SOLAR ENERGY DEVELOPMENT IN NEW JERSEY: RIGHT TIME, RIGHT PLACE!

Douglas J. Janacek, Esq. and Nancy A. Lottinville, Esq.

All of us are intrigued by the concept of utilizing a clean, renewable energy source to generate abundant and cheap power for our homes and businesses.  Some of us have even investigated installing a renewable energy system but have come away disappointed due to onerous regulatory obstacles and the high cost associated with these installations.  That is, unless you are looking into installing a solar energy power facility in New Jersey.  If that were the case, you could:

• Own and operate a solar panel installation that not only provides electricity to your building but also provides you with Solar Renewable Energy Certificates (“SREC”) based on the amount of electricity generated that can be sold on the open market or to a local utility that is required to purchase it; or
• Contract with a third party provider who will analyze your site or sites, propose rooftop panels, “solar trees” or other solar facilities as appropriate, obtain necessary governmental approvals, install the facilities and then maintain and operate them - all at no initial cost to you.  In return, you pay the third party provider a negotiated price for the electricity supplied that is typically a significant savings over utility generated power.  The third party provider also receives the benefits associated with the SRECs resulting from the solar power electricity generated by your facility.

More and more businesses in the Garden State are coming to the realization that seriously investigating installation of solar facilities is a “no - lose” proposition.  Owners of buildings, shopping centers, parking decks, distribution facilities, bank branches, quick service restaurants, convenience stores - you name it - have either committed or are about to commit to installing various solar panel configurations at one or multiple locations throughout the state.  Serious interest in solar projects has exponentially increased as evidenced by the attendance at recent seminars and conferences presenting industry expertise and keynoting legislators responsible for sponsoring clean energy legislation. 
So, how did we get here and where are we going?

Energy Issues and Solutions. 

New Jersey recognizes that the existing power distribution grid is old and in need of significant and constant upgrades, that retrofitting traditional carbon fueled power generation plants is enormously expensive in terms of hard costs and rate increases, and will consume an unacceptably long construction period.  In addition, any retrofit effort will confront the ongoing, ever increasing demand for more and more electricity.  In addition to the obvious environmental concerns and vociferous public objection, nuclear energy production requires billions of dollars and lengthy lead-time for the multiple permits and approvals required as well as for the actual construction of a nuclear power plant. 

As a result, the New Jersey Energy Master Plan adopted in 2008 resolved to supply 30% of the state’s electricity from renewable resources by 2020.¹   As of July 2009, New Jersey had installed 4,100 renewable energy projects, with 128 Megawatts (MW) of capacity. Of those projects, 4,000 are solar projects producing over 70% or 90 MW of the total renewable power produced. New Jersey ranks second nationwide and first on the east coast, for installed renewable solar energy capacity.² 

To support its Master Plan, New Jersey has taken both regulatory and legislative action to reach its goal successfully.  The increase in private commercial solar energy projects in New Jersey is the result of state programs that provide financial support and incentives rendering renewable solar energy projects cost effective in very short timeframes.  Legislative actions that streamline the permitting and installation process also facilitate program acceptance.  The New Jersey Board of Public Utilities (“BPU”) created the SREC, and it is the single most recognizable innovation responsible for fueling this significant private commercial interest in renewable solar energy in the private sector. 

The SREC program is an exciting and innovative financing mode employed to encourage solar installations.  Broadly summarized, SRECs are certificates earned as the result of credits generated by private solar producers.  SRECs are issued for the renewable solar energy kilowatts (kWh) generated.  For every 1,000 kWh generated, stored or used on a private site, an SREC is issued, which can be sold, traded or credited to reduce the principal balance and interest cost of the financing required to underwrite the installation of the renewable solar energy system.³   Independent of the financing arrangements, an SREC can be privately or publicly owned and traded either by the utility or by a third party provider, or even by the solar energy generator itself.  The SRECs acquired by a public utility as the result of a financing plan it underwrites can also contribute to the satisfaction of that public utility’s obligation to produce renewable energy while simultaneously reducing electrical demand on the power grid.  SRECs have replaced earlier rebate programs that required cash outlay of funds for installation of renewable equipment.⁴  

The rise of the solar renewable energy model to the top of the list of private sector renewable energy generation projects is also, to be sure, due in part to the relatively quick and easy installation of mostly unobtrusive, often roof installed, passive collection solar panel systems.  Even so, traditional land use and zoning controls can create obstacles whose solutions have delayed and even discouraged individual property solar generation projects.  However, streamlined state legislation has removed permitting obstacles in this emerging form of individual land use.  Recent legislation in New Jersey has excluded solar panels from the calculation of limitations on permitted impervious coverage⁵, which affect among other things, state stormwater regulations.  Pending New Jersey legislation also proposes:

• to override municipal zoning control by conferring statewide permitted use status on certain solar and wind projects;⁶
• to eliminate municipal zoning control of roof mounted renewable solar energy systems that either extend twelve inches or less above a roofline or for ground mounted systems that include ten or less solar panels located more than 50 feet from a property line;⁷  and
• to limit municipal fees charged in connection with these approvals.⁸ 

Installing a Renewable Solar Energy System.

