After California, New Jersey is North America's second-largest solar power market. According to the Solar Electric Power Association (SEPA), three New Jersey utilities rank in the top ten in the nation for installed solar capacity. They are Public Service Enterprise Group's (PEG) Public Service Electric & Gas, FirstEnergy's (FE) Jersey Central Power & Light, and Pepco Holding's (POM) Atlantic City Electric. But if the New Jersey's legislature passes Senate Bill 1925 in its present form, developers will be heading for the hills and thousands of jobs will follow.
Driving the economics for solar power are solar renewable energy certificates, or SRECs. New Jersey has two requirements tied to their market-based SREC program. First, energy suppliers are required to provide consumers a small amount of solar power as part of their energy offering. Currently, that requirement is less than 2%. Each year, the requirement will increase slightly. By 2025, the requirement will reach approximately 4%.
Four percent may not sound like a lot of power, but it is. Currently, the 2% requirement produces more than 442,000 megawatt-hours per year of solar power. By 2025, it will likely be over 4 million megawatt-hours.
New Jersey's second requirement is called Solar Alternative Compliance Payment (SACP). Load-serving utilities are currently required to pay a penalty of approximately $700 for each megawatt-hour that is deficient in the solar mix. SACP penalties slowly decline over time and they effectively put a lid on the SREC market.
It is important to understand that New Jersey's consumers, not the state or the utility, pay for SRECs. Their costs are buried in consumers' utility bills and the net cost to consumers is difficult to forecast.
Let me explain the uncertainty. New Jersey uses a free market to set prices for SRECs. The state creates a growing demand by requiring load-serving entities to buy instate SRECs.
New Jersey is also a full member of the PJM Interconnection, a regional grid that uses the market to set local energy prices. PJM's energy prices are largely set by the production costs of their operating generators.
The production cost of solar power is zero. When solar panels are producing power in New Jersey, they displace PJM's most costly generators and that displacement lowers PJM's wholesale price of power. While SRECs do cost consumers money, they also save them money. The costs and savings are determined by two separate and independent markets.
For the last 12 months, the SREC market has gone haywire. Prices began falling from the $600 range to below $90 earlier this spring. Developers oversupplied New Jersey's solar market and load-serving entities are getting SRECs on the cheap.
Nevertheless, New Jersey loves its solar program. It worked beautifully; it provided the state with investment, jobs and a new tax base. The market responded better than expected. Now it has to work off surpluses. Rather than waiting for the surplus inventory to be consumed by the state's annual SREC increases, the state decided to accelerate SREC schedules. From many points of view, accelerating SRECs is a good idea.
However, they also want to lower the SACP. The current version of S1925 has SACP starting at $350 and declining to $242 in 2028. These numbers are too low and these levels will discourage utility-grade investments. But the new SACP schedule won't be the only discouragement.
The current version of S1925 also limits grid-connected solar farms. Grid-connected farms are the most efficient method of producing solar power. They also grab a disproportionate amount of SREC allocations.
The state prefers the distributed generation approach. They want homeowners and shop owners to slap a few panels on their roofs and consume solar power locally. The problem with this approach is it is most costly and least efficient solution. Think about it. How many existing homes have roofs oriented in the perfect direction for solar production?
The current version of S1925 feels like it has been heavily influenced by utility lobbyists. It makes sense. The last thing an incumbent power producer wants is to have very efficient generators enter their market. Because power knows no state lines, incumbents in nearby states are also threatened by large solar projects.
The current version of S1925 punishes new solar operators like NextEra Energy (NEE). NextEra recently activated a new solar farm in southern New Jersey. While they may not lose money, NEE will not enjoy the revenue opportunities they once expected.
Many people are confused by energy issues because they don't first anchor their arguments with a point of view. This seems to be the case with New Jersey legislators. If they really want more solar power, don't punish investors and developers.