While Washington politicians trade barbs over Solyndra's bankruptcy, the real solar power story is unfolding two hundred miles away. New Jersey's solar power program has been far more successful than anyone could have imagined.
According to the Flett Exchange, one of the nation's largest exchanges for Solar Renewable Energy Certificates (SRECS), New Jersey has been experiencing a larger-than-expected amount of solar installed at a rate faster than expected. Motivating the investments is New Jersey's Renewable Portfolio Standard (RPS), which requires the state's power producers to purchase 442,000 SRECs from solar producers for energy year 2012 (June 2011 to May 2012). Through the first quarter, already more solar capacity has been installed than needed for the entire energy year. If this trend continues, new Jersey's energy year 2012 will see an oversupply of SRECs.
Developers use SRECs as the driver to finance most solar photovoltaic systems. Typically, one SREC is the equivalent of one megawatt-hour of solar power production. In New Jersey, the value of an SREC is based on market supply and demand, and that market is limited to solar produced within state lines.
In energy year 2011, SREC spot market values ranged between $600 and $650. Developers used these prices to sell in the forward markets and use the proceeds to finance their facilities. Everything was fine until this May when the 2012 energy markets opened.
According to the Flett Exchange, SREC spot prices immediately dropped 15% to approximately $500. In June, New Jersey's prices dropped another 25% to $400. In August, solar power supply exceeded demand, and spot prices plunged to $150. In September, spot prices slowly migrated towards $200.
For developers and banks, SREC prices are critical. Banks find it difficult to finance a solar project when SRECs fall below $400, which is exactly what has happened in New Jersey. Because New Jersey's market prices are below investment grade, many solar developers are packing up their bags and leaving town.
Developers are not moving to Pa., Del., Md. or Washington, DC, since their SRECs are also below investment grade. Instead, they are heading to Mass., primarily for financial reasons, despite its underwhelming insolation.
New Jersey's political constituents and energy consumers have been big winners in the state's SREC program. Solar power displaces inefficient and dirty gas turbines and lowers the average market-clearing price of wholesale power. Not only do constituents find their ambient air cleaner, but also consumers find energy prices lower; solar power's low production costs displaces costly gas power and lowers the retail rates.
Even though this year's supply exceeds demand for energy year 2012, it does not mean that New Jersey has seen the last of developers. The state's energy policy calls for additional solar capacity to be added every year for the next decade. For example, the RPS currently requires 442,000 SRECs for energy year 2012. But for 2016, the state will require 1,357,000 SRECs. In 2020, the state will require 2,164,000 SRECs.
The winners are businesses and homeowners, who installed systems on their rooftops and back yards. The other winners are equipment manufacturers of solar panels, support structures, inverters, transformers and switchgear equipment. Specifically, solar products and services companies like SunPower (SPWRA) and First Solar (FSLR) should see their New Jersey revenues climb and continue to climb as the state adds more requirements. Specialty companies like Power-One (PWER), an energy conversion company, and MEMC Electronic Materials (WFR) should also see long-term revenues.
New Jersey's solar program is providing the state with many new jobs in various categories. The installation and operation of solar power requires local utility employees, technical advisors, engineers, zoning experts, construction workers, licensed installers and operating engineers.
Surprisingly, no matter how many solar panels are installed, not one of the state's traditional power plants will be forced into retirement. Capacity will still be needed as solar power production traditionally fades as the state's power consumption approaches daily peaks. But solar power always shaves a portion of the daily peak saving some behind-the-meter owners demand charges and all consumers from absorbing traditional peak pricing.