A plan that would put solar developers in a competitive bidding process for state incentives for their projects received a mixed reception at a Tuesday hearing before the New Jersey Board of Public Utilities. The state’s top consumer advocate expressed support for the plan, but solar advocates said the proposed process would inject too much uncertainty into project finance, which would in turn draw few bidders.

The main point of contention was the BPU’s proposed Competitive Solar Incentive (CSI) Program, under which developers of solar projects above 5 MW would have to participate in a competitive bid to set the level of payment they would receive for solar renewable energy credits (SRECs) for their projects. Both behind-the-meter and grid-tied projects above 5 MW could participate, and the BPU would rank the bids and award the incentives to the lowest bidder.

The goal of the CSI program is to add 300 MW of new solar to the state’s energy mix every year, reaching a total of 17 GW of capacity by 2035 and 32 GW of solar — about 34 % of the state’s electricity — by 2050. Developers say grid-scale projects will be essential to meet the state’s targets. According to figures from the Solar Energy Industries Association (SEIA), the state has about 3,739 MW of solar installed.

But Scott Elias, senior manager of state affairs, mid-Atlantic, for SEIA, questioned how many developers would be interested in participating in the CSI solicitations for large, net metered projects, given the preparation work needed, without knowing the size of the incentive in advance.

“It’s pretty impractical for developers to meaningfully engage in complex and lengthy power purchase agreement negotiations with an offtaker [solar power purchaser] without knowing the revenue streams that will be available,” Elias said.

However, Sarah Steindel, assistant deputy rate counsel at the New Jersey Division of Rate Counsel, welcomed the BPU’s effort to set the level of incentives by a market process, rather than staffers deciding the incentive levels, as was done in the past.

“Over the years, rate counsel has advocated for competitive processes as a tool to control the high costs of solar for New Jersey’s utility ratepayers,” she said. “We strongly support the current effort to let the competitive market tell us what levels of subsidies are truly required to meet the state’s renewable energy goals.”

Tuesday’s hearing was the first of several the BPU expects to schedule to gather public input on the competitive component of the board’s plan for reshaping New Jersey’s solar incentive system, which the board released in July. The BPU expects to complete the information gathering process by the end of the year and develop a program guideline proposal by the end of March 2022. Additional hearings on the proposal will then be held, with the goal of having a completed plan in late spring.

“We’re working with getting the maximum benefits to ratepayers at the lowest cost,” said Louisa Lund, project manager for Daymark Energy Advisors, the consultant hired by the BPU to help develop the CSI program. “We want to support the growth of the solar industry. We want to help New Jersey meet its renewable energy credit goals. And we want to have a transparent process.”

Shrinking Incentive Rates

Earlier this year, Gov. Phil Murphy signed the Solar Act of 2021, which created a new incentive program and competitive bidding process for projects above 5 MW, with the goal of encouraging larger-scale projects in the state. (See NJ Grid-scale Solar Bill Signed by Murphy.) A few weeks later, the BPU incorporated that program into a larger new program to revitalize solar sector incentives offered by the state.

The new program, known as the Successor Solar Incentive Program (SuSI), includes two parts: the CSI competitive bidding program and the Administratively Determined Incentive (ADI) program, providing incentives for net metered residential projects, net metered nonresidential projects of 5 MW or less, and community solar projects. The ADI program was not the focus of the hearing Tuesday.

The legislation created a new program of solar renewable energy certificates, SREC-II, to be reimbursed by the BPU for each megawatt-hour of energy produced, with a goal of deploying 3,750 MW of new power generation capacity by 2026. (See NJ Sees Solar Growth in Reduced Incentives.)

New Jersey awarded similar energy credits for more than a decade through the Solar Renewable Energy Certificate (SREC) Program, which paid about $250 per MWh of power generated. Concerns about that program’s expense led to the Clean Energy Act of 2018, which shut down the SREC program when solar generation hit 5.1% of the state’s electricity production. That cap was achieved in April 2020, after which the state created an interim program with transition renewable energy credits (TRECs) of about half the value of those in the original SREC program.

Under the new program, SREC-IIs will be awarded in both the CSI and the ADI programs, with the value of certificates set in the ADI program varying between $70 and $100 per MWh, depending on the type of project, with an additional $20/MWh for public projects.

About 60% of the new capacity is expected to be generated with incentives at rates set by the BPU, and competitive bids under the CSI program will account for the remainder, with an emphasis on non-greenfield projects.

“We know that there’s a preference in New Jersey for developing on the previously disturbed lands,” Carrie Gilbert, internal project sponsor for Daymark, told the hearing. “But we wanted to understand some of the particulars of developing on contaminated land and landfills: like, how is the development timeline different than maybe a greenfield project? Are there additional costs? What kind of information could you provide on the environmental benefits that might help us figure out a ceiling for additional costs?”

Other issues raised by the BPU staff for public input include whether SREC-II subsidies should be provided through administrative rules or contracts, and whether developers believe that either of the two systems has “any implications on project cost, risk premium or other aspects of project financing.”

Seeking Serious Projects

The BPU and Daymark highlighted several specific issues for public input at the forum, including

• • • whether projects on contaminated land and landfills should get special consideration — and longer time frames for completion — due to their complexity;
    • how big a fee the agency should charge bidders to take part in the competitive solicitation;
    • what kind of barriers might prevent the participation of public agencies in the bid process — such as public procurement requirements, financing and rigid timelines — and how can the BPU shape the program to alleviate them.

Joe Henri, vice president of business development at Dimension Renewable Energy, a California-based developer of community solar projects, encouraged the board to set application fees and performance deposits at levels high enough to “discourage speculation” and ensure a pipeline of viable projects.

“Performance deposits tend to suck the speculation right out of the market,” Henri said. “Knowing that you have a nonrefundable deposit helps focus the developer. If it’s a substantial and meaningful deposit, it ensures that their financiers have been over the proposed project to make sure that it’s actually viable and has a chance to go forward and produce what it’s promising to produce.”

Elias, of SEIA, said that if the competitive bid program goes ahead, it should avoid awarding fixed SRECs, which might “not offer any energy revenue certainty to project investors.” Although the SREC value will not change, fluctuations in energy prices will mean the developer’s income from selling energy will vary as market prices go up and down, Elias said. To avoid that, he suggested that the BPU consider an “Index-REC,” like the one offered in New York and being implemented in Illinois.

In the proceeding for the New York rule, the American Wind Energy Association [now the American Clean Power Association] and the Alliance for Clean Energy New York filed a petition arguing for an indexed REC based on a reference market index that will change monthly over the life of a project contract. Indexed RECs would serve as a hedge against market volatility, lower the financing costs for renewable generators, and provide lower costs and less volatile prices for ratepayers, the organizations said. (See NYPSC Expands Energy Efficiency, Indexes RECs.)

Echoing that argument, Elias said, “Instead of staying fixed, the Index-REC price will go up or down depending on the direction of prices in the energy and capacity markets.” That ensures “a consistent amount of revenue for developers, and the projects can always get what they need. This basically de-risks the revenue for the developer and [independent power producer] and allows the REC bids to be much more competitive” because they don’t have to add in a safety margin to the bid to account for possible market fluctuations, he said.