With the COVID-19 pandemic impacting financial markets across the globe, we wanted to provide an update on the SREC markets and how this crisis could affect pricing and liquidity in the near-to-medium term.
On the supply side of the market, production of SRECs from existing systems should remain largely unaffected, since solar assets will continue to generate electricity at their typical rates. However, depending on the extent of the economic damage caused by COVID-19, build rates of new solar assets may see a decline during the current period. While the extent of this impact cannot be determined with certainty, it is likely that the market will see a slowdown of new solar asset build during this economic downturn, which will slightly decrease overall SREC production.
A larger question mark lies on the demand side of the equation, where the severity of the crisis’ impact on electricity load remains unknown. While residential electricity usage will likely increase as a result of more people working from home and spending time indoors, the commercial and industrial sectors will see a drop-off in electricity demand. In the PJM and Massachusetts markets, commercial and industrial electricity demand makes up approximately 62% of total load demand, significantly outweighing residential load demand. Depending on how long the economy remains shut down, we will likely see overall electricity load falter in the back-end of Q1 and at least the first half of Q2.
In states where the SREC market may be closer to relative equilibrium, in the prompt period, and sensitive to shifts in market fundamentals (i.e. solar build and electric load), such as New Jersey, Maryland, and Massachusetts, we may experience a near-to-medium term decrease in pricing. However, for those states, such as Washington D.C., where the market is currently under-supplied, the drop in load will likely be insufficient to shift the underlying balance in the market.
Another near term impact of this crisis may be a lack of liquidity. Natural buyers of SRECs may take a less active approach and wait until this crisis unfolds further to determine their demand for SRECs for the current compliance year. This would mean less liquidity in the markets and could result in fewer credit transactions.
It is important to understand that while a temporary drop in SREC demand is possible, if the crisis resolves in the next couple of months and economic activity goes back to normal, the effect on the SREC markets will be temporary and short lived.
With so much uncertainty surrounding the fallout from this virus on the economy, it is hard to determine the exact impacts this will have on the SREC markets in the medium-to-long term. In the short term, we may expect lower pricing and less liquidity, which will likely persist until the United States starts to round the corner with the COVID-19 virus. SRECTrade will keep its clients, partners, and constituents updated as we push through this unprecedented time.
