Solar Legislation Expected to Increase Investment in New Jersey

February 2, 2010

Solar Legislation Expected to Increase Investment in New Jersey

By Governor James J. Florio & Glenn J. Williams, Esq.

New Jersey continues to forge ahead in its quest for clean renewable energy. With the passage of each new law, New Jersey enhances critical elements of its financial incentive infrastructure and regulatory landscape in order to remain well positioned to attract private and public investments in solar energy. Success, however, requires one to navigate an evolving labyrinth of state and federal regulations which are often influenced by countervailing political and economic forces.

Renewable energy regulation at the federal level dates back to 1978, when amidst rising concerns about the environment and rising costs of oil, Congress passed the Public Utility Regulatory Policies Act, or PURPA, to encourage the development of alternative energy sources. Federal regulations issued pursuant to PURPA require electric utilities to purchase renewable energy from qualified facilities producing it.

In New Jersey, the current renewable energy regulation regime has roots in the Electric Discount and Energy Competition Act of 1999, which directed the Board of Public Utilities (BPU) to establish Renewable Portfolio Standards for the State. The standards set by the BPU as outlined in the current Energy Master Plan adopted in 2008 call for 30% of the States electricity to be generated from renewable sources by 2020, of which 2.12% is to be from solar power, commonly known as the Solar Carve-Out.

Suppliers of electrical power in New Jersey can meet their obligations by purchasing electricity produced by a renewable energy generator directly via a Power Purchase Agreement, and/or indirectly, in the case of solar power, by purchasing Solar Renewable Energy Certificates, or SRECs; both of which provide a key financial engine for renewable energy infrastructure development. The financial terms of a Power Purchase Agreement generally bear a direct relationship to the costs and financial incentives necessary to attract investors to develop a renewable energy power project. An SREC is a certificate earned by the generator of solar power for each megawatt of power produced. SRECs are tradable and are often used as the basis of project financing. For example, a number of electric suppliers have agreed to finance solar project developments in New Jersey by extending loans that are repaid using SRECs, such as PSE&G's Solar For All program.

The market value of an SREC is determined by the carrot and stick approach established by the New Jersey Legislature. An electric supplier can comply with its obligations under the Renewable Energy Standards by, for example, use of Power Purchase Agreements and/or by purchasing SRECs. However, if the supplier fails to meet Renewable Portfolio Standard goals, it is required to pay the State a penalty in the form of a Solar Alternative Compliance Payment, or SACP. Requiring suppliers to either purchase clean energy or make penalty payments establishes a market for SRECs.

New Jerseys SACP penalty rates were set at $711 per megawatt hour in 2008-2009 and were scheduled to decrease yearly to $594 per megawatt by 2015-2016. The current SACP amount is $693. In theory, because solar energy producers price their SRECs at rates lower than the penalty payments imposed upon suppliers, suppliers purchase them to save money while helping the State meet its goals for a cleaner environment. However, a flaw in the financial structure was exposed. In reality, the time horizon established by the SREC / SACP structure has proven to be insufficient to generate significant investor confidence in developing solar projects in New Jersey.

Recent legislation has addressed flaws in the financial incentive infrastructure and has further laid the groundwork for new solar project developments in New Jersey.

A3520 - Solar Energy Advancement and Fair Competition Act On his last day in office, January 18, 2010, Governor Corzine signed into law A3520, the Solar Energy Advancement and Fair Competition Act which addresses the SREC / SACP financial infrastructure shortfall by establishing a greater demand for solar energy and extending timelines which should boost investor confidence in developing the solar energy supply in this State.

The Solar Energy Advancement and Fair Competition Act directs the BPU to adopt enhanced Renewable Energy Standards which require electric suppliers to purchase power from solar generators on a 15-year schedule, from Energy Year 2011 to 2026. The law also requires the suppliers to collectively purchase at least 195 Gigawatt hours (GWh) of electrical power from solar generators in 2010, increasing incrementally to 6,085 GWhs by 2026; hence a greater defined demand for solar power was created.

It also directs the BPU to establish a corresponding 15-year schedule for the SACP, i.e. penalty payments, for failure to comply, essentially therefore extending the market value and timeline of the SREC. If the supply of solar power available in the market via Power Purchase Agreements and/or SRECs is insufficient for electric suppliers to meet their collective obligations, then the balance of that obligation must be paid at the SACP penalty rate; hence a greater incentive to develop the solar energy supply was created. And, by lifting the previous 2 megawatt cap on net metering systems, the law provides more opportunities to construct larger facilities to meet that demand.

The law clearly attempts to prevent any reduction in either the Renewable Portfolio Standards or the SACP penalty payment schedule, and encourages the BPU to periodically consider increasing the required solar energy component of the Renewable Portfolio Standards. Additionally, the law contains an escalation clause in which the schedule set forth in the Standards is to increase by 20% in the event that : (1) the number of SRECs generated meets or exceeds the demand for 3 consecutive reporting years, starting in 2013; and (2) the average SREC price for all SRECs purchased by entities with Renewable Portfolio Standards obligations decreases in the same 3 consecutive reporting years. There are a number of limits and exemptions to this clause, but its capacity to encourage investor confidence in solar energy projects is clear.

A4341 Authorizes increased grant funding to local governments for site remediation for redevelopment of contaminated property for renewable energy projects This law, enacted on January 17, 2010, authorizes matching grants of up to $5 million per year from the Hazardous Discharge Site Remediation Fund to municipalities, counties or certain redevelopment agencies for up to 75% of the cost of remediating contaminated property for renewable energy generation. In so doing, it expands the current law authorizing such grants for projects involving the redevelopment of property for recreation, conservation, or affordable housing to include the redevelopment of contaminated property for renewable energy generation.

S1538 - Concerns biomass, solar, and wind energy generation on farms On January 16, 2010, S1538 was signed into law. It permits the owner of preserved farmland in the State to construct, install and operate biomass, solar, or wind energy generation facilities on the farm, provided that the equipment does not interfere significantly with the agricultural use of the land, is owned by the landowner, and is used to provide power or heat to the farm. The law also allows a person who owns preserved farmland to obtain a permit to allow a third party to construct, install, and operate solar or wind energy facilities and equipment on the farm.

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