The NJ EDC SREC Auction for 26,325 SRECs appeared to spook the market into believing RY 2011 may have more than expected supply. This variance from expectations has caused SREC prices to fall from $665 to $560 in July.
In forming expectations for supply in the market, we must reiterate modeling the market fundamentals of installation rate and power generation based on solar irradiance to determine the maximum SREC production. Our analysis shows–though the market may come close to balancing supply and demand–that it is unlikely to end up oversupplied in RY 2011.
See previous in-depth analysis of the solar markets: Divining The Mysteries Of SREC Markets
Market Fundamentals
Reporting Year (RY) 2011 closed with a final capacity of 339.6 MW, more than double the capacity of the RY 2010 closing of 168.3 MW. The best-case scenario, based on 1200 SRECs per 1 MW of installed capacity for all active projects in RY 2011, could produce 286,000 RY 2011 SRECs from the installed capacity.
As stated in our previous blog, 16,000 more SRECs should have been generated in the best-case scenario for RY 2010. These SRECs could still be minted in RY 2011 making the total available SRECs for RY 2011 compliance 302,000 SRECs. This still remains short of the RPS target of 306,000 SRECs, providing little justification for SREC prices declining so far below the SACP of $675 (see upper bound red dashed line in the chart below).
A portion of the RY 2010 SRECs became available in the July 2011 EDC Auction with an additional 1,911 RY 2010 SRECs available. This leaves approximately 14,089 RY 2010 SRECs unaccounted for.
The last minting of SRECs for RY 2011 was 46,789 in June bringing the total PJM GATS issuance to 270,608, assuming the June minting was for only RY 2011 SRECs. Including the known RY 2010 SRECs described above, this brings the total minted SRECs available for RY 2011 compliance to 272,519.
The EDC Auction is hosted quarterly for the sale of SRECs generated in the previous quarter. With the previous auction hosted in April, the July auction was for the sale of SRECs minted from April, May and June. In this past quarter, more than 120,000 SRECs were minted, a record minting for the NJ SREC market.
The 26,325 offered in the EDC Auciton were from this record Q2 minting and not in addition to it. Regardless, with total SRECs issued at 272,519 SRECs, an additional 26,325 would not push the market into over supply.
Possible Explanations
A possible trigger of this could be the lingering possibility of RY 2010 SRECs flooding the market. 14,089 RY 2010 SRECs, 1,911 RY 2010 EDC Auction SRECS, on top of the 270,608 RY 2011 SRECs issued by July, plus 26,325 RY 2011 EDC Auction SRECs, do total more than 306,000 and thus lead to oversupply for RY 2011 (see table below for summary).
However, this is a false conclusion. We must reiterate that the RY 2011 EDC Auction SRECs are a subset of the 270,608 RY 2011 SRECs generated.
The reaction of the market is most likely to have been an irrational overreaction partly driven by the now certain oversupply in RY 2012 that has driven down RY 2012 SREC prices. This decline could have had a spill over into the RY 2011 prices, even though the RY 2012 market does not impact RY 2011 under the current market conditions.
Together, these two misunderstood factors could be causing the declining prices, but they are both not in line with fundamentals.
The fundamental upper bound of SREC production remains 286,000 plus a possible 16,000 RY 2010, totaling 302,000 tradable SRECs for compliance in RY 2011. Because the RY 2011 market is undersupplied there is no need to bank SRECs into RY 2012, and thus RY 2012 prices do not impact RY 2011 prices.
A plausible explanation relates to timing as the compliance year draws to a close. With a large proportion of SRECs already contracted over the reporting year, there remain fewer buyers in the market. These buyers, faced with a larger group of sellers, can leverage the competition to bid down prices in the market.
Caution in Q3 2011
There will be more RY 2011 SRECs minted in July, August and September, and a word of caution needs to be given to how these are interpreted by the market. What is published as minted in PJM GATS will include RY 2011 and RY 2012 SRECs. The majority of these SRECs will be for RY 2012. In RY 2010, 75% of July minted SRECs were for the new reporting year.
July’s installed capacity stands at 343.9 MW, which has surpassed the NJ CEP reported final installed capacity of 339.6 MW. Given this, the July minting of RY 2011 SRECs should contain the bulk of the remaining RY 2011 SRECs. It will not be until the end of August that the NJ CEP will report what portion of SRECs are from each year for the July minting. Be patient, there should be no surprises in the numbers.
SREC Trading volumes are also difficult to interpret. In RY 2010 the trading volume for the 130,000 SRECs minted was 248,030 showing that the volume traded is not reflective of the actual compliance obligation.
June and July 2011 trading volume totaled 117,000 taking the annual total to 320,000 SRECs. This is not an indication of oversupply, but simply that more transactions than required for compliance were completed. This is a sign of healthy liquidity in the market.
These explanations are based on the information reported by the NJ CEP and PJM GATS for build rates, SREC minting and power generation per MW. If the market does not match the above stated fundamentals, then the NJ CEP will require a reassessment of the fundamentals and our model will be adjusted.
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.
