SREC advocates urge calm amid solar storm

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The perfect solar storm that has swept the eastern United States is proof that it really is possible to have too much of a good thing when it comes to the sun. Just ask any small-scale solar developer in the eastern United States who has been burned by crashing prices on the market for solar renewable energy certificates (SRECs).

Seventeen states have solar “carve-outs” in their renewable energy portfolio standards (RPS), but only nine jurisdictions, including Washington DC, have introduced SREC markets.

The policy designed to make small-scale solar investments more attractive has been a victim of its own success in some states, such as Pennsylvania and New Jersey, where spot prices fell from a peak of $700/MWh in 2009 and 2010 to less than $200/MWh in September 2011.

But the problem still isn't fixed. In New Jersey, 689.1 MW of SREC-eligible PV has been installed as of 29 February this year. That amount of capacity alone could produce around 826,000 SRECs, almost 50% more than is required this year.

There is also still legislative uncertainty even though Governor Chris Christie introduced an energy master plan last year, which would accelerate the RPS and raise the SREC requirement from 596GWh in 2013 to 772GWh.

Despite the teething problems of this fledgling market, the National Renewable Energy Laboratory estimates that solar carve-outs in SREC markets are scheduled to grow from more than 520MWAC in 2011 to nearly 7,300MWAC in 2025 – most of it less than 10kW.

“We've seen pretty volatile pricing in recent years. It's a challenge getting the project financed based on uncertain future revenues from the SRECs,” said Lori Bird of NREL at last month's PV America West.

This embarrassment of riches was an unintended policy consequence combined with President Barack Obama's response to the economic crisis in 2008.

One of the major factors in the downward trend in SREC prices was the flood of cash introduced through the 1603 grant programme as part of the American Recovery and Reinvestment Act 2009.

Although the wind sector took the largest chunk of the $11.2bn awarded to date, small-scale solar projects suddenly became viable. Unlike the Investment Tax Credit, these mom-and-pop projects did not depend on large revenues against which to claim the ITC. Some 623 wind projects were awarded $8.4bn in cash grants, while 33,175 solar projects have taken around $2.2bn.

“Many of the markets are in a state of oversupply with the exception of Massachusetts as a result of the cash grants that were available and a very large amount of installations last year,” said Bird. “Some states are considering policy changes. We've seen discussion in Pennsylvania and New Jersey of expanding those markets but they haven't gone anywhere at this stage.”

This sudden flood of federal funding that upset the dynamics in the market raises the difficult question of how nation-wide incentives impact emerging energy markets regulated to a greater or lesser extent at the state level.  

“One lesson is how do other policies and incentives interact with SRECs?” said Bird. “The Pennsylvania market sold out very quickly and there was another rebate that was offered through the stimulus programme. It made investment very attractive for investors. It's a question for policymakers – how do the SREC markets interact with these other incentives that are designed to help the installation of small-scale systems?”

Yuri Horwitz, president and chief executive of Sol Systems, an east coast company which aggregates renewable energy credits, said that markets were still having to deal with the 1603 “overhang or hangover”.

“What failed us in Pennsylvania and what may fail us in New Jersey – where it's more a hangover from 1603… why are we building in these markets that are two times oversupplied when we know SREC prices are going to be terrible?

“Everyone needed to build systems to take advantage of the 1603 grant so people are building in markets that aren't even any good hoping that the market will even out because they know that taking ITC isn't going to work in their structure.

“Pennsylvania is ridiculous… the place has grown so dramatically over the last two years – it's completely collapsed the SREC market. It's really frustrating for many and it's because of the perfect storm of incentives there that have just overwhelmed the market. We saw around 37MW go in last month alone, which is huge.”

If New Jersey continues to grow at such a rapid pace, it could take two years for the SREC market to recover, Horwitz said. But there could be some surprise winners.

“Maryland is going to be one of the more interesting markets – in terms of over- and undersupply it's right on the cusp. Legislation also looks very promising depending on what the senate does to increase those requirements in the next year or so.”

DC was also the most promising market on the east coast for solar, he said.

“It's smaller than a lot of other markets but if you're OK with complexity and you're looking to expand your footprint we highly recommend [building] solar in DC. [While] Massachusetts is a market most of us can bet is going to be around for a while.”

Horwitz said that developers had also been too dependent on spot price trading to profit from projects.

“Many thought they were maximizing their profits by selling on the spot market in Pennsylvania and then got killed about six months later.

“Some mix of forward or annuity strategies with brokerage strategies or spot market strategies are really important for anyone that wants to manage their portfolio effectively and efficiently manage it like a hedge fund. Try to hedge your risks, mix and match solutions. But don't throw all your eggs in one basket and work on different solutions in your portfolios.”

However, many in the industry claim that the SREC collapse signals a massive policy failure that has created a barrier to financing for developers.

Long-term contracts that extend beyond the usual three-year deals between suppliers and load-serving entities would go a long way to reduce risk and free up capital, especially when SRECs become the primary incentive as subsidies expire.

Dan Berwick, director of policy and business development at Borrego Solar, said that SRECs were a “hot potato” issue that just passed risk between market participants who could not mitigate it, putting excessive strain on developers.

“When you have a market failure in a policy-created market, that's a policy failure and that is the absence of a requirement for long term contracts.
“The only reason SREC [risk] gets stuck with the supplier is not because the supplier is the most efficient holder of that risk, but that they start with the supplier and none of the participants want to hold that risk. Policy risk can't be well mitigated by buyers and sellers.

“Risk can be mitigated through policy design of long-term contracting mechanisms. But it's not happening. In the case of a policy-created market when risk isn't getting into the best hands of the party most equipped to mitigate it, that's a market failure.

“There doesn't need to be volatility in SREC markets; the volatility that we're seeing is a function of this wacky supply and demand curve [designed by regulators].

“Are we getting some benefit from leaving that SREC price uncertain? Developers are saying: 'I can't live with this uncertainty – to finance this deal I need a long-term contract'. Is there a counter argument to that? Are we doing something positive?

“My argument is no.”

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