Industry's N.J. boom casts shadow over program that spurred it

FLANDERS, N.J. -- A giggling Kyle Bartz used the new rooftop solar panels as a trampoline atop the sprawling Toys R Us distribution center here on a recent sunny summer morning.

"This is the latest panel on the market," said Bartz, the national director of energy management for Toys R Us. "It's extremely durable, extremely flexible."

The thin-film solar panels he was jumping on are now part of the nation's largest rooftop solar installation, covering 20 acres -- the size of about 15 football fields -- atop the distribution center. The 5.38-megawatt project will slash $350,000 a year from the building's power bills, a 72 percent reduction, the company said.

While the Toys R Us installation wrested the crown for largest U.S. rooftop solar plant away from another New Jersey building earlier this month, the 4.26-MW installation on the Avidan Management building in Edison, still another Garden State entity claims it is going be No. 1 this fall. Developers putting 27,000 photovoltaic panels on the Gloucester Marine Terminal in Gloucester City say it will have a rooftop capacity of 9 MW.

"We think the momentum has been fabulous," said Michelle Siekerka, assistant commissioner for green energy at the New Jersey Department of Environmental Protection. "We've seen a thriving industry and we've seen jobs created as a result."

Now in the 10th year of an experiment in government-driven industry building, the state public utility board's solar renewable energy certificate (SREC) program -- widely hailed by industry experts as the country's most successful renewable energy subsidy program -- has taken off in 2011.

A state that had just six solar power systems when the incentives were launched in 2001 is now home to more than 10,000 solar installations with more than 400 MW of installed capacity, up from 260 MW at the end of last year, the nonprofit Interstate Renewable Energy Council says. In June alone, 40 MW were added.

New Jersey is on track to meet its goal of getting 2 percent of total electricity generation from solar in the next three months. The state will have built three of the nation's largest rooftop systems in less than a year.

California is still the national solar leader, with more than 1,000 MW of installed capacity, but Siekerka maintains that by the end of 2011 the solar industry will have grown faster in small, cloudy New Jersey than in large, sunny California.


But not all is sunny in the Garden State clean-power boom. There are some concerns that the solar projects are coming on line too quickly. Utilities fear that the boom could create problems for the electric grid, so regulators are denying applications for some new systems temporarily while energy company executives work through backlogs.

And some worry that the industry has not created enough jobs. While the solar industry estimates that it has created thousands of jobs, New Jersey's unemployment rate (9.5 percent) is still higher than the national average (9.2 percent).

Manufacturing of solar components has also not taken off in New Jersey as many boosters had hoped. Solar companies admit the majority of their panels come from China, but that is starting to change after MX Solar opened the state's first photovoltaic (PV) manufacturing plant late last year.

Achieving the state's 2 percent solar-power target also means that supply of renewable energy will meet demand for the first time since the SREC program launched, so traders fear a collapse in the price of energy certificates. To date, SREC prices have already slid by around half and are expected to go lower.

Project developers worry that would slow industry growth significantly, especially after Gov. Chris Christie (R) announced a plan to scale back the state's renewable portfolio standard.

"We saw a little bit of a slowdown as the energy master plan was released, and we saw SRECs take a dive a bit," said Richard Cooper, president of Pro-Tech Energy Solutions. "It slowed capital that was coming into our state."

Model for Eastern states

Reforms are now being considered at hearings on the governor's new energy master plan.

One proposal would raise the 2 percent target. The state may also delay scheduled decreases to the Solar Alternative Compliance Payment, the penalty utilities would pay in lieu of the SREC purchases.

Already the New Jersey program has become the model for some other states.

Massachusetts, Maryland and Ohio have copied parts of the plan and New York is poised to adopt a system almost identical to New Jersey's.

"The East Coast is really becoming an SREC-driven marketplace," Cooper said.

Pro-Tech and other New Jersey solar companies are already active in Massachusetts, and they are awaiting the launch of New York's system in hopes of capturing market share before the Empire State's own companies can catch up.

New Jersey has also popularized the model of a utility-driven process for solar development, the opposite of what some clean-energy advocates favor -- the spread of independently owned rooftop projects to the grid.

Though California has some half-dozen separate incentives for solar and a more aggressive renewable portfolio standard requiring utilities to purchase set amounts of clean power, New Jersey businesses say their state's model affords more opportunity for companies of all sizes.

Toys R Us liked the New Jersey model enough to make its Flanders building the first major rooftop installation in the company. Bartz said the company plans to repeat the Flanders experience elsewhere but has so far made no commitments to launch similar rooftop solar projects on the West Coast.

"Right now the only feasible way in a sense to do solar in California is the wholesale model, to sell the power directly," Bartz said.

"The market created in New Jersey, the SREC market, allows companies to take the benefit that's created from solar and use that to build systems of this nature."

Putting utilities ahead of households

The rise of Petra Solar, seen by many as the most successful New Jersey startup in recent years, parallels the sudden growth of the industry in the state.

Founded by a former semiconductor industry insider, Petra has built a model around serving the needs of New Jersey utilities. Homeowners asking Petra to put panels on their roofs are told to look elsewhere.

