Since the 1990s, solar generation facility developers have relied on an unpredictable and volatile mixture of federal and state incentives to support the financing for solar facilities. The recent solar investment tax credit extension has offered some additional certainty for wary solar investors, and the Clean Power Plan is expected to spur more renewable energy development - if that legislation survives judicial challenge.

Given the mercurial nature of federal incentives, the solar industry has depended heavily on the revenue streams arising from state-based renewable portfolio standards (RPS) and associated solar renewable energy certificate (SREC) programs. This article provides an update on the Massachusetts and New Jersey SREC programs and offers some key insights as to how solar energy will factor into a more diversified national energy future. The efficacy of these programs may provide a glimpse of what could be in store for states currently considering implementing solar mandates as a development incentive.

Over the last decade, six states - including New Jersey, Massachusetts, Ohio, Pennsylvania, Maryland and Delaware - and the District of Columbia have implemented successful SREC programs. SRECs are a virtual commodity intended to represent the environmental attributes produced by a solar facility. Together with the revenue derived from net-metering contracts or power purchase agreements, the sale of SRECs under a long-term sales contract or on the spot market provides the revenue required to support development of solar generation facilities in the U.S. SREC programs anticipate that the trade value of SRECs will be determined by the market but generally ensure a price ceiling through the establishment of an alternative compliance payment (ACP). The monetary value of SRECs varies widely depending on the applicable regulatory environment and associated demand.

New Jersey adopted its first RPS in 1999 and has since updated the enabling legislation several times. Under the current rules, New Jersey electricity suppliers and providers must incorporate 24.39% of renewable energy by EY2028 (“energy year” 2028 runs from June 2027 to May 2028). However, the New Jersey RPS requires electricity suppliers and providers to meet two separate milestones for the incorporation of renewables. The first milestone requires each electricity supplier or provider serving retail customers in the state to obtain 20.38% of the electricity it sells from qualifying renewables by EY2021. The second milestone, which was addended to the RPS in 2010 and revised in 2012, comprises the solar carve-out provision. The most recent solar provision requires suppliers and providers to incorporate an additional 4.1% of electricity sold within the state from qualifying solar electric generation facilities by EY2028.

In theory, the solar ACP (SACP) provides a price ceiling for SRECs and should offer market participants a reasonable estimation of actual SREC prices on the spot market. The SACP was set in EY2009 at $711/MWh with a 3.6% annual de-escalator through 2014. In EY2014, the SACP dropped to $339/MWh subject to the same 3.6% annual de-escalator. As of EY2016, the New Jersey SACP stands at $323/MWh.

By 2012, it was clear that New Jersey’s aggressive RPS and SREC program had been wildly successful as a development driver but, conversely, had failed to sustain SREC pricing that most investors would view as financeable. In fact, by EY2012, New Jersey SREC prices had fallen to under $70/SREC - a mere 10% of the peak $700/SREC in 2009 - due to the oversupply of available SRECs. To reinvigorate the market, New Jersey legislators adopted S.B.1025, which extended the life of SRECs from three to five years and nearly tripled the quantity of SRECs that electricity providers and suppliers must purchase between EY2013 and EY2014. In addition, the 2012 legislation shifted the RPS requirement from a fixed megawatt-hour requirement to a percentage of retail load, adjusted the SACP, and capped grid supply projects at 80 MW while allowing distributed generation projects and residential solar to proceed unimpeded.

Although many industry critics complained that the 2012 legislative fix didn’t go far enough when SREC prices didn’t immediately climb again to those heady 2009 prices, New Jersey’s SREC market has stabilized, and by the end of 2015, SRECs were trading just south of $300/SREC. Oversupply continues to put downward pressure on New Jersey SREC prices, but developer trepidation after the 2012 market crash has encouraged a more moderate approach to development.

Massachusetts issued a legislative framework for an RPS in 1997, and its first RPS took effect in 2003 until it reached 4% in 2009. The Green Communities Act (GCA), which became effective in 2009, has served as the true catalyst for the development of renewable energy generation facilities in the state. Under the GCA, the RPS was divided into Class I (new renewable generation from solar, wind and marine/hydrokinetic generation) and Class II (existing renewable generation facilities installed prior to Dec. 31, 1997). Moreover, instead of obligating suppliers/providers to contribute to a statewide percentage of generation from renewables, the GCA’s alternative energy portfolio standard requires suppliers to affirm that a minimum percentage of their retail electricity sales are from qualifying Class I generation facilities. The Class I annual obligation is scheduled to increase by 1% annually with no expiration date. Notably, the percentage of sales requirement means that the qualifying generation facility does not need to be located within the state.

