NJ Market Update

Posted February 13th, 2012 by SRECTrade.

The collapse of NJ SREC prices resulting from a market oversupply in the last six months has called for legislative or administrative action.  Theoretically the RPS is a self-correcting mechanism where low prices lead to a slowdown in build rate while the annual Renewable Portfolio Standard (RPS) increases to catch up to any oversupply.  In practice, SREC price signals are impacted by other outside incentive programs like the Treasury cash grant which can lead to dramatic overshoots like we currently see in NJ and PA.  Also, the RPS adjusts only on an annual time frame, so while it should eventually self-correct, it may take several years even if almost all new solar development stops.  While a few of the large, well-capitalized commercial and utility scale solar companies can afford to stop installation while the market mechanism corrects itself, most of the hundreds of smaller pure play solar installers will either have to leave the state or close.  As a result, they, and the thousands of existing solar PV system owners in the state, are pushing for changes to the RPS program to ensure the continued vitality of the industry and the SREC revenue streams they are counting on to pay for their installations.

The RPS in NJ was created by a state law, but largely implemented by an administrative agency, the Board of Public Utilities (BPU).  While the state law sets the general framework for the RPS, it also gives the BPU significant latitude to modify the RPS rules, creating two avenues for changes to the RPS: legislative amendments or administrative rule changes. Mainly due to disagreement within the solar industry itself over the role of large utility scale solar farms in the RPS, the state legislature failed to pass a bill in the last hours of the 2010-2011 session that would have increased the RPS requirement in the short-term and decreased the alternate compliance payment (ACP) to minimize costs to ratepayers. With a new legislature recently sworn in, it will probably take months before any further legislative action will take place.

This leaves administrative action by the BPU as the only possible short-term solution. The two ideas on the table now both involve extending the Electric Distribution Company (EDC) loan and SREC-based financing programs, which otherwise have all expired.  The first option is to extend them and increase the RPS requirements 1:1 for the increase in the capacity these programs will bring on line, effectively having a neutral effect on the market. The second option is to extend the loan programs but do nothing to the RPS requirements, which would exacerbate the oversupply by driving yet more capacity into the market without stepping up demand.

The most pressing issue for either option is a bit more subtle, but affects all parties in the electric utility industry.  There is an existing law, the Solar Energy Advancement and Fair Competition Act, which generally exempts Basic Generation Service (BGS) suppliers from any change in SREC requirements during their contract term. That means that any increase in the RPS falls entirely on competitive Load Serving Entities (LSEs) that do not have BGS load requirements for the first 3 years, making it more difficult for them to compete with BGS suppliers. As a result, the LSEs are generally against any RPS change that goes into effect now, although ambivalent to something that goes into effect in 3 years. The EDCs are split on the program, some support extending the loan programs and others don’t. The NJ Rate Counsel is generally opposed to any action that would increase costs to ratepayers.

The Solar Energy Industries Association, a solar trade group, has emerged as a creative negotiator in the process.  They have put forward a modified option 1 which extends the EDC loan programs and increases the RPS an equal amount. However, while the loan programs go into effect now, the increase in requirements doesn’t happen for 3 years. To avoid a glut in the market, the EDCs would be required to bank all the SRECs they generate in the first 3 years, and sell them all once the corresponding increase goes into effect. This clever solution addresses the concerns of most of the parties involved and may have a good chance to pass.

None of these options actually addresses the current oversupply for existing systems, so unless the conversation changes dramatically, we will continue to see depressed NJ SREC prices for several years with no quick fix in sight. The only exception to this might occur in August or September if enough generators decide to hold their SRECs for higher prices and create a shortage of available SRECs, even though the supply of generated SRECs exceeds demand. There is a very asymmetric engagement here if the market is examined through a game theory lens. In a normal game like this, buyers and sellers have an equal time horizon, i.e. the buyers need 100 SRECs by Sep 30th and the sellers have to sell it by Sep 30th or it will become worthless, essentially a big game of chicken to see who blinks first. In this case, the buyers need the 100 SRECs by Sep 30th, but the sellers don’t have to sell by then and in fact will rationally anticipate that today’s low prices will inhibit further supply, leading to an undersupply sometime in the next 3 years (the life of their SRECs), which will allow them to sell for more then buyers are offering today. Throw in some option theory here, and absent a liquidity crunch sellers should be unwilling to exercise their option to sell early since they give up the remaining volatility value. The real question is if the thousands of sellers will continue to show a unified front, or if, like often occurs in the Prisoners Dilemma, they will sell low even if sub-optimal because they can’t trust all the other sellers not to do the same.

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