FEATURE ARTICLE, APRIL 2011

IT TAKES MORE THAN SUNSHINE
New Jersey is creating a model of progressive solar policy.
By Jamie Hahn

Solis Partners designed and installed a 921-kilowatt rooftop solar energy system on New Jersey's oldest and largest publicly owned utility, Public Service Electric and Gas Company's Central Division Headquarters in Franklin Township, New Jersey.

The Northeast may not seem like the ideal region of the country for solar, given the fact that we don’t score very high on the solar irradiance resource index, but in fact the implementation of solar is driven more by financial incentives and electricity prices than by weather — and these two factors have provided a fertile landscape for the growth of solar in the Northeast. 

The leader in solar among the northeastern states is New Jersey, whose rich state incentives have catapulted it to second place in the nation in installed solar capacity after California — and first place if calculated on a per capita-basis. New Jersey now has almost 260 megawatts of installed solar with more than 8,000 projects statewide, compared to only six solar installations in 2002.

New Jersey also has the benefit of a high concentration of commercial and industrial buildings whose underutilized rooftops are ideal platforms for the deployment of large-scale distributed solar.

New Jersey’s model program for solar development includes state-mandated requirements for the generation of electricity from renewable energy sources, such as solar power; excellent interconnection and net metering standards that make it easy for commercial solar systems to tie into the grid; and a Solar Renewable Energy Certificate (SREC) financing model that provides energy credits and long-term financing for solar projects.

The state-mandated Renewable Portfolio Standard (RPS) requires that utilities generate a certain percentage of electricity from renewable energy sources (22.5 percent by 2021). In order to meet the requirement, utilities buy renewable energy credits such as SRECs from solar suppliers. This means that any company or residence that installs solar panels can sell SRECs on the open market, which help can help fund the installation of the system and generate revenue after that system has been paid back. Each SREC, which represents the environmental benefit of the solar electricity (as opposed to the actual power), is the equivalent of 1,000 kilowatt-hours of electricity. New Jersey’s online marketplace for trading SRECs is the first such operation in the world.

According to the state Office of Clean Energy, SRECs are currently trading for about $650 on the spot market, with long-term 10-year contracts available in the $375 to $475 range. Solar generators earn SRECs for 15 years after they have interconnected to the grid.

New Jersey’s SREC program replaced a costly rebate program, which was found to be impractical because the rebate fund was constantly being exhausted, requiring that projects wait until the next cycle. The production-based SREC program, which is funded by utility ratepayers rather than by taxpayers, provides the long-term sustainability that the stop-and-go rebate cycle lacked. 

New Jersey may have the region’s richest SREC incentives, but it isn’t the only state in the Northeast to offer SREC-type programs. Following in New Jersey’s footsteps, other northeastern states such as Delaware, Massachusetts and Pennsylvania have also instituted SREC-type programs, along with other states around the country including Maryland, North Carolina and Ohio, as well as the District of Columbia. 

Although the design of the SREC programs vary by state, they all have the same goal: to facilitate financing for solar projects. With the high upfront cost and extended payback period on solar investments, financing is the greatest barrier to widespread implementation. The long-term revenue stream provided by the sale of SRECs provides the security that businesses need to attract financing from traditional sources such as banks, private equity or hedge funds.

In New Jersey, the SREC program has also led to innovative, non-traditional financing models. For instance, solar systems may be financed by a utility, with the loans being repaid through the SRECs generated by the system. Or, they may be owned by a third party that harvests the SREC income in return for providing an on-site, long-term source of low-cost electricity to the building’s owner. 

Indeed, New Jersey’s SREC program, in combination with federal incentives such as the Treasury Grant Program, which funds 30 percent of the cost of a solar system, and the new 100 percent bonus depreciation allowance, which allows businesses to depreciate 100 percent of the cost of a solar system in the first year, has made solar such an attractive proposition that many commercial building owners can’t believe it’s true.

Companies must act quickly to take advantage of these programs. Both incentives are set to expire at the end of the year. For the Cash Grant Program, companies can qualify if they have incurred 5 percent of the cost of the system by the end of the 2011; however, to qualify for the bonus depreciation, the solar system installation must be completed by the end of the year.

As a result of these programs, the payoff period for commercial solar in New Jersey has been reduced from 5 to 7 years to only 3 or 4 years. Because a solar system has a lifespan of 25 years, this means more than two decades of pure gravy in the form of avoided electricity costs (or, in the case of a leased system, reduced electricity costs), and income from the sale of SRECs.

Of course, as with any new initiative, the SREC programs have their problems, the most notable of which has to do with the long-term outlook. In order to create investor confidence, states need to provide long-term assurances regarding price.   

In New Jersey, as in other states with SREC programs, SREC prices are determined through a Solar Alternative Compliance Payment (SACP) schedule. The SACP is the per-megawatt-hour penalty a utility must pay if it fails to meet the state solar mandate. The SACP serves as a ceiling on SREC prices — if utilities don’t buy SRECs from solar suppliers, they have to pay the penalty to the state.

In New Jersey, the SREC price is expected to average approximately $100 per megawatt-hour lower than the SACP in a given year, with the SACP declining at an annual rate of 2.5 percent to reflect the diminished need for incentives as the solar market matures and systems become less expensive. SRECs have been trading at approximately 4 to 5 percent less than SACP schedule. Under current rules, the New Jersey SACP is set through 2016, but the Board of Public Utilities (BPU) is expected to extend the schedule through 2026, which will provide greater long-term certainty.

The SACP, however, only provides a ceiling. What about a floor? Financing entities also need long-term assurances that the bottom won’t drop out of the SREC market. While some states have implemented floor pricing, New Jersey has introduced a new, auction-based SREC-based Financing Program through which winning bidders are currently receiving 10-year SREC contracts of more than $400 per megawatt-hour.

While it is true that the SREC-based Financing Program eliminates the opportunity to benefit from the market upside, most would much prefer the certainty of lower long-term SREC prices to higher prices that could plummet without warning.

In addition to the clean energy benefits, New Jersey’s SREC program has also yielded a big payoff in terms of job creation. New Jersey now ranks 11th in the nation in solar job creation, despite the lack of a manufacturing sector. But that is coming too: lured by the robust local market, as well as by New Jersey’s position between the world’s two other largest markets — California and Europe — solar manufacturers are beginning to move in.

Since the loss of our industrial base in the mid-20th century, the Northeast has been plagued by blighted cities, aging infrastructure and declining prosperity. While other areas of the country may have sunnier weather, our progressive policy initiatives are propelling us to a position of national leadership in solar that offers the prospect of restoring the region’s position as a national economic engine.

Jamie Hahn is managing director of Manasquan, New Jersey-based Solis Partners, a solar developer and integrator of solar power systems.

©2010 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.