State Seeks to Set Low Ceiling on Long-Term Price of Solar Energy

Tom Johnson | September 22, 2011 | Energy & Environment
Payment schedule determines what solar suppliers will pay for power over next 15 years

The state is proposing a steep cut in the top price power suppliers must pay to comply with mandates to promote the development of solar energy, a move advocated by the Christie administration in its draft Energy Master Plan (EMP).

In a step anxiously awaited by the industry, the Board of Public Utilities (BPU) yesterday proposed a 15-year price schedule, which essentially establishes the ceiling of what it could cost suppliers who are required to buy an ever increasing amount of their electricity from solar installations.

The schedule lays out what suppliers must pay in so-called solar alternative compliance payments (SACPs) if they fail to meet the state’s solar requirements by the other option available to them–purchasing certificates from owners of solar installations for the electricity their systems generate.

SREC graph

Since ratepayers ultimately pay the cost of both SACP payments and solar certificates, it is important to consumers and the industry that the state agency establish a payment price that is reasonable and balanced. Making the decision more problematic is the fact that under state law, the agency cannot adjust the SACP downward, once it establishes the payment schedule.

Here’s the dilemma: If the payment schedule is set too high, electricity customers will pay too much for promoting a cleaner source of energy. If it is set too low, suppliers might opt to make an SACP instead of buying solar certificates, a trend that could cool off what has been one of hottest sectors of a sluggish New Jersey economy.

The schedule proposed by the board, to be subject to public hearings, is likely to have little effect on what is now an oversupplied market caused by a wave of solar installations in the past year, resulting in a steep drop in the price of the solar certificates. Once trading on the spot market in the mid-$600 range earlier this year, the glut of projects pushed the price down to the $200 range this week. That has created an anomaly: traditionally SRECS have traded slightly below SACP prices. The current SACP payment is $658, which all but makes it irrelevant in the current market.

Nevertheless, many solar industry executives had lobbied hard and long to get the BPU to lay out the 15-year schedule, a step they viewed as critical to sending long-term signals to the market of what the cost of meeting the state’s solar mandates would be. The schedule proposed by the agency reflects the decline in price of solar certificates, lowering the SACP from $594 in 2016, the last year for which the BPU has currently set the payments, to $475, a 20 percent drop.

Such a decline was mentioned in the draft energy plan, which recommended that “in order to minimize the cost burden by non-participants (people who do not have solar systems but help defray the cost), the state should materially reduce the SACP as soon as possible.” Even so, the cost to ratepayers would be huge, the plan said, projecting it would amount to $11.3 billion between 2011 through 2025, an estimate solar executives lambasted as wildly inaccurate.

“It’s significant,” said Scott Hunter, renewable program administrator in the BPU’s Office of Clean Energy, especially when compared with historical drops in the SACP payments, which typically averaged about 2.5 percent. In the new schedule, the drop in the compliance payments is about that at 2.54 percent rate each year.

That is not as big a drop as some would have liked. The Division of Rate Counsel had lobbied for a slightly bigger cut in the first year of the new schedule and declines ranging between 8 percent and 10 percent in subsequent years, according to its director, Stefanie Brand.

“I think it’s high,” said Brand, referring to the SACP of $475. Noting the law precludes the state revising the payments downward once they are set, Brand said her office argued the that board set the payment price lower and adjust it upward, if it failed to reflect market realities.

Some solar executives argued otherwise. “We’re a bit concerned the initial adjustment (in 2017) is too steep,” said Fred Zalcman, director of government affairs for SunEdison, one of the more active solar developers in the state. He suggested the initial price might serve as a disincentive to enter into long-term contracts for solar installations, which he and others have argued could help create more stability in the marketplace. He testified during hearings on the energy master plan that any one-time adjustment should not be more than 4.5 percent.

In 2016, Zalcman noted, a federal tax credit for solar developers will drop to 10 percent from 30 percent, eliminating the ability of developers to offset the cost of solar through federal incentives. At that point, solar developers will need to rely on the SREC more to finance their projects.

That argument held little sway with some of the BPU commissioners. Commissioner Jeanne Fox said when the state moved to a market-based system reliant on SRECs, the aim was to help customers finance their systems. “It wasn’t to make money,” she said.