What is driving the recent volatility in New Jersey SREC Prices and what impact will this have on Solar Project ROI for Corporate entities?
As a leading developer of solar photovoltaic (“PV”) projects for Corporate entities, we have seen significant volatility and sharp declines in the market price of New Jersey Solar Renewable Energy Credits (“SRECs”) over the last few months. As the attached chart indicates, there have been reductions in both the SREC spot market (i.e. where a SREC trades in the open market) and the SREC “contract” market (i.e. where multi-year strips of SRECs are traded on a fixed price basis).
SREC Price Drivers
We believe there are several major factors driving this recent SREC price volatility. First, as in any true market, underlying Supply and Demand factors ultimately drive SREC prices. SREC Demand has been set legislatively, and barring a legislative change in policy (something we view as highly unlikely), annual demand for SRECs will increase in predictable fashion through 2026 as a function of NJ’s Renewable Portfolio Standard (“RPS”) requirement. The Supply of SRECs is a different matter however.
Up until 2011, the NJ solar market was “short” solar capacity – that is, there was not enough solar PV installed and producing SRECs to satisfy the annual SREC requirements that are embedded in the state’s RPS, and as a result, SREC spot prices tended to be close to the penalty payments that load-serving entities are required to pay if they are unable to satisfy their solar obligation with SRECs. On April 14, 2011, the NJ Board of Public Utilities issued a press release that indicated there was over 305MW of installed solar capacity in NJ, and that new systems were being installed at an unprecedented rate. We believe this marked the sunset of the “short” solar market, and that Supply had truly caught up with – and will likely exceed, perhaps significantly – Demand, at least on a short-term basis.
Another factor contributing to SREC price declines was the June 7, 2011 release of Governor Christie’s draft Energy Master Plan (“EMP”), which details the Christie administration’s energy agenda. While offering a mixed perspective on solar overall, the EMP was critical of the high historic cost of SRECs and the associated cost to the rate-payer.
SREC Impact on Solar Project ROI
So why does any of this matter? And what will the likely impact be for Businesses looking to “go solar” in New Jersey?
The SREC mechanism is the key driver behind NJ’s fast-growing solar industry and offers solar PV system owner’s the opportunity to generate a substantial cash flow stream from the generation of solar electricity (see our prior Blog – New Jersey SRECs – post dated March 10th 2011, for more background on NJ SRECs).
Since the potential SREC income stream is the largest piece of the “investment return puzzle” for Solar PV Projects in NJ, the price of SRECs is a major determinant of any Project’s ultimate Return on Investment (“ROI”).
At EnterSolar, we focus solely on the solar PV needs of Corporate entities, and we approach the development of solar PV projects from a strict ROI and Capital Budgeting perspective. Corporate Investment Projects demand certainty and demonstrable “worst case” cash flow forecasting, and as a consequence, we strongly encourage our Corporate clients to avoid “playing” the SREC spot market.
Long-Term SREC Contacts
As an alternative to the risky and volatile SREC Spot Market, we place significant emphasis on providing EnterSolar clients with long-term SREC monetization options and certainty. We typically recommend and arrange long-term (10-15 year) SREC sale contracts. To learn more about long-term SREC contracts and EnterSolar’s unique approach to Solar PV for Corporate entities, please contact us.