We recently received an update on the New Jersey solar market from the office of New Jersey’s Clean Energy Program, bringing us up to date on new solar capacity built through June. As of June 30th, New Jersey had a total installed capacity of 1,793.79MW – a 61.49MW addition from the figure previously reported as of the end of May.
The 61.49MW addition is obviously noteworthy at first glance, and the market has immediately responded by selling off significantly in the days that followed the report’s release. A closer look into the data, however, provides a more nuanced understanding of what that figure really represents. Given the magnitude of the market reaction after this release we took the opportunity to update our New Jersey capacity models to provide a framework to better understand the data.
You can find our updated New Jersey SREC capacity presentation here.
While it is true that 62MW of new projects were added to the cumulative total of installed capacity, that number actually represents revised figures for monthly installations dating back to January 2015. The 62MW can be broken out as follows:
- 11MW of upward revisions attributed to 2015 monthly figures
- 32MW of upward revisions attributed to 2016 monthly figures
- 19MW of new build attributed to June 2016
Given the distribution of the newly reported capacity increase, the result on the observed average build rates is not quite as extreme as we have seen other groups report. Using the newly updated numbers, the trailing twelve month average build rate is about 22.5MW/month and the 2016 YTD average is 25.7MW/month.
In aggregate, the New Jersey RPS is quite large and this recent surge in build in and of itself does not necessarily tip the overall balance of the SREC market. While we have seen a broad sell off in New Jersey SRECs across most vintages, we believe the New Jersey market can maintain current pricing even if the build rate remains elevated in the short term. What has most likely sent SREC prices lower is the possible impact that a more long-term increase in build rates might have on the balance of the NJ SREC market.
Looking ahead there are two very different possible scenarios. For the sake of keeping RPS comparisons constant through this analysis, we will make the assumption that NJ SB2276 (which increases the NJ RPS solar requirement slightly) successfully makes its way through the legislative process and is formally adopted. First, the solar sector could react to the recent drop in SREC values and regress from its current trend to a less aggressive – though still above the historical average – rate of 17MW per month. A build rate averaging somewhere close to 17MW per month would keep solar installations just slightly ahead of goals set by the current RPS schedule, leaving us no more than 5% oversupplied in any given year through 2021. This would likely leave SREC prices stable and trading at consistently strong levels.
The alternative is to presume that the most recent increase represents a “new normal” for New Jersey solar. An average build rate of 34MW per month, which more closely tracks the current trend, extrapolated out over the next five years would result in a very significant oversupply that would almost certainly push SREC prices lower in 2019 and beyond. A build rate anywhere near 34MW per month eventually outpaces the growth built into the current RPS schedule and overwhelms the market structure that has been put in place through recent legislation.
We will focus on following how this trend develops over the coming six months. If the solar industry does indeed respond to the price signals being sent by the NJ SREC market, and build rates normalize to more sustainable rates, then New Jersey solar economics will continue to benefit from strong SREC prices. If, however, developers ignore these signals and continue to aggressively install new assets irrespective of RPS support we will likely see SREC prices continue to retreat in a manner that reflects the underlying shift in the balance of SREC supply and demand.
As always, we will continue to monitor these trends and share our analysis as new information becomes available. In the meantime please feel free to reach out to your SRECTrade coverage with any questions or comments.
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