Solar Market Expanding in Pennsylvania

Solar Market Expanding in Pennsylvania

November 10, 2010

Pennsylvania is poised to take off as a solar market as a result of an “alternative energy portfolio standard” adopted in 2004 whose solar targets are expected to ramp up rapidly. Trading in renewable energy credits in the state will also escalate rapidly, including credits tied to renewable energy projects in 12 neighboring states. Pennsylvania is one of 16 states that require utilities to supply a certain percentage of electricity specifically from solar. Despite this, the state still has only 29 megawatts of installed solar capacity. The Pennsylvania alternative energy portfolio standard or “AEPS” requires both utilities and power marketers that serve retail customers to supply a small, but rapidly increasing, percentage of their electricity from solar photovoltaic systems each year. There are 11 covered utilities in Pennsylvania and about 50 power marketers. Electricity suppliers covered by the program must hold a minimum number of solar alternative energy credits—called “SAECs”—to meet their obligations. SAECs are awarded to utilities that use solar equipment to generate their own electricity. SAECs can also be purchased along with electricity from independent generators who use solar in a bundled transaction or purchased separately through a tradable instrument. The amount of SAECs required, as a percentage of electricity sold, increases nearly 400-fold during the 15-year period covered by the program. The solar targets are expected to increase faster than overall demand for electricity.

Important Details

The Pennsylvania AEPS requires annual increases in energy production from alternative sources of energy over a 15-year time frame ending in 2021. The AEPS splits different technologies into two classes, tier I and tier II, and establishes minimum thresholds that must be met from each class, along with a separate solar PV minimum that counts towards the tier I requirement. The requirements for each category are shown in table 1. Tier I includes technologies such as solar thermal, solar PV, wind, geothermal and biomass, and tier II includes technologies such as waste coal, demand-side manage ment, hydropower and municipal solid waste. SAECs have become much more valuable than tier I and tier II credits (all credits are per megawatt-hour) because of the separate minimum requirement for solar PV. The weighted average price in 2009 for a tier I credit was $3.65 and only $0.36 for a tier II credit. This compares to a weighted average price of $260.19 for an SAEC (with a range of $225 to $690). If an entity failed in the 2009 “energy year” to obtain the minimum number of SAECs, it had to make a compliance payment of $550.15 per megawatt-hour of shortfall. The 2009 year ran from June 1, 2008 to May 31, 2009. (For purposes of the Pennsylvania market, the energy year, compliance year and reporting year all begin on June 1 of the previous year and end on May 31 of the stated year.) The prices for compliance year 2010 have not yet been released. The AEPS is expressed as a percentage of total electricity sales. It increases each year so that by 2021, 18% of the electricity consumed in Pennsylvania must be generated from alternative energy sources -— 8% from tier I technologies and 10% from tier II technologies. The solar PV requirement, which is a set aside but counts toward the tier I requirement, increases from .0013% in energy year 2007 to .5% in energy year 2021. At the end of each compliance year, the electricity supplier must hold the proper number of SAECs. If it does not, then it must pay a solar energy compliance payment. The compliance payment varies from year to year and is only computed after the end of the compliance year. For a given year, it is 200% of the market value of SAECs for the reporting period plus the levelized value of up-front rebates received by sellers of SAECs. An SAEC is issued for every megawatt-hour of electricity produced from a qualified solar PV system located in the PJM footprint. (PJM is the regional transmission organization responsible for the electricity grid that covers nearly all of Pennsylvania and part or all of 12 other states and the District of Columbia.) This means that facilities located outside Pennsylvania can receive SAECs in Pennsylvania. Despite this, most systems are located in the state. More than 70% of the approximately 2,900 systems currently certified under the program are in Pennsylvania. A proposed bill that the legislature failed to enact this year would have limited credits under the solar set aside to solar PV systems in Pennsylvania. The bill could still be enacted in the future. A facility can generate SAECs for as long as the facility remains certified as an eligible generator, and the SAEC may generally be used for compliance by a utility for the energy year during which the SAECs were generated or one of the two following years. If a utility purchases an SAEC while the utility is under a rate cap, then the SAEC may be used in the energy year the rate cap is lifted or in the year after. There is a three-month true-up period after the end of each energy year during which covered utilities and power marketers may acquire additional renewable energy credits to avoid having to make the alternative compliance payment. This could have the effect of producing a spike in credit prices three months after each energy year ends. The alternative compliance payment acts as a cap on how high credit values can go.