In 2010, a newly promulgated solar carve-out with a capacity limit of 400 MW led the Massachusetts Department of Energy Resources (DOER) to launch the state’s first SREC market program. The program, known as SREC-I, reached full capacity by early 2013. By way of an emergency regulatory issuance in June 2013, the DOER allowed an additional 259 MW (for a total of 659 MW) to qualify under the SREC-I program.

Regulatory authorities and industry participants in Massachusetts lauded the success of the SREC-I program but expressed concerns that the Massachusetts SREC market could be headed for the same oversupply troubles that were paralyzing the New Jersey SREC market in 2011. Thus, in May 2014, the DOER launched the SREC-II program with the express purpose of staving off extreme market volatility.

The SREC-II program extended the 400 MW installed capacity goal to a new target of 1,600 MW of solar capacity by 2020. Facilities qualified under either the SREC-I or SREC-II program may produce and sell SRECs for up to 10 years starting when the projects are deemed eligible by the DOER. Additionally, the SREC-II program dramatically lowered ACP rates for new SRECs (e.g., for 2016, the SREC-I ACP is $472/SREC, while the SREC-II ACP is $350). Under SREC-II, the ACP rates will continue to decline on an annual basis between 2017 and 2024, with the ACP rate for future years to be determined at a later date.

However, the most significant difference between SREC-I and SREC-II - and perhaps the most significant difference between SREC-II and all other state SREC programs - relates to how the program has been designed to encourage projects under 25 kW and/or distributed generation projects that use the majority of their output on-site and to discourage larger commercial and utility-scale facilities. SREC-II accomplishes these development objectives through the application of SREC value disincentives known as “SREC factors” and by deferring available capacity for larger projects until all of the smaller and/or preferred types of solar project capacity has been tallied on an annual basis.

Under SREC-I, as in all other states with SREC programs, one SREC was awarded for each megawatt-hour of electricity produced by a solar facility. Under SREC-II, solar facilities are assigned to one of four categories (A, B, C and D), each of which is subject to designated “SREC factors” - i.e., multipliers ranging from 1.0 to 0.7. Category A facilities, which include small solar installations (<25 kW) and emergency power units, community solar projects, and solar projects benefiting low- or moderate-income housing developments, continue to receive SRECs on a 1 MWh/1.0 SREC basis. Category B facilities, which include building-mounted projects and ground-mounted projects larger than 25 kW that send more than 33% of their output to the grid, are subject to a 1 MWh/0.9 SREC factor. Category C facilities, which include facilities sited on landfills and brownfield sites and ground-mounted units with a capacity of <650 kW with more than 33% of the electrical output on an annual basis sent back to the grid, are subject to a 1 MWh/0.8 SREC factor.

The final category, Category D, known as the “MG” or “managed growth market sector,” includes all facilities not assigned under categories A, B or C - generally, large ground-mounted commercial and/or utility-scale solar facilities. In addition to being subject to a 0.7 SREC factor, Category D projects are limited to annual capacity blocks made available on a two-year forward schedule by the DOER. Annual capacity blocks are calculated by the DOER in light of remaining capacity after projects qualifying under categories A, B and C have been tallied.

The 2014 and 2015 annual capacity blocks for the MG market sector were 28 MW and 80 MW, respectively. In 2014 and 2015, the DOER announced that the annual capacity blocks for 2016 and 2017 would be zero.

On Feb. 5, the DOER announced that capacity for all projects larger than 25 kW under the SREC-II program had been reached, effectively suspending any further development plans for larger projects not already in the queue until further notice. MG projects that submitted a request to be qualified under the program (known as an application for assurance of qualification) during the SREC-II period may be added to an MG waiting list, which the DOER will draw upon in the event qualified MG projects fail to meet production or other mandatory milestones. Therefore, although wise developers will need to shelve new plans for larger facilities, the DOER announced on March 14 that 15.6 MW of capacity remains available under the SREC-II program for systems equal to or less than 25 kW.

The ultimate goal of all RPS programs is to provide market incentives for renewable energy development until these generations sources achieve parity with traditional generation. In response to SREC oversupply and market-adverse fluctuations in SREC prices, Massachusetts and New Jersey made significant changes to their solar RPS and SREC programs. These changes were intended to stabilize - and generally have stabilized - SREC markets and encouraged steady growth in the solar sector, even in view of volatile federal incentive programs.

Jennifer Simon Lento is senior associate legal counsel at Kenyon Energy LLC. She can be reached at (215) 485-8580.