The Optimization of the New Jersey Solar Renewable Energy Credit (SREC) Market

Open Access
Author:
Brady, Connor Daniel
Area of Honors:
Energy, Business, and Finance
Degree:
Bachelor of Science
Document Type:
Thesis
Thesis Supervisors:
  • Seth Adam Blumsack, Thesis Supervisor
  • Seth Adam Blumsack, Honors Advisor
  • Zhen Lei, Faculty Reader
Keywords:
  • Solar Power
  • Solar Energy
  • Incentive Market
  • Solar Renewable Energy Credit
  • SREC
Abstract:
Solar photovoltaic (PV) installations require some sort of financial incentive due to the relatively high levelized cost of energy (LCOE) that is associated with PV at present. The New Jersey Board of Public Utilities (BPU) introduced the Solar Renewable Energy Credit (SREC) Program to promote solar investment, with one SREC being granted to a producer for each megawatt-hour (MWh) of solar power generated. SRECs can be traded on an open market or retired in order to meet compliance standards. The SREC program is intended to attract investors and market participants to the solar industry to promote alternative energy in the state of New Jersey. However the market has experienced intense price volatility due in large part to heavy SREC oversupply, which is a red flag for investors in any market. It is important for the SREC program to attain a degree of stability if it is to fulfill its goal of incentivizing solar for years to come. The future of the market is uncertain, and creating a better understanding of how it should behave is of great value to installers, load serving entities, and consumers alike. There have been multiple studies of SREC prices, and this paper looks at the market from a slightly different perspective- SREC production. The amount of solar to be installed in New Jersey must meet the Renewable Portfolio Standard (RPS) requirement, as mandated by the NJ BPU. This paper seeks to answer the question, what SREC issuance quantities for Energy Years (EY) 2014 through 2020 would result in the optimal net discounted profit from the standpoint of the producer? In addition, this paper seeks to find the optimal SREC issuance quantities for EY 2014-2020 that would minimize the net discounted value of total cost to the consumers. To answer these questions, an optimization model was created that takes into account market parameters as they exist at present, as well as estimated future solar PV LCOE. Future SREC prices were forecasted through an econometric analysis of past SREC prices as a function of annual SREC issuance. It was found that a quadratic regression line captured this relationship quite well. Taking into account future SREC price, policy structure, and future solar costs as constraints, an optimization problem was constructed and carried out for both net discounted cost and net discounted profit. It was found that in order to maximize the value of the SREC program from the producer’s perspective, solar production should be slowed down. This will help to ease oversupply issues, causing SREC prices to slowly recover and even reach SACP levels. The model suggests that lower production and higher prices will help get the most value out of the incentive program, and maximize profits. In order to minimize cost to the consumers, the model suggests halting solar production completely for EY 2014 and 2015, and putting off future SREC production for as long as possible in order to discount costs further into the future. Only until EY 2016 would production be necessary to meet the RPS target, and the model recommends producing an amount of SRECs only equal to the RPS target once banked supply has been exhausted. The optimal solution in both of these cases is not very likely to occur, as solar production in the state is expected to grow and not decrease. With this in mind, the existing oversupply problem will persist into the future, creating volatility and low prices in the market. While a further investigation of the relationship between price and supply could be beneficial, the future of the program as it pertains to SREC production is important to understand as well. From a supply perspective, this paper recommends that New Jersey should slow down its production of solar systems and new SRECs, which would cause prices to begin to stabilize and approach the Solar Alternative Compliance Payment (SACP).