SRECs: Boom and Bust in the New Jersey Market

Thousands of New Jersey businesses, homeowners, and municipalities have incorporated clean, renewable energy into their lives. And why wouldn’t they? Renewable energy helps protect the environment, reduces dependence on fossil fuels, and helps lower our carbon footprint.

But let’s remember, solar energy is an investment, especially for businesses, and affordability can be a prohibitive factor. To help alleviate this burden, states like New Jersey introduced Solar Renewable Energy Credits (SCRECs) to increase the economic value of solar investments and help with the financing of the equipment. An intangible commodity, SRECs are market-based policy tools that allow solar owners the opportunity to earn a credit for each megawatt-hour they generate, which can then be sold in the marketplace. 

Today, though, investors are realizing the NJ program can no longer guarantee investors sizable profits. When the NJ solar market was created in 2009, the spot market traded close to $700. Now, NJ SRECs are trading around $130 for 2013 spot SRECs and $135 or so for 3-5 year contracts. That’s a huge decline, and a potential loss for many home and business investors who probably didn’t realize the investment’s potential for risk. 

The Garden State’s “Gold Rush” Mentality 

At the time they were introduced, the high value of SCRECs was driven by state and local policy measures and penalty prices intended to encourage solar development. Early on in the SREC program, investment decisions in NJ solar seemed easy.

There were two key elements that led thousands of businesses to invest in solar:

  1. The 1603 tax grant; a tool devised by the federal government that was relatively simple to take advantage of and provided any investor with a check from the US Treasury Department for 30 percent of the total cost of the installation (expiring at the end of 2011).
  2. SRECs; during the program’s early years, SREC demand exceeded supply, which fostered a high price environment. These SREC prices were assumed by many to remain unchanged for the duration of the solar investment (which was not the case).

Given the allure of the spot prices, many unsophisticated investors rushed to build their own solar installations and neglected to hedge their investments against long-term SREC price volatility, causing a solar “gold rush” that ultimately saturated the market. This resulted in significant drops in SREC prices and subsequent upside-down investments.

A Volatile Cycle

As the holder of the nation’s second highest solar penetration rate per capita, NJ’s solar economy has been thrown into flux by a host of variables. To top it off, by year’s end, the 50 percent bonus depreciation will disappear, making it that much harder to justify investments in NJ solar. 

The unpredictability of NJ’s solar market is no secret. In August, eight megawatts of solar capacity were installed in NJ, a little less than the 11 megawatts of systems developed the month before; but this is in stark contrast to the 85 megawatts installed in the month of January alone in 2012.

It’s worth noting, that while more volatile, the increased price discovery and relative liquidity of the NJ SREC market, when compared to many other solar markets, allows the NJ SREC market to function effectively as a hedging tool for market participants to lock in the value of their investments if they are sophisticated enough to do so.

Turning NJ Solar Investments Around 

Currently, there are thousands of system owners in NJ who perceive themselves as being “stuck” with their investment in solar. System owners have either found themselves at a complete loss on their solar PV investments or are in over their heads, managing time-consuming, intricate activities to help maintain the value of their investment.

What’s a NJ system owner to do? For many, selling it is the best option.

Small- to large-sized solar owners should consider selling the system to an interested and qualified third party who can package and sell discounted electricity generated by the system back to its original owner in a Power Purchase Agreement (PPA). A similar alternative is to sell the system to a purchaser able to structure a lease for the generating equipment as a way of financing/refinancing the initial investment.

These solutions allow current system owners to recover some or all of their original capital invested in an upfront payment along with a discounted power price into the 10 to 15 to 20-year horizon. At GP Renewables & Trading, we work directly with system owners to evaluate each of their solar investments and help them to determine the best way to move forward. Each system owner’s situation is unique, and solutions can and should be tailored to fit each party’s needs.

Until a hybrid program is devised with the policy goal of allowing the average homeowner and the more sophisticated investor to both successfully invest in solar the solar future in NJ will remain cloudy.

Lead image: Gold and dollar bill via Shutterstock 

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After working for more than five years at premier energy trading firm Sempra Energy Trading, in mid-2010 Gabe left to start GP Renewables & Trading in order to better serve the community of participants in all corners of the energy markets. GP Renewables & Trading is a multifaceted energy services company that combines energy management consulting, project development, and commodity risk and operations management to provide a full array of services to clients in the North American wholesale, retail, renewable power and natural gas industries. At Sempra, Gabe traded a portfolio of financial and physical power and natural gas positions spanning every ISO territory in the continental United States. He held several positions at Sempra before his final position as a trader on the East Coast Term Power Desk, including responsibilities in areas such as Business Analysis, Credit & Collateral Management, Power Scheduling and Real Time Trading. Gabe holds a B.S. in Engineering Mechanics with a concentration in Robotics from the Johns Hopkins University Whiting School of Engineering. For more information, visit GPRenew.com

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