Over the past couple of years, the solar industry has thrived in Pennsylvania and New Jersey due to federal and state programs that have provided hundreds of millions of dollars in incentives. These programs are necessary for solar energy to compete in electrical markets. One program, utilized by both Pennsylvania and New Jersey, is a program in which producers of solar electricity receive certificates for solar power produced. In Pennsylvania, the certificates are called “Alternative Energy Credits” or AECs, and in New Jersey, they are called “Solar Renewable Energy Certificates” or SRECs. The certificates are earned as the electricity is produced and can be sold or traded. The certificates are purchased by electricity suppliers in order to meet minimum required levels of sustainable energy in each state and to avoid penalties resulting from noncompliance. The demand for the certificates is created by state programs requiring electricity suppliers to use renewable energy. However, since the certificates are traded on the open market the value of the certificates fluctuates based on supply and demand at any given time. Solar developers’ increased production of solar projects has resulted in an increase in the issuance of certificates.
Revenue generated from the sale of certificates is in addition to revenues or electrical savings resulting from the electricity that producers are feeding back into the grid. This allows producers of solar electricity two avenues to recover the initial installation costs of the solar panels.
Oversupply of Solar Certificates
The problem that has arisen in Pennsylvania and New Jersey is that solar developers in recent years have built such a large number of projects that there is an oversupply of certificates. In Pennsylvania, this oversupply is exacerbated by the fact that out-of-state solar energy producers are eligible to receive energy certificates. Most states, including New Jersey, only permit in-state solar energy producers to receive, trade and sell certificates. Currently, Pennsylvania is projected to generate four times the amount of solar energy needed in 2011-12 to satisfy the state requirements.
Because New Jersey, on the other hand, has a protected market for its certificates (i.e. it does not allow out of state producers to participate) they have not decreased in value to the same extent as those in Pennsylvania. That being said, certificates in New Jersey have experienced a decline in price based on the expectation of an oversupply of certificates in the next 12 months. Current projected estimates show that New Jersey will have a substantial oversupply of certificates for Energy Year 2012. If the projections hold true, certificates in New Jersey will continue to decrease in value (assuming the state requirements are not increased).
An Issue that Needs to be Addressed or Left to Market Regulation?
The oversupply has caused the certificates in Pennsylvania to lose as much as 75 percent of their value in the last year. Certificates in New Jersey have also seen a decrease in value, but to a much lesser extent. Since the demand for the certificates is created by established state requirements, the certificates will either continue to lose value as more projects are built or the state is going to have to increase the amount of certificates electricity suppliers are required to purchase. There are arguments on both sides regarding whether an increase to the state requirements is appropriate. Those in the solar industry are lobbying for an increase in the state requirements. This is because solar developers rely on revenue generated by certificates to recover initial installation costs. If the certificates decrease in value then it will take solar developers significantly longer to recoup their costs. Solar developers will have to consider if it is still cost effective to move forward with solar projects in Pennsylvania and New Jersey in the future.
Those opposing increases to the state requirements argue that an increase in the requirements will raise the cost of electricity for the average consumer because solar energy is more expensive. They also argue that the devaluation of the certificates is a function of supply and demand and is properly moderating solar development. According to those opposing an increase to state requirements, there is no current problem in the solar industry, instead, the market is functioning as capitalism intended.