The enactment of major changes to Ohio's renewable program is starting to send bearish signals to the PJM Tier 1 renewable certificate (RECs) markets, which are still digesting the revisions and the timing of their implementation.
Ohio governor John Kasich (R) signed SB 310 into law on 13 June. Supporters said the bill would help keep energy costs low by temporarily freezing the state's renewable energy mandates from 2014-16 and lifting restrictions on out-of-state RECs.
Under the new law, utilities and electricity suppliers are no longer required to use in-state resources to meet half of their annual renewable energy targets. The bill gives electricity suppliers the option to use either in-state or out-of-state resources. But it is not clear yet how this will be implemented once the bill formally takes effect in September. It could be when electricity suppliers adjust their compliance reports, which are due by 15 April 2015, or it may be up to the Ohio Public Service Commission to adjust its regulations.
Despite this uncertainty, Ohio non-solar REC prices have started to drop. Ohio non-solar RECs for 2013 were at $16/MWh before they were heard to trade on 20 June at $10/MWh. Argus on 23 June assessed the 2014 RECs at $9.50/MWh, a roughly 41pc decline associated with the changes. Yesterday, the assessment dipped another 50¢.
The dramatic change in price reflected a market shift to a single product that included both in- and out-of-state non-solar RECs. It also signaled a removal of the premium that had gone to RECs generated in-state.
In-state and out-of-state Ohio solar REC prices have been relatively stable and have not declined in price as much as the non-solar RECs, according to market sources. Prices for Pennsylvania SRECs, which were used to meet about half of Ohio's solar requirement last year, fell by $5 to $55/MWh on 13 June and are now at $50/MWh.
The REC price decline also reflects the potential for the changes in Ohio's program to create an oversupply of non-solar RECs that can be used for compliance. The current program requires half of the annual requirement to be met with in-state renewables and another half from bordering states. SB 310 changes that to allow the use of any resources that can demonstrate "deliverability" into Ohio, which means renewable energy projects in states further away can generate RECs that qualify.
The price drop in Ohio has apparently affected other PJM top-tier RECs, which have declined by $1 since Kasich signed SB 310. The change in Ohio has a regional impact because non-solar RECs in Ohio are also eligible to qualify for compliance in other states, but the RECs can be only be retired once.
States with renewable portfolio standards commonly have tiers for various types of renewables. The Tier 1 or Class I in the PJM programs commonly include solar, wind, biomass, geothermal, and small hydro, though each state can differ. The common classifications allow RECs to qualify across multiple states, and can lead to some price correlation among the various state REC markets.
In May, New Jersey Class I REC prices were around $17/MWh, but prices fell by $1 the week after SB 310 was signed to close at $15.50/MWh, according to Argus assessments. Yesterday, they declined another 25¢. Prices fell across the curve with the Tier I RECs that qualify in Maryland, Pennsylvania and New Jersey for 2016 also trading at $15.50/MWh for 15,000 RECs on 19 June.
Despite the decline, the other PJM markets are still roughly in line with each other. But Ohio non-solar RECs are now well below the other PJM markets.
In addition to repealing the restriction on out-of-state RECs, SB 310 freezes Ohio's renewable energy mandates at the current 2.5pc of annual retail sales through 2015 and 2016. The targets had been scheduled to increase to 3.5pc next year and 4.5pc in 2016.
Keeping a flat target will limit demand growth for renewables and remove additional incentives for renewable energy development. The bill will create uncertainty for renewable energy investment in Ohio, according to critics.
In 2013, about a third of Ohio's non-solar REC requirement was met with wind power generated in Indiana and Pennsylvania. The supply of cheap wind power to qualify in Ohio can grow if more midwest wind generators can demonstrate "deliverability" into Ohio.
Should Ohio use more out-of-state RECs to comply with its program, there could also be an impact to in-state renewables that are less fungible in other states. For example, certain large hydro projects in operation in 1980 or later that are at least 40MW in size can generate RECs in Ohio, but those RECs are not fungible in New Jersey, which allows in-state hydro projects less than 3MW to count as Tier 1. Black liquor, a paper pulp waste that is considered a form of biomass, can qualify as Tier 1 in Ohio and Maryland but is a Tier II resource in Pennsylvania and may not qualify at all in other PJM states.
The most active PJM non solar markets are in New Jersey, Maryland, Pennsylvania, and Ohio, and price movements in Ohio are felt across the region. The recent price drop may be just the start of further changes in the markets.
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