The uncertainty that hung over the New Jersey solar renewable energy certificate (SREC) market in 2016 may continue this year, as a key bill that tries to match demand with rising solar capacity remains held up in the state legislature.
The lack of movement for the legislation, which seeks to bolster demand starting in energy year 2018, coupled with continued growth in solar capacity, has some in the market expecting a downturn by the middle of 2017. But that may depend on whether solar construction maintains its current pace.
The lack of a fix to the market could lead to a significant drop in SREC pricing after the 2017 energy year, which ends on 31 May, according to one market source.
"I think that the [vintage] 2017s may continue to be strong through compliance. After that, the market may tank," the source said.
If there is a significant decline in market, it will not necessarily come as a result of oversupply for the 2017 energy year, but rather because of longer-term expectations that there will be far more SRECs than needed in 2019 or later. Those concerns can weigh down near-term market pricing. In the latter half of this year, the market for energy year 2017 SRECs dropped from about $290/MWh to as low as $207/MW before rebounding somewhat in recent weeks to around $230/MWh.
Recent data from the state's Clean Energy Program (CEP) was in line with expectations, with about 10MW of new capacity added in November. It also fell roughly in line with previous state estimates that SREC generation in energy year 2017 could slightly exceed demand.
"There is nothing here to indicate any big changes," said Howard Fleischer, managing partner of brokerage NJSREC.com.
But other forecasts suggest the market will be fairly well balanced for the 2017 compliance period, in part because it appears developers may be slowing down construction in response to lower the SREC prices.
"The average monthly rate has fallen drastically from the first half of the year to the second," said SRECTrade, a brokerage firm. The build rate for the second half of 2016 could drop to 20MW/month, compared with 33MW/month for the first half of the year, SRECTrade said.
But longer term, SRECTrade and others predict a significant oversupply for the market, potentially 25pc for 2019 and nearly 50pc for 2020. The surplus could be higher if build rates pick up. This is largely because, even if the pace of new projects slows somewhat, the state's energy use has been relatively flat in recent years.
The state required the use of solar to meet 2.75pc of electricity sales, or just under 2.1mn MWh, in energy year 2016. For 2017 the target rises to 3pc, or just under 2.3mn MWh, assuming no change in electricity sales for the year. New Jersey-eligible sources generated just over 1.1mn SRECs during the first five months of energy year 2017, including about 108,000 in November. If December matches that pace, the market would be more than halfway toward the potential 2017 requirement, with another 200,000 of eligible SRECs from previous years still available.
Concerns about supply could be remedied by the legislature. But lawmakers in November delayed action on a bill meant to address the problem. It is not clear whether the bill, AB3918, will resurface in the 2017 legislative session. The office of Assembly speaker Vincent Prieto (D) has said it could be months before a vote is held. The bill cleared the Senate last June.
The bill would use a "pull forward" mechanism to boost demand and better match supply. Some of the requirement for energy years 2019 and later would move up to 2018-2021 and the final 4.1pc/yr solar target would shift to 2022 from 2028.
The bill is designed to avoid a price crash similar to what happened in 2011, which was also the result of oversupply. Lawmakers responded by passing the 2012 Solar Act to buoy SREC prices and avoid a boom-and-bust cycle in the market.
Longer term, some say that solar market viability is possible only through strong legislative support, such as through a dramatically expanded renewable portfolio standard (RPS).
"I think that REC obligations will be beefed up post-2022," the market source said. "From a [solar] REC market basis, you just have to hope that the RPS increases exponentially."
SRECTrade said that the New Jersey SREC market could experience "depressed pricing" beyond 2018 "without some type of legislative amendment to the current state RPS schedule."
But other market sources are more optimistic about the solar market, at least in the near term, saying individual trading positions are affecting the outlook for some at the start of the new year.
"I think people hype things up depending on their book, or what they would like the perception in the market to be," another market source said.
As for the prospects of the legislature helping the market, "it all depends on what legislation gets passed," the market source said. "I think there is a bit of caution [in the market]. Hedgers are not going to act based on rumor."
Other market players refrain from taking any strong position. "Anything is possible in the New Jersey SREC markets," NJSREC.com's Fleischer said.
Legislative uncertainty, new construction and different opinions in the market will continue to paint a muddled picture in the New Jersey solar market into 2017.