Outlook

The Pennsylvania program has been in effect since February 2005, but the first reporting year under the program was February 28, 2007 to May 31, 2007. In the first reporting year, the program covered only two utility service territories representing less than 4% of the total electricity load in Pennsylvania. Only 26 SAECs were turned into state authorities. In the 2008 reporting year, four more utility service territories representing another 10% of the load became subject to the program. Another 349 SAECs were turned in. No new utility service territories became subject to the program in 2009, but one more service territory representing approximately 26% of the total electricity load in the state became subject to in the program in reporting year 2010. Total volume reached 1,221 SAECs. During reporting year 2011, the final 60% of electricity load will be covered. This is four more utility service territories. Utilities and power marketers operating in these areas will be required to comply started January 1, 2011. In the 2012 reporting year (the first reporting year the entire state will be covered), 29,000 SAECs will be required to comply. By 2021, a total of 937,931 SAECs will be needed. There is support in the state legislature for a dramatic increase in the state solar target, but not enough to pass it. House Bill 2405 would increase the solar requirement to 3.0% by 2025, rather than the current .5% by 2021, and would add solar thermal as an eligible technology for the solar requirement. The bill would set a yearly value for the alternative compliance payment for failure to meet the specific solar target and require that all solar systems be located in Pennsylvania. The tier I and tier II requirements would also be increased. The outgoing governor, Ed Rendell, wrote an op-ed article in The Philadelphia Inquirer recently supporting the bill, but proposing an increase in the solar target to 1.5%, given opposition to the higher 3% target. There is not enough support to pass the bill. It failed recently to reach a vote in the state Senate for the third time in two years.

Maximizing SAEC Value

There are several ways for developers to maximize the value of their SAECs, including bringing production on line in the next few years, showing an ability to enter long-term contracts and pushing for enactment of the higher requirements that have been proposed. Current forecasts are for approximately 27.8 megawatts of solar PV capacity to be available in 2010 against a demand of only 5.8 megawatts. However, demand for solar PV will exceed capacity in 2015 if only 25% (the historical rate) of the PJM queue projects—projects within the PJM footprint that are currently planned—are actually built. The market price of SAECs is expected to increase over the next several years because of the escalating number of SAECs required by utilities and power marketers. Another means of maximizing value is to enter a longerterm contract. In February 2010, the Pennsylvania Public Utility Commission approved 10-year agreements to purchase six megawatts, or 80,000 SAECs, by PECO Energy at an average price of $256.57 per credit. This is important because it shows that utilities are willing to pay prices in long-term contracts that are not heavily discounted and it gives solar developers financial certainty for a longer period of time. In some states, it is rare to have a contract for more than a few years that is not heavily discounted. Large, high-quality installations could attract utilities willing to enter long-term contracts. Knowing that utilities will enter contracts can also attract new, large installations. For example, in late October, GlaxoSmithKline started installing North America’s largest rooftop solar array at its facility in York, Pennsylvania. The company expects to sell about 3.4 million kilowatt hours worth of SAECs to utilities per year to help pay for the system. Demand for SAECs is expected to exceed solar capacity additions over the next few years. Neighboring states have higher solar targets than Pennsylvania, and this will have an effect on the value of Pennsylvania SAECs since they can be used by utilities in these other states to comply with those other state programs. Delaware has a 3.5% solar target. New Jersey has a 4% requirement.