A longer view: Solis Partners Managing Director Jamie Hahn on New Jersey Governor Christie's Energy Master Plan and the state's SREC market

Jamie Hahn
Jamie Hahn

Jamie Hahn is co-founder and managing director of Solis Partners Inc., a provider of solar energy systems. His firm engineers, finances, constructs and operates solar power plants for the commercial, utility and non-profit markets. Jamie has built a team at Solis with competencies in financial, technical and construction aspects of distributed solar generation projects. As a result, the firm possesses a vertically integrated, cross-disciplinary approach that provides a significant competitive advantage in the marketplace.

Jamie has more than 15 years of experience in sales, business development and executive management, with a track record in identifying, building and managing technology-based businesses. As managing director at Solis Partners, Jamie brings over 5 years of project finance and power industry experience. He has sourced and closed financing for a variety of mid- to large-scale distributed solar power generation assets.


Solar Server: Overall, what are your impressions of Governor Christie's Energy Master Plan for New Jersey?

Jamie Hahn: Overall, I feel as though the EMP provides a roadmap for how New Jersey can promote a diverse portfolio of new, clean, cost-effective in-state electric generation. I think it recognizes the role that solar power can play in meeting the state’s RPS objective as well as its role as an engine for economic growth. The jobs, the economic growth and all of these small businesses created by the solar industry are most important. The numbers speak for themselves when looking at the number of jobs created in this sector in one of the worst economic climates of our lifetime.

I think the most important aspect of the EMP to New Jersey’s solar industry is how it acknowledged and addressed the current over-build predicament that we are currently experiencing in New Jersey. The administration proposes to accelerate the RPS requirements in order to provide some interim relief to the SREC market and provide for a soft landing that would allow the solar industry to adjust. 

This type of legislative action would provide relief and give certainty to the development markets and financial community. But most importantly, it will provide the foundation for the solar industry to continue to develop and grow at a sustainable rate.

It is imperative that the administration recognizes that we must take a far longer view than ten years in order to establish the foundation for a clean and secure energy future in New Jersey.


Solar Server: Can you talk a little more about this? I understand that this plan reduces the SAPC payments and accelerates the schedule for the solar carve-out in the RPS. And can you go into a little more detail about how the sum of these changes will affect SRECs and the New Jersey solar industry overall?


Jamie Hahn: Certainly.  The primary cause of the current overbuild scenario that we are facing today in New Jersey was the unintended consequence of overlapping federal and state incentives combined with lowered installed costs.

The SREC market was first created in 2007, and was one of the first market-based production incentives in the nation. For the first 3+ years of the program we were in a short market where by there was not enough installed solar capacity to meet market demand. This environment caused the SREC valuations to trade at a very small discount to the SACP schedule, which in essence acts as the market ceiling.

Than at the federal level we had the advent of the American Recovery and Reinvestment Act in February 2009. This provided project investors with two enhanced federal incentives; One they could now take the 30% as a Cash Grant in lieu of the Investment Tax Credit (ITC), and two they could take 100% Bonus Depreciation in the first 12 months rather than taking it as a 5-year MACRs.

These federal incentives combined with high SREC valuations bolstered investment in New Jersey and induced consumers to go green. At one point, New Jersey probably had one of the highest internal rates of returns on investing in solar projects, not only in the United States, but in the world. This environment caused the level of development and construction to increase rapidly across the state.

Then we came to the point where the market realized that we had more solar installed, more SRECs in essence in the market, than were necessary for that given year’s RPS requirement. This created a long market and caused the SRECs to decouple from the SACP schedule. The values dropped from approximately USD 600 to USD 200 an SREC.

That obviously created a major concern in the marketplace, people were concerned that it was going to go to potentially zero, but really it was the market mechanism finally taking hold. And the whole intent in the architecture of the SREC program was that it was going to be a market-based mechanism that was driven by supply and demand. But it happened much quicker than people had anticipated.

With that being said, the critical question is how overbuilt are we. As of today, it appears we have enough SRECs in the ground today, not only to meet the current RPS requirement for energy year 2012, but also energy year 2013 and 2014. So we went from a very short market to a very long market in a very limited period of time.

And so the proposed legislation would shift the statutory RPS schedule and therefore increase demand on SRECs starting in energy year 2013, which begins on June 1st, 2012. By reducing the outlier years of the RPS schedule, and reducing the SACP it will provide the foundation for the solar industry to continue to develop and grow at a sustainable rate.

I would say within our industry, there is a general consensus and agreement that a reduction in the overall SACP schedule is warranted, and the reason that it is warranted is to reflect the continuing downward trend in the capital cost of installed costs. By reducing the SACP, it also enables us to minimize the rate impact of the RPS acceleration and reduce the costs to rate payers overtime.

I think those are the two primary components that we talked about. By injecting more demand for SRECs in the marketplace, that will help absorb the current overbuild, and create continuing, albeit more modest, demand for new solar product for business continuity in New Jersey.


