by Natacha Kiler

What do the dot-com bust, the home mortgage crisis, and the NJ solar market have in common?

Lots of people started believing that their investment was certain to make them rich. Perhaps we should learn from history: when the masses start believing they are certain to get rich easily, they are likely to be wrong.

While it is true that New Jersey solar renewable energy credits (SRECs) are fetching high prices on the spot market today, they will not always get such high prices. Let’s recall the major goal of solar legislation and performance-based solar renewable energy credit (SREC) markets is to help the nascent solar industry grow and reach economies of scale in both manufacturing and installation so that solar energy becomes cost competitive with polluting fossil fuels. Legislation can do this by:

1) Making solar an attractive investment to early-adopters
2) Creating a financial penalty for energy suppliers and utilities who do not employ clean technologies

Inherent in this logic is that one day the solar industry won’t need legislation-based financial incentives to succeed.

California provides a great example of how a production based incentive is supposed to increase solar capacity while driving solar incentive costs down. The program was set up in steps so that every time a certain capacity of solar applications were queued, the incentive would drop to the next level. The idea is that the solar incentive would drive scale and help cause the costs of panels to drop, while installers learn to be more efficient at installations and drive their costs down. The starting production based incentive for Step 1 for residential systems was $390/MWh; today two of the three investor-owned utility programs have incentive levels at Step 7 ($90/MWh). As of September 1, 2010, there are 690 MWs of installed solar capacity in California, and the state is perceived to have the most successful solar market in the country.

Certainly, the legislation and market dynamics that support the New Jersey market are different than those of California, but the intent of the legislation and the driving forces will ultimately lead to the same results: more solar capacity and a decrease in the level of solar incentives.

So why do so many people in New Jersey believe that solar is a surefire investment?

There are two main reasons.

REASON 1: The Alternative Compliance Payment (ACP) for not creating or purchasing SRECs is high (currently $675/SREC with scheduled decreases annually) and the current supply of solar capacity does not generate enough SRECs to meet the legislation-driven demand.

REASON 2: Installers who want to sell more solar have an inherent incentive to lead prospective solar energy system owners to believe that SREC values will remain high because it shows a higher ROI.

Buyer beware.

The first half of reason 1 is true today, but solar capacity will not always be undersupplied. Each and every energy supplier who is subject to the ACP is trying to figure out how to avoid paying the expensive penalties. Energy suppliers can avoid these fees by developing their own solar plants or purchasing solar-generated energy from large solar farms through Power Purchase Agreements (PPAs).

The development of small and large solar plants will continue as long as the investment returns are good, but the more solar plants there are, the lower the returns will be. Ultimately, solar will succeed, energy suppliers won’t have to pay alternative compliance penalties and the value of SRECs will diminish.

There is no question of whether this will happen, the only question is when this will happen.

What about the installers that lead their customers to believe that SREC prices will be high? Unfortunately, we expect that some customers will get burned when they expect their surefire investment to perform and they’re left with minimal SREC payments.

Luckily, some citizens of New Jersey are starting to talk about the risks of assuming spot market rates will stay high. We expect that, over time, more and more people will recognize the importance of long term SREC contracts. There are also forthright installers who educate their customers about the risks of the spot market and offer them the option to lock their rates with long-term contracts that ensure the SREC value over time.