Recently, I wrote about how the incredible success of the New Jersey solar and Pennsylvania solar markets was beginning to have adverse consequences with respect to each state’s primary solar incentive, the Solar Renewable Energy Credit (SREC). Two months later the trend is continuing to get worse but solar advocates in both states are beginning to get a grip on the problem and are putting the downturn in proper market context.
As a refresher, SRECs exist in states that have Renewable Portfolio Standard (RPS) and represent the environmental attributes from a solar facility. They are produced each time a solar system produces one megawatt-hour (MWh) of production, and more importantly, they are a critical mechanism to help finance the cost of a solar system. Most RPS requirements demand that energy suppliers or utilities procure a certain percentage of electricity from qualified solar renewable energy resources in a state. These energy suppliers and/or utilities can meet these RPS requirements by purchasing SRECs from homeowners and businesses who own solar systems and produce SRECs.
SREC’s used to sell in Pennsylvania for around $300 but have recently been selling for around $100. And New Jersey SRECs used to be priced around $600 but have been selling for as low as $200-$300. The decline in price has been due to the fact that SREC’s have been incredibly effective at stimulating demand for solar in these states, so much so that they have over-supplied the market with SREC’s…much more than power companies need to satisfy their state RPS requirements.
In New Jersey, for example, in the first three months of 2011, the state installed 49% more megawatts of solar capacity than it did in the same period last year with 520 solar projects totaling more than 40 megawatts installed in June – a record number of projects and solar capacity for one month. That is a lot of SRECs flooding the market in a relatively short period of time.
Some solar proponents are deeply concerned about the decline in price, namely State Sen. Bob Smith (D., Middlesex), chairman of the New Jersey Senate Environment and Energy Committee. Sen. Smith wants to introduce legislation that would accelerate by one year state requirements for how much renewable energy must be produced, forcing power companies to buy more SRECs.
Unfortunately, this is only a band-aid as it simply delays the inevitable by a year as power companies, after the one year, still will not be required to purchase materially more SRECs than they currently do. If the government wanted to “fix” the market, it would simply make a permanent increase in the amount and number of SRECs power companies are required to purchase for the duration of the RPS. Even if states do this, judging by past experience, the market will continue to over-saturate and supply will just out-strip demand again.
Other solar proponents find the decrease in price painful but a sign of a healthy market. Recently, Scott Edward Anderson, a contributing writer to The Energy Collective interviewed Peyton Boswell, managing director of EnterSolar (a New Jersey solar installer, who stated “The New Jersey solar market is coming out of a short-term installation boom…That was unsustainable in the sense that the solar MW capacity developed and installed was far in excess of what is required under the state’s RPS.”
James Hough, an energy trader at PSE&G Energy Resources & Trade, part of the state’s largest utility, also expressed his confidence in the natural flow of the New Jersey SREC market as well stating, “Especially over the past six months or so, the amount of construction has really kind of taken off, and because of that we’re in a situation where there’s more solar being generated than what’s being required…so as such it really makes sense to see the prices go down. It’s a sign the market is working the way it’s supposed to be working.”
The same dynamic is transpiring in Pennsylvania as the long-term prospects of Pennsylvania solar seem strong due to the structure of their RPS. For 2011-2012, the state solar RPS requirement is only 0.0325% which amounts to 53,000 SRECs, according SRECTrade. As a result, demand for SRECs in Pennsylvania for 2011 is essentially capped so any over supply is clearly going to drive prices down. However, for 2013-2014, these numbers almost triple to 0.0840% and 140,000 SRECs. And by 2020-2021, the numbers are huge with a 0.5050% state solar RPS requirement translating to 945,000 SRECs. So while Pennsylvania may continue to see short term downward pressure in the price of SRECs, over the long term the demand appears set to grow substantially.
While the short term decrease in SRECs is painful for those who are trying to finance solar in New Jersey and Pennsylvania, this is all a part of a healthy market driven process to cool off the solar market and eventually make it more sustainable. As Dan Berwick, director of policy and business development at Borrego Solar, stated, “The market is supposed to respond to the natural movement of supply and demand . . . and that’s what we’re seeing now…It’s tough medicine, but to a certain extent the industry kind of has to take it.”