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January 23, 2020

Governor Signs Class 1 Renewable Energy Cost Cap Relief Bill into Law

On January 21, 2020, Governor Murphy signed legislation that allows the New Jersey Board of Public Utilities (“BPU”) to soften the impact of the upcoming cost cap reduction that could have seriously impacted New Jersey’s ability to meet its aggressive renewable energy requirements. The legislation, S-4275, amends legislation signed into law in 2018 (the “2018 Legislation”) to allow the BPU to smooth out the Class 1 renewable cost cap reduction over a six year period which would have potentially significantly reduced incentives for new solar necessary to meet New Jersey’s aggressive renewable energy requirements.

By way of background, in 2018, concerns about the cost of New Jersey’s existing solar incentive program through Solar Renewable Energy Credits (“SRECs”) drove legislation establishing a solar transition program. The 2018 Legislation required the expiration of the current SREC program when 5.1% of the electricity sold in New Jersey comes from solar, or by June 1, 2021, whatever comes first. The BPU was instructed to commence proceedings to establish a new or modified renewable energy program. At the same time, the 2018 Legislation ramped up significantly the renewable energy requirements. Although the renewable requirement was increased and accelerated, in order to protect the ratepayer from rate shock, the 2018 Legislation established a cost cap which capped the cost of Class 1 renewable energy, which includes solar, to customers at nine percent (9%) of the total paid by electric customers in New Jersey during energy years (“EY”) 2019-2021, which then reduces to seven percent (7%) of the total costs beginning EY 2022 and thereafter (the “Cost Cap”). Note: An Energy Year commences on June 1st and extends 12 months.

The Cost Cap was predicted to significantly restrict the extent of incentives that could be permitted during a transition period. Specifically, the “kink years” of EY 2022-2024, during which the Cost Cap would be reduced from 9% -7%, would have potentially reduced solar incentives to the point where the number of new solar projects would be limited. Thus, even though the 2018 Legislation was mandating more renewables, and in particular solar, in New Jersey, the Cost Cap could have seriously impacted the amount of new solar necessary to meet these goals.

S-4275 provides BPU a tool to “flatten” the Cost Cap during transition so that existing projects are not potentially impacted and new projects can receive incentives under a new solar program. In sum, S-4275 provides that if the cost of the Class 1 renewable energy requirements to ratepayers is less than 9% during EY 2019-EY 2021, the BPU may raise the cost to customers during EY 2022-2024 from 7% to 9% as long as the total cost burden of Class 1 renewable energy on customers over the period of EY 2019-2024 does not exceed the sum of 9% of the total amount paid by customers in EY 2019-2022 and 7% of the amount paid by customers in EY 2022-2024. Since the expectation in EY 2019-2022 is that the cost to ratepayers should be less than 9% of the amount paid by customers, S-4275 allows the BPU to shift that savings to the next three year period when the Cost Cap is supposed to drop to 7%. While the short term impact on ratepayers could be costs that are higher than would be under the Cost Cap in any individual year, S-4275 mandates that the amount spent by customers over the entire EY 2019-2024 period not exceed the Cost Cap as originally established in the 2018 legislation.

The practical impact is that with the removal of a precipitous Cost Cap reduction from 9% to 7%, there is simply more incentive money to allow solar projects to be built to meet New Jersey’s aggressive renewable energy mandates. The Cost Cap during the 2022-2024 energy years can be raised such that it may not materially impact the entry of new solar projects under a new solar program. Under 2018 Legislation, the drastic reduction from 9% to 7% was predicted to prevent any meaningful new solar incentive because the cost of the existing SREC program was anticipated to eat up the total amount permitted under the 7% Cost Cap. S-4275 provides the BPU with a tool to temporarily raise the Cost Cap allowing appropriate incentives to stimulate new solar construction under a new solar incentive program.

It is important to note that S-4275 does not in and of itself change the Cost Cap set forth in the 2018 Legislation, but rather gives the BPU the authority to do so. It is unclear at this juncture whether BPU will be utilizing this legislation to modify the Cost Cap.