Direct Contract with a Public Utility

Individual commercial property owners can arrange to finance the installation of a renewable solar system directly with their electric utility, and can directly engage the contractors required to install them.  In general, direct dealing with the public utility involves the basics, that is, the public utility meters the renewable solar output generated and credits the solar generator’s construction financing loan obligation with SREC values, which are in some programs granted a minimum floor value based on the date of the loan application.  Commercial solar energy loans generally amortize over an up to 15 year term at a rate of interest higher than offered to residential users, but often require no cash repayment when sufficient SRECs are generated.  In commercial settings, the public electric utility typically retains the rights to the SRECs under the loan agreement and by filing UCC’s on the solar equipment.  Property owners, including landlords, must grant subordinations to the public utility and must waive all rights to the SRECs as a condition of the public utility construction loan.  Commercial renewable solar energy producers see immediate reductions in their electrical costs.  Public utilities often retain a call option to purchase SRECs generated by the renewable solar system after the loan is repaid, whether or not repayment is achieved before or after the loan term expires. 

Renewable Energy through Third Party Providers

Third party renewable energy providers offer commercial and industrial customers many more customized design, installation and financing options for the installation of cost saving solar electrical generation.  Service options include individual building - integrated solar designs, flexibility in trading and ownership treatment of SRECs, accessory solar  resources such as automobile charging stations, and even solar shade producing equipment.  Third party providers handle all permitting, zoning, legal and construction requirements at their cost.  Third party providers can arrange financing based on anticipated SREC revenue, which can pay interest and principal on the loan, as in the public option, or otherwise as negotiated.  In larger commercial contexts, third party providers arrange for long-term contracts with trading parties for the management, purchase and sale of SRECs generated by the renewable solar system.  Additionally, private providers will assist the commercial solar generator in claiming investment tax credits or tax refunds for the costs of installation.  Commercial users experience direct reductions of electrical costs to public utilities, and reduce or eliminate investment costs through SREC trades and sales, while also benefiting from accelerated depreciation and federal investment tax credits.

The Business Case

The economic benefits of generating and trading SRECs can be quite compelling for larger electrical customers.  While not a typical commercial customer in the ordinary sense, the experience of Board of Education of Lacey Township, New Jersey sheds some light on the potential benefits.  The Lacey Board of Education recently announced that it accepted a bid in excess of $3.2 million dollars from PSE&G for the purchase of the SRECs the Board will earn in connection with the electricity generated by facilities located at its schools and buildings between April 2010 and May 2013.  Notably, the revenue generated by this sale to PSE&G is in addition to the $335,000 in annual savings that the District has experienced on its electric bill in the past year.

As in all innovative approaches to the operation of a business organization, responsible parties must make themselves fully familiar with the multiple physical plant, permitting and financial issues presented.  SRECs are subject to regulatory control and some aspects of those regulations, but not all, have been incorporated into legislation to provide lenders and investors with more certainly as this innovative market develops. 

However, in assessing the business case for renewable solar energy, there are many positives that add up to measurable financial savings as well as less quantifiable, but equally important benefits.  The measurable benefits are the cost savings for reduced electrical demand and the potential income stream realized from SRECs.  The less measurable, but potentially very valuable benefits lay in the social contribution made by private commercial and industrial solar generators.  While these businesses hedge their own financial positions against unpredictable fluctuations in costs, they also generate very positive public relations and related benefits associated with their commitment to become indisputably “Green”. 

FOOTNOTES:

1. New Jersey Energy Master Plan, 2008.
2. New Jersey’s Clean Energy Program Project Activity Reports, July 2009.
3. “New Jersey’s Innovative Solar Renewable Energy Credit Program Paves Path for Future Growth” Press Release, New Jersey Board of Public Utilities, August 12, 2009 (www.nj.gov/bpu).
4. P.L. 2010, c .4, amending N.J.S.A. 40:55D-95.
5. 2010 Senate Bill S2126 adopted 8/23/10; Assembly Bill A3139 pending.
6. 2010 Senate Bill S2006 adopted 6/28/10; Assembly Bill A3125, pending.
7. 2010 Senate Bill S2006 adopted 6/28/10; Assembly Bill A3125, pending.
8. Vosseller, Bob, Staff Writer, “Lacey solar power project to generate $1M for next 3 years”, Asbury Park Press, August 24, 2010 (APP.com).
    
    

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   Douglas J. Janacek Co-Chairs the Real Property and Environmental Department and is a member of the Gibbon's Executive Committee. Nancy A. Lottinville’s real property practice is fully engaged in all areas of land use development and governmental permitting as well as in multiple aspects of transactional real estate.