Federal Grant Extension Could Increase Likelihood of NJ SREC Prices Dropping


As Reported by Reuters News Service it may be expected that the Grant in-Lieu-of the Federal Tax Credit may be extended in the lame duck session of Congress. The ability to obtain a grant expires on Dec 31, 2010. When Congress begins in January the ability to extend the Grant diminishes due to the increase in Republicans.

If the Grant expires solar developers will have to find tax equity partners for solar projects instead of just filing paperwork and receiving a cash grant within 60 days. In general, the Investment Tax Credit (ITC) has been worth more than the grant, however solar developers prefer not having to obtain a tax equity partner. Many solar developers are not sophisticated enough to obtain tax equity partners and the inclusion of a tax equity partner generally requires forward hedging to mitigate downward price risk in SREC based markets. Forward hedging and inclusion of another partner generally diminishes returns and forces installers to be more competitive. This will squeeze developers and integrators margins.

An extension of the Grant is bad news for present solar investors in states like New Jersey where increased development is trending towards an oversupply of solar in the next year. Grant expiration is the best way to throttle back new installations in the next year. This may allow the shortage of SRECs to continue thus potentially delaying a drop in SREC values. SREC values in New Jersey have been trading close to the Solar Alternative Compliance Payment (SACP) due to a shortage of solar installations compared to State requirements. If the rapid rate of installs continues, the market can become oversupplied sooner rather then later. The extension of the Grant has an increased likelihood of passing due to the fact that is will be included in legislation extending the Bush tax cuts. This will force Republicans to vote yes.

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