Many households or companies may dream of independently using their roof space to provide much of the power to their homes, and even sell some of it back to the local utility when they are not using it. But Petra Solar CEO Shihab Kuran insists they should be required to first request permission from their utilities.

The current approach to distributed solar in much of the United States -- installing systems first and then ordering utilities to accept that power -- is the wrong approach, he said.

"If solar continues to be built the way it is being built today, without putting that generator under the command and control of the utility and that generator is intermittent in nature because a cloud goes by and so on ... in effect you might be destabilizing the grid," Kuran said.

At Petra's headquarters and manufacturing center in South Plainfield, company executives showed off the model that has allowed them to grow from just a handful of employees to the state's market leader: a single panel, selected for high efficiency and procured from a variety of manufacturers, fixed to a special bracing system that can be mounted to a utility pole in 30 minutes.

Each unit comes with its own wireless communications device that beams data back to Petra and PSE&G, New Jersey's largest utility and Petra's biggest client. The accumulated data tell grid operators how much juice the panels are letting into the system at any given time, providing clues as to how much needs to be procured from other sources to meet expected power demand.

Petra has benefited from PSE&G's need to get ahead of the solar sourcing requirement as quickly as possible. State utilities can meet the renewable energy target by either building their own systems or through purchases of SRECs. SREC prices have been buffeted by a very high penalty for noncompliance.

Petra's panels are now ubiquitous in New Jersey -- more than 95,000 of them are now mounted on their poles, making it difficult to travel anywhere in the state without coming across one. PSE&G says the Petra systems so far provide about 19 MW of the 40 MW or so they have independently installed. The company has a goal of achieving 80 MW of solar, leaving plenty of room for more.

Kuran's firm is thinking bigger, recently expanding to California where he hopes business will take off. "If we remain on the trajectory that we have today, I can see hopefully a day in the near future where there will be thousands of employees at Petra," he said.

Petra Solar's panels have two-way communications and on-and-off capabilities. PSE&G has opted out of this option, but Petra says that functionality is available to other customers.

Is the grid at risk?

The solar boom doesn't worry Fred Lynk, strategy and planning manager at PSE&G, as long as it stays below 15 percent of total installed capacity.

"You never want to get above 15 percent of the circuit capacity there because you start to get potentially some reliability problems," Lynk said at PSE&G's Newark headquarters.

Because electrical power is scheduled ahead of expected demand, an over-reliance on solar could collapse a grid should unanticipated cloud cover lead to a rapid drop in output from the panels, he explained. "But we're not seeing that because the penetration of solar on individual circuits hasn't been approaching that 15 percent," Lynk said.

But in Atlantic City Electric's territory, solar has topped the magic 15 percent mark in many circuits.

Though industry insiders say the solar market has grown the fastest in South Jersey, growth there slowed dramatically after Atlantic City Electric (ACE) recently announced that they would no longer accept new applications for inserting more solar into their system.

The reason, said people familiar with the situation, is that ACE saw that in some parts of its grid solar capacity had already reached or exceeded that 15 percent threshold, creating worry that they would take the blame should power supply on a cloudy day become a problem. Though solar panels have exploded all around ACE territory, upgrades to the power grid there have not.

Petra's wireless communicators only send data one way, and the panels cannot be shut off. But Lynk said that it's possible PSE&G may in the future demand even more control, including an on/off switch for panels should the capacity percentage get too high. He admits that PSE&G has already said "no" to a few developers in circuits that were approaching 15 percent solar capacity threshold.

Siekerka at the Department of Environmental Protection believes it is a problem that's easily surmountable.

"Any developer could come in and pay the cost of an upgrade and would be able then to have their project proceed," she said.

And besides, industry insiders say, new rooftop installations in New Jersey are a tightly regulated affair, even if they seem to be popping up again and again out of nowhere.

Any project that seeks to earn SREC income must get registered with the state's SREC Registration Program, before even a single panel goes up. NJBPU shares that information with utility companies to confirm that adding to the system won't cause any problems.

Rooftop solar systems also have to be net-metered only -- building owners cannot sell power directly to distributors. Developers must show that a system will produce less power than that building consumes. Power does flow into the grid on holidays and weekends when a building's consumption is minimal, but that juice is subtracted from the net extraction from the grid that the building is supposed to take, contrary to a European-style feed-in tariff where power is sold directly at a subsidized high rate.

That is the model Toys R Us used in Flanders. The company actually does not own the system but instead lends its rooftop space for free to Constellation Energy, which owns and operates it. In exchange Constellation and Toys R Us signed a 20-year purchase power agreement (PPA) that locks in the power for the toy retailer at an undisclosed discounted rate. Building it didn't cost anything for Toys R Us.

"For a company like Toys, it provides them with a piece of the power supply, a nice 20-year hedge," said Constellation Energy's solar sales leader Michael Smith. "And where else in the energy market can an end user get a 20-year hedge for power?"


The SREC model has proved to be versatile, allowing for multiple financing structures that have seen small to massive installations put up at little to no cost to the building owner.