Solar Server: So tell me, Are you concerned at all by the reduction in RPS targets from Governor Corzine's 30% by 2025 to the 22.5% figure in the Master Plan? I note that this is something that was protested by environmental groups.


Jamie Hahn: No, we don't see that as having a real impact on the true underlying market, as you indicated I think a lot of environmentalists were upset that there was a reduction. My personal belief is that it was more of a red herring that was put out there, yet at the end of the day the most important thing is to define the RPS and SACP schedules through 2026. This is what will help create more certainty in the market.

By creating more certainty, that allows investors to get more comfortable in investing and bringing capital into this marketplace, with more certainty you reduce the level of risk, therefore reducing the cost of capital, and by reducing the capital cost of these projects, you ultimately reduce the installed cost of solar. And that's really the goal here at the end of the day.


Solar Server: With these changes in the Energy Master Plan, where do you see New Jersey's solar industry in coming years, say by 2015. What will the overall impact be by that time?

Jamie Hahn: I think first of all, we are going to be seeing a major transition, not just in New Jersey's solar market, but nationwide, because the cash grant was not extended. So the ownership structures in these projects will shift, when you have to deal with an investment tax credit versus a cash grant. You will see many projects built out through Q1, Q2 of 2012 due to the fact that the developers safe-harbored the projects and securitized the grant.

Entering Q3, Q4 and beyond, I think the market will look quite a bit different, yet different is not necessarily bad. I think we will be looking at a more modest build rate than what we have experienced in the last 12 to 24 months.

However at the same time, we've only installed approximately 500 MW, and we still have over 5000 MW of additional solar capacity to be built between now and 2026. We’ve come a long way, yet we're really just scratching the surface here. I think we're going through a bit of a transition period in the industry, and I think that at the end of the day, our industry needs stable policy on which to make sound business decisions.

At the same time we must determine a way to regulate the amount of development so that there is a targeted balance and no massive oversupply going forward. The industry needs a better way to monitor itself than what has been done through the Board of Public Utilities (BPU) to date. The more transparency, the less likely that we are going to be in the same position that we are today; a boom and bust cycle.

Since there wasn't good insight, the market didn't understand the overall level of solar development and construction activity statewide, and it was too little too late. At the end of the day the market needs a way to monitor itself through the BPU.

I think we also need to look at requiring a project registration program, more so than what is required today, so that we don't have these unrealistic solar project queues where 95% of them will probably will never see the light of day.  This will allow the BPU to better plan for what is coming down the road.


Solar Server: Is there anything that we haven't talked about that you think is important for Solar Server's readers to know about the Energy Master Plan and New Jersey's solar market in general?


Jamie Hahn: Yes, I think the only thing that we didn't touch on - the Energy Master Plan, even the draft, was all about rigorous net economic benefit analysis of solar to the ratepayer. What is the ratepayer getting out of solar if they don't have solar on their own home or business?

I think what we have to look at, and solar in New Jersey is a unique market compared to California or Arizona where they have plenty of open land. We are a very congested state, that has very little open land remaining, yet we have tremendous amount of large industrial and commercial users of electricity throughout the state.

I think it's imperative that we focus on behind-the-meter projects, and that we get away from direct grid-fed applications. The reason that I say that is that behind-the-meter applications provide the greatest overall net economic benefit to ratepayers and to businesses in the state.

Why? It will allow these businesses and organizations to lower their operating costs to run their operations in New Jersey, by allowing on-site distributed solar generation to immediately impact and reduce the amount of electricity that they otherwise have to buy from the grid.

New Jersey has some of the highest electricity rates in the nation, the fact that we are going to continue to import more and more electricity from out of state just causes electricity rates to continue to go up. So by providing the ability for these entities, these businesses and homes to lower their operating costs, it will allow us to retain businesses that are currently operating in the state today, and it will allow us to attract new businesses back into New Jersey.

The only other piece that we did not touch on that is very important is the ability to securitize long-term SREC contracts. The utility SREC finance programs need to continue and evolve. They create the necessary certainty that will allow the financial community to invest. By placing a greater reliance on competitive market forces, we will be able to continue driving down project costs.


Solar Server: Could you go into that for our readers?

Jamie Hahn: What that means is that it is very difficult for smaller systems, like 200 to 500kW, to secure a long-term contract on their SRECs - a year, three-year, five-year, or for that matter a ten-year forward contract so that the investor has certainty with contracted SREC revenues.

So from a cash-flow perspective, the SREC is the one piece that entails volatility and people have a hard time getting their arms around. The depreciation benefit, the grant/ITC and the electricity are very quantifiable, but by only playing the spot market, the day-to-day mercantile market to monetize SRECs, it is very volatile.

So the ability for owners and investors to lock into long-term forward contracts needs to continue and evolve. The ability to secure long-term contracts creates the necessary certainty that will allow the financial community to invest and provide continued opportunities for market participation, in all sectors.

 

 

Conducted by Solar Server International Correspondent Christian Roselund