Divining The Mysteries Of SREC Markets

on June 08, 2011 at 9:45 AM

Forward Solar Renewable Energy Credit prices have slumped recently; we believe this is a result, at least in part, of market concerns over potential oversupply for Reporting Year 2012.

A recent New Jersey Board of Public Utilities report indicates that the RY 2012 mandate of 442,000 Solar Renewable Energy Credits (SRECs) may potentially be exceeded.

SREC selling intensified after the BPU report. RY 2012 contracts have traded to as low as $375/SREC and have since recovered to $460/SREC. The approximate market valuation for RY 2012-2014 and RY 2012-2016 strips is currently $360/SREC and $275/SREC, respectively.

This raises the question about whether the New Jersey SREC market as a whole will be in oversupply in RY 2012. To answer this, first an understanding of the market fundamentals is required, followed by testing the fundamentals to actual market activity in RY 2010. These fundamentals can then be projected into 2011 and 2012.

The Fundamentals

Generation- The NJ BPU has prescribed that 1 MW will generate, on average, 1200 MWh over the year based on the solar irradiance of Newark and Atlantic City. This number is based on NREL PV Watts data at a derate factor from DC to AC of 0.75. This derate factor can vary by plus or minus 10%.

Monthly Build Rate – As the NJ solar market expands, capacity is added each month and the market’s ability to generate SRECs increases. The target set by the Renewable Portfolio Standard (RPS) for SREC generation is to be met by this expanding generation and the increasing supply of SRECs. Too fast an initial build rate can result in over supply that can take a considerable time period to recover from. Think Pennsylvania. Too slow a build rate and the market will remain fundamentally short of the target and SREC prices too high. Based on the fixed annual target and the generation per MW, a target average monthly build rate can be determined.

RPS Ramp Up – States have elected to slowly ramp up their RPS programs in the initial phase, followed by more aggressive increases once the market is more established. NJ demand increased by approximately 65,000 SRECs from 2008 to 2009, followed by 136,000 from 2011 to 2012.

Reporting Year 2010 Analysis

Using the build rate and generation per MW criteria above to analyze the RY 2010 data, the assumptions can be scrutinized for accuracy and reassessed for projecting SREC generation in future reporting years.

Monthly installation rates from June through December 2009 averaged 5.7 MW. These ramped up in 2010 to an average of 8.3 MW for January through to May. The average growth rate for the full RY 2010 was 6.8 MW. The total installed capacity in the SREC Registration Program (SRP) at May 31, 2010 was 168.2 MW.

To achieve the RPS mandated 180,000 SREC target for RY 2010, starting at 83 MW installed capacity and assuming generation of 1200 SRECs per MW, the average monthly installed capacity should have been 13.5 MW.

The NJ BPU reported that 130,000 SRECs were generated in RY 2010, well short of the 180,000 RPS target. However, given the installation rates and the BPU prescribed 1200 SRECs per MW, the market should have generated approximately 146,200 SRECs.

This begs the question: What happened to these SRECs?

The RY 2010 SREC actual generation translates to approximately 1067 SRECs per MW on average, or a derate factor of 0.67. This 11% difference relative to the 1200 BPU number can be attributed various components of the market. The possible explanations include:

Installation below optimal specification. This could relate to any of the factors reducing the derate factor from 0.75 to the above stated 0.67. These include:

• PV module nameplate DC rating
• Inverter and Transformer
• Mismatch
• Diodes and connections
• DC wiring
• AC wiring
• Soiling – including snow
• System availability
• Shading

Delays in authorization and verification of installed systems pushing back the commercial operations date. This is of particular concern as installation rates increase rapidly and existing authorization and verification resources struggle to keep pace.

Administrative delays causing system owners to have to register backdated SREC;. This administrative process is set up to accommodate delays through the backdating registration process and the year-end, four-month SREC reconciliation period. However, this could open up the possibility of some systems not registering all of the backdated SRECs or delaying the registration to RY 2011 or 2012.

For analysis of RY 2011 and forecasting for 2012, you will need to wait for my next post in the coming month.

Alex Anich is Director of Research at Karbone, an environmental commodities brokerage, renewable energy project finance, and emission reduction research and advisory firm based in New York City.