Oversupplied SREC Market
There are various factors which have led to an oversupply of SRECs in Pennsylvania. One of these factors is the ability for out-of-state SRECs to be used for Pennsylvania compliance. The PA SREC market is unique in that it allows PJM region states to register and sell their SRECs in Pennsylvania. PJM is the Eastern Regional Transmission Interconnection. This renewable energy region consists of all or part of 13 US States and Washington DC. (Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia, and the District of Columbia comprise the PJM region.) Some PJM regional states do not have a RPS or a viable SREC market, but can still register and sell their SRECs into Pennsylvania. Allowing out-of-state solar installations to sell their SRECs into the PA SREC market is disenfranchising Pennsylvania solar installations. Instead of rewarding instate solar generators Pennsylvania legislation is diluting their investment by allowing out-of-state installations to flood the PA market with SRECs. For Energy Year 2011 (June 1st-May 31st) 18 MWs needed to be purchased by Load Serving Entities (LSEs) or Competitive Electricity Suppliers (CESs) who serve electricity load into Pennsylvania. This meager SREC demand was met by an overwhelming SREC supply of 72 MWs registered, thus creating an oversupply of 54 MWs or approximately 60,000 SRECs.
Other PJM states like New Jersey have a closed SREC market. New Jersey does not allow other PJM region states to register and sell their SRECs into their home state. This type of legislation helps New Jersey grow its solar renewable energy markets internally, create in-state jobs, and does not force ratepayers to fund outside state solar projects. New Jersey legislators also passed a law in 2010 that deals directly with an oversupplied SREC market. If NJ SRECs decline three consecutive energy years in a row, solar requirements will automatically increase by 20% each year. This law acts as a circuit breaker to keep the market from collapsing and ensures that the NJ SREC market is a viable mechanism for years to come.
Another way for Pennsylvania to control the amount of SRECs that are being registered and sold into its market is to institute a megawatt cap on solar installations. Megawatt caps inhibit large solar farms from dominating a developing market. In essence, they protect the RPS from being satisfied too quickly and flooding the state with SRECs. New Jersey was successful in implementing a 2 MW cap for net-metered systems. The New Jersey Board of Public Utilities (BPU) allowed the SREC market to develop slowly. Once the market was well established and operating efficiently, state officials lifted the 2 MW cap (January 2010) and New Jersey grew into the largest and most active SREC market in the United States. Capping the size of solar facilities creates an even playing field. It encourages distributed generation and allows various entities to participate in developing solar, instead of having the market dominated by a few utility-scale solar facilities.
A Stronger Renewable Portfolio Standard (RPS) is Needed
Pennsylvania’s RPS needs to be updated. “When we created the Alternative Energy Portfolio Standards Legislation in 2004, the solar energy requirements were carefully constructed to start low and increase very gradually over the first 10 years.” (Representative Chris Ross, “Proposed Legislation-Solar Renewable Energy Certificates” to the House of Representatives, 5/16/2011). However it has been seven years since state officials have critically reviewed Pennsylvania’s RPS and its effect on the SREC market. Like any other developing market, the PA SREC market and RPS need to be supervised and frequently upgraded for the betterment of its participants. By taking a proactive stance on the RPS and implementing SREC market circuit breakers, Pennsylvania can reduce renewable energy boom and bust cycles.
A sobering exercise is to compare New Jersey’s RPS Requirement in SRECs to that of Pennsylvania’s. The following diagrams illustrate how New Jersey’s RPS is significantly greater than Pennsylvania’s from Energy Years 2011-2016. This is backwards legislation, since Pennsylvania uses the most electricity in the PJM region. Last quarter alone Pennsylvania used 22.44% of PJM region electricity; Virginia was second at 16.62%, Illinois was third at 14.06%, and New Jersey was fourth at 10.92% (Monitoring Analytics). The obvious solution would be for Pennsylvania to increase its RPS and promote renewable energy technologies to reduce the strain on the electricity grid, deter climate change, and purify air quality.
Defined Solar Alternative Compliance Payment (SACP)
Pennsylvania should also enact a competitive and clearly defined Solar Alternative Compliance Payment (SACP). The SACP is a penalty that utilities and electric distribution companies (EDCs) pay if they do not procure enough SRECs in the open marketplace. Unlike other PJM region states which have clearly defined SACPs (DE, NJ, MD, OH and Washington D.C.), Pennsylvania takes a different approach to setting their SACP. Pennsylvania’s SACP is 200% of the average market value of SRECs sold in that energy year and is not disclosed until six months after the close of the energy year. Pennsylvania’s back dated SACP does not help solar development. The state’s “wait and see” approach for reporting their SACP does not bring certainty to a developing solar market. On the other hand, New Jersey provides its solar market with a forward projecting eight year SACP (EY 2009-EY 2016). New Jersey’s SACP is set at $711 in 2009 and gradually declines 2.5% to $594 in 2016. This clearly defined penalty schedule is valuable to solar developers, debt lenders, and equity investors. It allows them to model out forward SREC projections on a percentage basis of the SACP and assume tight, balanced, and oversupplied SREC scenarios. SRECs are the key financial component for successful solar development and a future SACP should be available to the marketplace to allow investors to quantify their risk.
Forward Pennsylvania SREC Market Conditions
The PA SREC market is in a contango market. Contango is a commodities term which means that the forward energy years are trading at a premium to the spot energy year. As one goes out on the forward PA SREC curve, future SREC generation can trade at a premium to discounted spot SRECs. This could be happening for few reasons:
Pennsylvania has the right environment for solar development. Deregulated electricity caps are coming off, which could drive up the price of electricity. Solar energy significantly reduces or neutralizes electricity costs. However Pennsylvania legislators need to implement regulations that stabilize and entice parties to invest in solar. By increasing Pennsylvania’s RPS and closing state boarders to outside solar generators, Pennsylvania can demonstrate that it is serious about renewable energy and the growth of it’s SREC market.
Flett Exchange, LLC discloses that there risks associated with the buying and selling of Solar Renewable Energy Certificates (SRECs). SRECs can fluctuate in price, be volatile in nature and there is no guarantee that SREC prices will appreciate or decline over time. SRECs are sensitive to economic, political, legislative, regulatory and other unforeseen factors and can experience periods of illiquidity.
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