Guest post by Ian Clarke from their journey to solar in New Jersey
It seems like it should be pretty straightforward: a state decides that it wants a minimum of its power generation to come from specific types of renewable resources. It designates target percentages for each type of renewable energy and, by way of incentive, allows renewable energy generators to claim the environmental benefits in the form of renewable energy credits, or RECs, that can be sold at market prices to those electric-load serving entities who don’t have enough renewable generation to meet their allotted minimums.
That creates an economic incentive for individuals and companies to invest in renewable energy, and uses market forces to drive the level of that investment. That sounds fine in theory, but the practice is a little more complex.
About two years ago, I attended the Wall Street Green Trading Summit in New York. I am a consultant in energy trading and risk management, but I had not really been following the REC markets in my home state of New Jersey and was surprised to learn that solar renewable energy credits, or SRECs, were trading in excess of $600/SREC. Each (S)REC represents a megawatt hour (1,000 kilowatt hours) of (solar) renewable energy generation.
I and my wife Jamie had been pondering installing solar generation at our central New Jersey home for several years, albeit not that seriously. The value of those N.J. SRECs got me thinking that solar would likely make a lot of economic sense, in addition to the environmental benefits it would bring.
So I got in contact with an environmental consultant from the conference, and we started to run the numbers. They indicated a payback period of about five years if we went ahead with what is a pretty significant cash outlay. We factored in the savings from not having to pay our utility for electricity, the potential revenue from SRECs, the likely income from reinvesting that revenue along with the electricity cost savings, the N.J. state rebates that were in force at the time, and a 30% federal tax credit. The latter applies to installations placed in service through the end of 2016.
Being an energy risk consultant, I wanted to try to lock in those high SREC prices, which seemed almost too good to be true. To do that, I proposed to sell forward some 80% of my projected SRECs for next 3-5 years, which in 2010 seemed feasible, albeit in a lightly traded forward market. If I did that, not only would I be protecting myself against a decline in SREC prices, I’d also be covered volumetrically.
I wanted that protection, because when you sell an instrument forward, you’re guaranteeing that you will deliver it at a future date for a price you agree to today. Those forward prices are predicated by market participants’ views today of where the market is likely to be in the future, given current supply and demand projections. By selling only 80% of my projected SRECs, I’d be de facto insuring myself against any unforeseen shortfall in production. After all, if I didn’t have the SRECs to deliver in the future, I’d have to purchase them on the open market to meet my forward delivery obligation, perhaps at a higher price.
With the economics of the concept squared away, it was time to get down to the physical and contractual aspects of the project. There were several open items that needed to be addressed, including the size of the installation and its location, along with the selection of a contractor and contract negotiations. One would assume that these should have been pretty basic issues to resolve. We quickly discovered that not all contractors are created equally and that shifting state rules and regulations only compound the problem.
Continue to next chapter, Contractor #1
This chapter is a part of the Solar Should Be Simple Series written by Ian Clarke about his family’s journey to install a residential solar array at their home in New Jersey. You can read more about their journey to solar or check out our own journey to solar in Massachusetts in our Going for Solar Series. Happy Greening!