Langan Energy Solutions, a recent spin-off of a large construction firm, provides one example of that flexibility.

Initially launched to help clients pay for energy efficiency upgrades that earn various government rebates and tax credits, Langan added solar to its model after figuring out how money could be made from incorporating PV into an overall efficiency retrofit.

President and CEO Joseph Langan said the small solar system mounted on his company's own rooftop serves as an experiment in that line of business but also provides opportunities to show clients what they could have. By lining up investors that share the returns from a 30 percent tax credit and up to 15 years of SREC sales, Langan said his firm can win contracts by offering potential customers a solar system in addition to whatever work they are looking for, usually for free.

"We've been able to roll out a few systems, one in Parsippany, one in Clifton," Langan said during an interview at his Elmwood Park office. "We have a similar deal where it won't cost them a nickel to do this multimillion-dollar solar project."

Langan's team has even found a way to place solar panels on the roofs of churches and nonprofits they work with. Not-for-profit institutions are not allowed to earn SREC credits, so Langan owns and operates the system and sells the power to the building at a discount under a PPA. After 15 years, when a system can no longer earn SRECs, Langan agrees to "sell" the system to the building owner but will then immediately offer that cash back as a donation -- essentially deeding the system to the building for free.

"We're starting to get creative with it," Langan said. "Every week we're bidding jobs and trying to leverage that for our energy business."

Pro-Tech Energy Solution's evolution is somewhat similar. Started as an energy auditing and efficiency contractor, Pro-Tech began incorporating photovoltaics into its business model a few years ago.

The two businesses were linked for a time, with Pro-Tech working on upgrading a structure's lighting, insulation and air conditioning before equipping it with panels as customers requested. But Cooper now admits the solar model has become the lead business as more and more customers, especially municipalities and school districts, keep knocking on his door.

"Over the last, I'll say, three years, the gravitational pull has really taken us to become predominantly a solar energy company at this point in time," Cooper said. Pro-Tech's revenues have grown by around 300 to 400 percent annually since it moved to installing PV panels, he estimated.

State officials say they are pleased with the way the industry and solar jobs market has diversified. From primarily laid-off construction workers putting panels on the homes of higher income households, New Jersey is now an active marketplace for electrical engineers and smart grid systems experts. Market monitors say the state is also at the leading edge in a wave of innovation in unique racking solutions, management systems, wiring and electrical equipment that can boost the efficiency of panels.

But it wasn't until last December that the state became an official PV manufacturer. That is when Italian equipment maker MX Solar opened its 65-MW manufacturing facility in Somerset. Capacity will be expanded to 130 MW beginning this month, and MX estimates sales from the plant will reach $100 million in 2011, mostly through exports back to Europe as the firm grows its U.S. market share.

Somehow all of this growth has not led to a spike in residential and commercial electricity rates, despite SREC prices hovering around $600 per megawatt for most of the systems' lifetime.

Lynk at PSE&G estimates that his firm's solar program costs customers an extra 30 cents per month on their utility bills. Lower natural gas prices have helped to cushion the blow, but it is mostly thanks to the way his firm has structured its finances, he said.

"We're amortizing the cost of the program over 20 years," Lynk said. "So we're getting our return ... over that period of time, and we're flowing all the benefits back to ratepayers." The steep drop globally in prices of solar PV equipment has also helped, he admits.

Challenges ahead

The growth of the solar industry is fitting, boosters say, since it was in New Jersey where modern photovoltaic technology was invented in the first place -- at AT&T Bell Laboratories in Murray Hill in 1954.

But New Jersey's solar industry is now facing its toughest challenge.

Once solar power hits the 2 percent statewide capacity mark later this year, SREC supplies will match demand and then will exceed demand next year. Returns on investments will plummet for developers who assumed the $600 SREC price would last for the length of the program.

"The amount of solar installed is quickly going over what's needed in the short term," said Michael Flett, president of the Jersey City-based environmental commodity brokerage Flett Exchange.

Flett warns that without adjustments to the system, like increasing the 2 percent solar carve-out in the state renewable portfolio standard to 3 percent or higher, some disruption could be expected in the short term. For years, high SREC prices were fueled by a high Solar Alternative Compliance Payment (SACP), but an oversupply could see prices dropping to well below the SACP, down to $290 or lower.

But overall Flett, whose company monitors the SREC market probably more closely than anyone else, isn't overly worried. He notes that the state still hopes to achieve 5,000 MW of capacity by 2026, leaving plenty of room for the industry to expand by more than tenfold over the next 15 years.

"There's still a lot of building that has to happen here," Flett said. "It's just that at this point they're really getting far ahead of themselves."

Smith at Constellation Energy agrees that much of the current momentum will last.

"New Jersey has created a system that will drive the cost of these solar systems down over time and that creates a nice glide path toward making these systems competitive with grid connected power, without subsidy," Smith said.

Looking back at the success, NJBPU President Lee Solomona said the 10-year SREC program hasn't just created more power supply, jobs and companies.

"It appears that this is something that can be successful moving forward," Solomon said. The effort has "made big strides in changing the perception of New Jersey, as a state where you can do business, develop and grow."

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