Glut instincts: Is there a solution to the SREC oversupply?


During the 2011 EY (energy year), both states saw severe drops in SREC pricing. SRECs in New Jersey, which traded for US$680 per megawatt hour (MWh) before the glut, are now down to a price of about $205. In Pennsylvania, oversupply has contributed to the continued decline of SREC prices to current levels of around $30 – only about 10 percent of their price one year ago.

In terms of total MW required under RPS policies, New Jersey had the highest aspirations, setting a target of 319 MW AC of solar capacity for 2011 – and of more than four gigawatts (GW) AC by 2025. The next largest near-term markets are Massachusetts (400 MW of photovoltaics by 2020), Pennsylvania (0.5 percent of photovoltaics by 2021), and Ohio (0.5 percent of photovoltaics by 2025). The Maryland market, while relatively modest in 2011, has aggressive targets that would require it to increase rapidly (two percent of photovoltaics by 2022), making it the fourth largest market by 2015, and second largest market after New Jersey in 2020.

As of the most recent NJ BPU report (November 30, 2011), solar installation capacity in New Jersey exceeded 530 MW – and that was only the midway point of the energy year, which starts in June and ends in May. That’s 44 percent higher than where the state needs to be to meet the 2012 requirement, assuming on-going growth. It also means that, with no growth, there is already enough capacity to meet the requirements in EY 2013. However, there still is some squeeze room in EY 2014 and EY 2015. Those markets are 17 percent and 34 percent short, respectively, based on installations today.

According to Pennsylvania’s Alternative Energy Portfolio Standards Act, the state requires just 18 MW of solar capacity in order to meet the "solar carve-out" for the 2011 Compliance Year, which also began in June and ends in May. However, in November, the state had over 100 MW of solar, leading to a dramatic decline in the value of SRECs.

How did this happen and what can be done to spark a recovery?

In an exclusive interview with pv magazine, Jamie Hahn, senior partner of Manasquan, New Jersey-based Solis Partners, which provides turnkey solar installation services, commented, "In New Jersey, we have experienced the ‘perfect storm', or should I say ‘the perfect solar storm'. Our SREC oversupply was created by the unintended positive consequences of overlapping programs intended to motivate solar generation."

Specifically, Hahn said, solar investment in New Jersey since 2009 has been buoyed by:

  • Federal assistance through the American Recovery & Reinvestment Act of 2009, which provided a 30 percent cash grant on systems costing up to $1,500 in lieu of an investment cash credit (and expired at the end of 2011);
  • Solar Alternative Compliance Payments, which were supposed to be comparable to the price of SRECs, so that LSEs would not be attracted to acquire alternative compliance credits instead to meet their obligations under the state’s Renewable Energy Standard;
  • Solar Renewable Energy Credits (SRECS), which in 2007, when the program launched in New Jersey, were priced at more than $600, making them an excellent deal; and
  • The decreasing cost of purchasing and installing photovoltaic arrays, as competition, particularly in the manufacturing sector, has brought prices down.

In addition, Hahn notes, the solar carve-out in New Jersey increased rapidly because of "a tremendous amount of utility scale development." He added, "It happened so quickly that it caught the industry off-guard. We have SRECs enough to suffice for the 2012 EY, as well as the 2013 EY and the 2014 EY."

Similarly, in Pennsylvania, Hahn explained, "They had a very weak RPS schedule all along, which meant that the amount that had to be deployed to meet the target was minimal. It didn’t take many utility scale projects to put the state into oversupply."

To address the oversupply situation, in May 2011, Pennsylvania State Rep. Chris Ross (R-Chester) proposed amendments to the state’s RPS in order to strengthen the market. First, he advocated that, after January 2012, Pennsylvania no longer should register solar technologies from out-of-state.

Second, Ross suggested that the capacity requirements for energy years 2013, 2014, and 2015 increase from 70 MW, 118 MW, and 205 MW, to 207 MW, 238 MW, and 290 MW, respectively. These changes would focus opportunities on local business and projects, while making SRECs a relevant factor in the Pennsylvania solar market once again – if not in the immediate future, then several years down the road. Pennsylvania House Bill (HB) 1580 has not been sent to the floor for a vote to date.

In New Jersey, following the release of an Energy Master Plan last June by Governor Chris Christie, the state Senate passed S2371, which would increase the SREC requirement in 2013 from 596 GWh to 772 GWh (the current 2014 requirement), with each subsequent annual requirement moving forward one year. The bill is now sitting in the Assembly Telecommunications and Utilities Committee.

"Both states are vying to get corrective legislation put through," said Hahn, "However, there is a tremendous amount of uncertainty – a lot of capital is sitting tight on the sidelines in New Jersey – and, in Pennsylvania, the capital has completely fled the state."

The delay of a decision in the U.S.-China solar dumping case until mid-March also adds to investor insecurity. "In the short term, this case will only keep the powder keg of capital securely closed," said Hahn. "In the long term, the solar manufacturers are going to have to bring costs down to be more competitive. That’s just a fact of the business."

In addition, Hahn believes, "The states will have to put a hard cap on project sizes moving forward. Not only do they propel us toward our RPS too quickly, but, in New Jersey, utility scale solar doesn’t make much sense. The state is too congested and does not have enough land."

What’s more, "We should require," he said, "that most projects moving forward be ‘behind the meter', which will reduce the operating costs of state businesses, make them more competitive in the marketplace, and attract new companies to the region."

What is an SREC?

A Solar Renewable Energy Certificate is equivalent to one megawatt hour (or 1,000 kilowatt hours) of solar electricity – generated either by an LSE (utility), or by a homeowner or other private entity. They are tradable credits valued by the supply and demand in a given marketplace.

SRECs are important because, in 30 U.S. states, electric utilities must comply with a Renewable Portfolio Standard (RPS) that requires them to meet an annual target for grid-connected deployment of solar power, and/or other types of renewable energy, such as wind and hydroelectric power. To conform to the mandate, utilities can either invest in and build their own capital-intensive solar plants, or purchase SRECs from project owners – homeowners or private entities – brokers, or aggregators.

Indeed, homeowners who want to reduce their energy bills through deployment of rooftop solar arrays can offset system installation costs by registering and selling their SRECs through brokers, and financing and aggregation companies such as Sol Systems, SRECTrade, and Flett Exchange.

Alternatively, those who lease their solar systems may arrange to have their leasing company keep and sell the SRECs their arrays generate. Many homeowners actually prefer this scenario, because it eliminates the bother of doing it themselves, as well as the initial wait for payments. Instead, the value of their SRECs is factored into the lifetime cost of the lease, bringing monthly payments down even further. Each solar system produces a certain number of SRECs per year, depending on size and other factors.

When the total number of SRECs purchased by LSEs is below what is required by a state’s RPS, the value of a SREC is high. Conversely, when there is an oversupply of SRECs, the value of each certificate is lower.

The lower the value of SRECs goes, the greater the disincentive to invest in solar energy. When SREC prices plunge, system owners and installers receive less remuneration. For LSEs, even if the price is low, there is no benefit in "buying ahead or stocking up for the future". LSEs are limited to selling their SRECs within the same energy year in which they are purchased, and are limited to selling SRECs in a state for three consecutive years before bidding for the opportunity again (the latter, being the prevalent policy in the northeastern United States).

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