Securitizing New Jerseys Solar Renewable Energy Market

Recently the Board of Public Utilities (BPU) along with representatives from various Electric Distribution Companies (EDCs), Solar Installers, and Project Developers met to commence talks surrounding the securitization of future Solar installations. The BPU hopes to securitize the market for future installations and make the overall process less expensive for potential solar participants. However, in order to accomplish this they have made several recommendations which may affect the future of the SREC market for installations coming online within EY 2009.

Initially the BPU had looked to the banks hoping they would realize the benefits of 10 year contracts backed by New Jersey Solar Renewable Energy Certificates (SRECs) as an asset. However, they overlooked the risk associated within the SREC market and have since realized Wall Street will not sign 10 year contacts for new installations simply because the risk reward ratio doesn’t add up. This leaves Wall Street unwilling to finance new projects, installers without work, and individuals unable to obtain proper financing for new projects. The SREC will be under supplied and in a tough position due to the fact that EDCs will need to purchase SRECs to meet their annual RPS but will be unable to given the fact that new installations will be cut short lowering future supply and increasing demand in relation to the annual RPS increases. Now as bad as that may sound there is one more factor that must be understood in order to fully grasp the situation and that is the new Regional Greenhouse Gas Initiative or the RGGI act.

The RGGI act is the US’ first Carbon Cap and Trade system which includes 10 states in the north east and most recently New Jersey. RGGI which is scheduled to kick debut this September will essentially give the state the power to mandate that electric public utilities offer renewable energy programs in their service areas. Further more as one might be able to guess the BPU will use this regulation to “encourage” utilities to enter 10 year contracts for future solar installations though installers. More specifically EDCs will be required to contract for 60% of the total annual addition to the SREC market from the annual increased RPS’. However, these contract requirements will decrease to 50% and 40% in years 2 and 3. This will basically transfer the market risk from the individuals and system installers directly to the EDCs who will now be subject to changing market conditions 10 years out.

So what does this mean for the SREC market as a whole? First we have to keep in mind that the very nature of the market is mandated by the state and without an RPS backed by legislation EDCs would not buy SRECs and participants wouldn’t be able to pay off their systems though the SREC trading system within a 8 to 10 year period. That said thanks to the RGGI act and the regulation that will require EDCs to sponsor renewable energy programs Wall Street will most likely begin to provide financing based on the contracts EDCs will be required to sign with installers. And eventually as the market stabilizes Wall Street will relax its lending policies and the market will benefit as installations pick up and New Jersey strives to reach its goal of 20% renewable by 2020.

If you have any questions or comments call one of our brokers at Flett Exchange, LLC. 201 209 0234 or email sproft@flettexchange.com

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