Next trend in solar: long-term contracts?
Competitive bids for long-term solar credit contracts is an approach that has been adopted in several states including Connecticut, New York, Delaware, and Massachusetts. Will this be the next new trend in incentives and financing for solar electric projects?
In the United States, states have tried various approaches to provide incentives to spur development of the solar industry. The first was the rebate approach. With this type of incentive system, the state provides grant funding upfront to a project to lessen large initial costs and funds the rebate program with a small charge on the monthly bills of electric ratepayers in the state. New Jersey used this approach very successfully to become the second leading state in the United States for installed solar projects. Some policymakers wanted to move beyond a rebate system and others favored a more market-based approach.
This led to the second approach to state solar incentives: the solar renewable energy credit or SREC approach. Under the SREC system, the government does not provide financial assistance upfront to finance the solar project. Rather, after a business or residence has constructed the solar system, and put the system into operation, it will qualify for credits based on the systems production: for every 1000 kilowatt-hours of power generated, the system owner receives one solar credit which in turn can be sold for money on the open market. The demand for the purchase of such credits and is created by a state requirement that a certain portion of all electricity sold in New Jersey be generated from clean, renewable sources. As a practical matter, this means that the entity selling power must either have its own renewable energy generating systems or must purchase solar credits.
New Jersey is an example of the state that moved from rebates to SRECs. About two years ago, New Jersey terminated all rebates and moved exclusively to an SREC approach. At first, the SREC system worked because the credits had enough value on the open market to provide incentives for the construction of solar systems. Unfortunately, New Jersey’s lack of structure for the SREC market place permitted new construction to outpace the reasonable availability of demand for credits. In response, the value of SREC’s crashed in 2012. This has resulted in an extreme slowdown in the solar construction in New Jersey and has imperiled thousands of local, solar jobs.
In the past year or two, there has been a new movement toward the development of a long-term contract incentive approach. In this incentive system, project developers bid in competitively for long-term SREC contracts. For example, in a developer may submit a bid saying that it wishes to contract with an energy seller if the entity will guarantee a specified SREC value for a specified period of time. The state acts as a mere broker and the decision whether the bid will be accepted is wholly up to the energy seller. This approach is market-based because the price is set by private parties making decisions in an open market. It also has the value of establishing an income stream over a long-term which is what is required for developers to be willing to construct new projects since they know what they will receive in SREC income. This allows them the ability to calculate if the project will provide a return on investment and that in turn provides a substantial advantage over the current SREC system where, as in New Jersey, the parties have no way of knowing what the value that SREC will be more than 3 or 5 years out for a system that will be in operation for 20-30 years.
Delaware, Connecticut, New York, and Massachusetts are all piloting long-term contracting programs. New Jersey, in addition to having its SREC system, does permit a small portion of the industry to be provided incentives through long-term contracts via its EDC program. However, the small size of the program, means that it has not reached its full potential there.
Whether competitively bid, long-term contracting will be the next big trend in solar remains to be seen. It must be said that it does try to target certain weaknesses that have been revealed in the SREC approach.
Tags: grants, long-term contract, Mr. Sustainable, rebates, solar, solar electric, solar renewable energy credit, SREC, sustainability, sustainable
