," he explains, "so with many of these small businesses, they get a USD$5 million project and their capital is tied up until six or eight months later when they complete that job, in order to go onto the next job. We don’t have that constraint and we’re going to be taking on more projects, and the projects will continue to get larger.

"We also have some unique finance structures that we can offer our clients, and we take a very consultative approach to the market. Some companies come in and they only offer power purchase agreements (PPAs). We don’t do that. We come in and analyze it from a finance perspective and we show the building owner how much a system will cost, and what the payback and cash flows will look like. If they still don’t want to invest in the system, then we have the ability to do a PPA."

Hahn additionally believes there is more rooftop space in New Jersey than there are brownfields or available land for ground-mounted PV systems. As a result, he believes the state will see more rooftop deployments in the future. But, he asks, how do you get the scale? "We have a program now, where we can offer a building owner that owns many properties, and has tenants in those spaces, a roof lease. They then have a new revenue stream that they didn’t have yesterday. How we sell the PPA is also very flexible. It doesn’t have to have to be a required 15 or 20 year PPA. The problem is the tenants in those spaces typically only have five, seven or eight years left on their lease agreement, and if you’re offering a 15 year PPA then you can’t close those projects. So, I think it’s also going to be some of the creative finance structures that we have as a company coming out that will allow us to get to a scale greater than some other companies."

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