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Introduction

Senators Bob Smith and Stephen Sweeny recently introduced New Jersey Senate Bill 1925. The bill proposes to amend New Jersey’s current Solar Renewable Portfolio Standard (RPS) requirements in attempt to help stabilize the oversupplied SREC market. The bill is currently in draft form and is scheduled to be heard by the New Jersey Environment and Energy Committee on Thursday, May 17, 2012.

Based on the information presented below, the proposed version of S1925, while increasing the near term Solar RPS requirements, will likely still leave the market oversupplied. This note summarizes the key points in the draft legislation and quantifies the near term and long term impacts it would have on the SREC market if passed into law.

Summary of S1925

Senate Bill 1925 proposes a few substantial changes that would influence New Jersey’s RPS requirements beginning in the 2014 compliance year (June 1, 2013 – May 31, 2014). The chart below demonstrates the change from a fixed SREC requirement under the current RPS to a % based Solar requirement under S1925. The Solar RPS requirements would change beginning in the 2014 compliance year, with a requirement of 1.832% increasing to 3.730% by the 2028 energy year.

Additionally, the table below shows the SREC quantities required under the current RPS versus the estimates required under S1925. While S1925 increases the RPS requirements in the near term, the % requirements estimate a decrease vs. the current requirements beginning in 2023.

Beyond the proposed changes in SREC requirements, S1925 would implement a new fixed Solar Alternative Compliance Payment (SACP) schedule. The schedule reduces the SACP beginning in 2014 to $350/SREC declining to $252/SREC in 2028. The implementation of this schedule will cap SRECs at a price of $350 in 2014 and decrease in future periods. The table below demonstrates the proposed schedule as compared to the current RPS requirements.

In addition to S1925’s proposed SREC and SACP changes, the bill also addresses a few other areas:

1) An SREC’s useful life would extend from 3 to 5 years; giving it eligibility in the year in which it is issued and the following four energy years.

2) During 2014, 2015, and 2016, approved non-net metered grid supply projects cannot exceed more than 100 MW in total aggregated capacity each year. Grid supply projects located on brownfields are not limited under this stipulation. After 2016, the approval of grid supply projects would be subject to review by the Board of Public Utilities (BPU).

3) Solar RPS requirements would automatically increase by 20% for the remainder of the schedule in the event that the following two conditions are met: 1) the number of SRECs generated meets or exceeds the requirement for three consecutive reporting years, beginning with energy year 2014 and 2) the price for SRECs purchased by entities with renewable energy portfolio standards obligations in each of the same three consecutive reporting years is less than the current SREC price in the year prior to the three consecutive reporting years (i.e. if the price in 2014, 2015, and 2016 is less than the 2013 price and the number of SRECs exceeds the requirement in each of these years, the 20% increase in the RPS will be triggered).

What Does This Mean for the NJ SREC Market?

While S1925 takes the steps needed to prop up the NJ SREC market, a closer look at the numbers suggest that even if this bill comes to fruition the market could continue to be oversupplied. The table below shows the current and proposed S1925 RPS requirements through 2017. Both scenarios demonstrate what the markets look like given estimates of installed capacity through April 30, 2012, and assume that excess, eligible SRECs from prior periods are used to meet the compliance obligations in the current period. Under the current RPS requirements, assuming no new build, the market is oversupplied through energy year 2016. Applying these same figures to the estimated SRECs required if S1925 is implemented, the market is short approximately 118,500 SRECs in 2014 (the equivalent of approximately 98.8 MW operational all year long).

Although the requirements under the current installed capacity and proposed changes under S1925 put the market at under supply with no new build, the likelihood of that is minimal. Over the last twelve months (LTM), the average MW installed per month has been 36.0 MW. That figure over the last 6 months has reached 44.9 MW/month. Given the recent historic build rates, we have analyzed 3 different scenarios in which the following cases are assumed:

1) Case 1 – shows half of the LTM average MW added per month throughout the course of the annual forecast periods;

2) Case 2 – shows the LTM average MW added per month remains the same throughout the annual forecast periods;

3) Case 3 – shows 1.5x the LTM average MW added per month throughout the annual forecast periods.

Note, for the purpose of obtaining an ending balance of MW capacity as of May 31, 2012, the table below assumes another 36.0 MW is added in the month of May 2012.

In each of the 3 cases presented above, the market ends up in oversupply through at least 2016. It is important to note that each case assumes all excess, eligible SRECs from the prior period are utilized to meet the current year RPS requirements.

As demonstrated in the scenario analysis, the market would need to substantially slow down current monthly build rates to allow supply to come in line with demand in the future RPS compliance periods. It‘s unlikely that build rates will decline fast enough to protect from future oversupply. This bill does not allow for an increase in build rates (it requires a decrease) and cannot be used as a justification for an increase in PV installation growth.

Reaching the install rates shown in Case 1 (approx. 18 MW/month) should be within reach despite the restrictions put on grid supply projects. Additionally, the potential introduction of new EDC SREC programs, as well as historic build rates in the residential and commercial sectors, will also contribute to meeting the levels outlined in Case 1. Clearly, SREC pricing and availability of forward contracts to support new project development will impact future build rates, but even in markets with an oversupply of solar (i.e. PA), projects continue to be built without much regard for the current SREC environment.

How Does this Impact the 2012 and 2013 energy years?

Under the current draft of S1925, the RPS requirements would be unaffected in 2012 and 2013. The 2012 generation period will come to a close at the end of May 2012. Compliance buyers will have until approximately the end of September to wrap up their purchases before finalizing RPS reports with the BPU. As it currently stands, we estimate the NJ2012 market to see an excess of approximately 180,000 SRECs. Recent over the counter trading has increased to levels between $125 and $135/SREC, up from the last SRECTrade auction clearing price at just above $115/SREC.

The Electric Distribution Companies (EDCs), or regulated utilities, in NJ will be holding an auction on Thursday, May 17, 2012. Recent announcements show that as many as 33,000 NJ2012 SRECs will be available for sale during this auction. Given these volumes, 2012 demand may be reduced after this auction.

In addition to the 2012 energy year, the 2013 compliance period is fundamentally oversupplied. Current estimates show the 2013 period will see an excess of approximately 496,000 SRECs. This estimate takes into consideration the excess SRECs from 2012 and installed capacity estimates through April 2012. The 2013 forward market has recently traded above the 2012 vintage, but given the fundamental oversupply it is likely pricing will trend downward throughout the 2013 compliance period beginning June 1, 2012 (note the first 2013 vintage SRECs will not be issued in GATS and available for delivery until the end of July 2012).

SRECTrade will continue to keep a close eye on the S1925 legislative process as it makes its way through the Senate Environment and Energy Committee and the remaining requirements needed before it can be signed into law.

Note: Percentage based SREC requirements have been forecast based on EIA Report updated 11/15/11 “By End-Use Sector, by State, by Provider”. Projected SRECs required utilizes the most recent EIA electricity data applying an average 1.5% growth rate per forecast year. The state’s RPS Solar requirement is then multiplied by forecast total electricity sales to arrive at projected SRECs required. Projected capacity required is based on a factor of 1,200 MWh per MW in New Jersey.