July 8, 2023
Andrew Kinross

In June, PJM Tri-Qualified Tier 1 Renewable Energy Credits (RECs)[1] hit an all time high of $37.50/REC (2023 vintage), a dramatic 12x increase over the price from just 6 years ago of $3.13/REC that few saw coming. Not only that, but the price has broken through the Maryland Alternative Compliance Payment (ACP) of $30, meaning supply was so short that compliance entities had maxed out the option of paying the Maryland ACP. With an acute shortage of new projects coming online in 2023, and no other obstacle in its way, prices broke through the $30 mark and shot up like a rocket. The $37.50 price is 83% of the Pennsylvania and Virginia ACP of $45 which now acts as the new ceiling price. The 2024 vintage is trading even higher, at $39.50.

In this article, we review historical pricing trends in this market, and what to look for in the future.

PJM Tier 1 REC prices rise from $1.50 to $37.50 in 10 years

Historically, the PJM REC market has been supplied primarily by large amounts of land based wind in IL, PA, VA, and IN, and solar from several PJM states. Black liquor, wood/wood waste, hydro, and landfill gas also play a role. PJM is a vast region containing territory in all or part of 13 states and the District of Columbia, from Virginia to northern Illinois.  New Jersey and Maryland allow RECs from anywhere in PJM territory and any adjacent control area provided that the energy is also delivered into PJM[2] while Pennsylvania allows RECs from PJM territory only. For years, the market has been oversupplied and the price has been relatively low. For the 10 year period from 1/1/2011 to 1/1/2021, the simple average price was $8.74 (Figure 1). Then, beginning in 2021, the price started a steady ascent all the way up to the $37.50 where it stands today.

Figure 1. PJM Tri-Qualified Tier 1 REC, 2011-Present ($/MWh)

Source: S&P Global Capital IQ, June 2023

Figure 2 shows the departure from where the market thought prices would go to where they actually went. In October 2018, the price of RECs was $6.28, and futures were pointing to a price of $7.85 by 2023. Instead, the price went much much higher than expected.

Figure 2. PJM Tri-Qualified Tier 1 REC Futures as of October 2018, vs. Actuals

Source: Evolution Markets (Futures), S&P Global Capital IQ (Actuals)

The main factor behind this price spike is the troubled interconnection queue. Demand from the RPS has been increasing but supply has not kept pace.

PJM became overwhelmed with requests for interconnection over the past five years. The study process had been designed for conventional generation projects and was now seeing 95% renewable energy projects and this transition led to delays. In April 2022, PJM decided to close the queue for two years from accepting new requests; FERC later extended that timeframe until 2026 (a four year period). Between 2017 and 2022, the time it took between making an interconnection request and securing an interconnection agreement rose from 28 months (2.3 years) to 64 months (5.3 years) (Figure 3). By comparison, the simpler and less exhaustive process in ERCOT remained steady at roughly 20 months (1.7 years).

Figure 3. PJM – Median Duration Interconnection Request (IR) to Interconnection Agreement (IA) (Months)

Source: Lawrence Berkeley Laboratory, Queued Up, April 2023

PPA prices have also reflected this shortage. Solar PPA prices in PJM are the most expensive in the country and wind PPA prices are 2nd most expensive, with only CAISO being more expensive.

In December 2022, PJM took an approach, which was approved by FERC, of “first ready, first served” to streamline the process for those projects that are at or near the NTP stage rather than treating requests equally on a first come, first served basis.

New Demand Driver – Virginia RPS

While the interconnection queue is a supply side driver, the most prominent new demand side driver over the past three years has been the introduction of the Virginia Clean Energy Act (VCEA) which became effective July 1, 2020. The legislation has an RPS that calls for 100% renewable energy by 2045 for Dominion and by 2050 for Appalachian Company. The ACP is set at $45. This impacts the Tri-Qualified market because some RECs that would have ordinarily been used for compliance in the Tri-Qualified market are being used for compliance with the Virginia RPS.  The early program compliance years saw a steep increase: 2021-2024 were 14%, 17%, 20%, and 23%, respectively. Other state markets in PJM, such as DC, have the same effect as Virginia, but the Virginia policy is the most recent and impactful.

The Road Ahead

Futures are pointing to a continued shortage of RECs for the next 5 years (Figure 4). The simple 5-year average of price as a percent of the $45 ACP is 87%.

Figure 4. PJM Tri-Qualified Tier 1 REC Futures, 2023-2027

Source: Nodal Exchange, June 25, 2023

The continuing issues related to the queue and the increasing Virginia RPS will be important in the near term as regards price. Other factors include:

  • The rollout of offshore wind
  • Proposed RPS legislation in Pennsylvania

Offshore Wind

The PJM offshore wind market currently has 5.8 GW of contracted projects and 8.7 GW of mandates (Figure 5).

Figure 5. PJM Offshore Wind Mandates x 2035

Source: State Mandates, Company Data, Power Advisory estimates

According to our modeling, if less than 4-5 GW of offshore wind is deployed, then the market may remain short, and pricing high. However, the more likely scenario is that the offshore wind will come online and drive prices down over time in the late 2020s and into the 2030s. Ocean Wind 1 and MarWin are the first two offshore wind farms readying for construction, but thus far, neither has begun any construction activity other than onshore component manufacture. There remains considerable uncertainty given the current supply chain issues and elevated lending rates. That differs from projects in New England and New York, where construction of foundations for South Fork, which will connect into NYISO, and Vineyard Wind, into ISO-New England, are underway (Figure 6).

Figure 6. First Three US Offshore Wind Farms >100 MW

Source: The companies, news articles

Subsequent offshore wind farms remain a question mark, as capital costs along with lending rates have risen significantly and many projects are attempting to renegotiate PPA prices, or exit contracts altogether. There could be delays before the next offshore wind farms come online in PJM.

Proposed legislation in Pennsylvania, Senate Bill 230

One of the big question marks for PJM RECs will be how Pennsylvania policy plays out. In March 2023, Senate Bill 230 was introduced which would dramatically increase the RPS and set three new RPS schedules, each with a new associated ACP schedule (Figure 7).

Figure 7. Proposed Pennsylvania ACPs as per SB230 (Nominal $/MWh)

Source: Senate Bill 230

This legislation has not yet gotten out of committee, but if it were to become law, it would have the effect of bringing the REC price down to just under the $25 mark, as compliance entities would be able to comply at that level with ACP payments, at least for some volume of RECs. Even though it is just one state market, it would have ramifications for the entire PJM Tri-Qualified REC market. Pennsylvania has had other proposed RPS legislation that hasn’t gone through, but the state is now in an unusual circumstance in that there is a democratic governor sworn in in January 2023 and a Democrat controlled house for the first time in 12 years. Both the governor and the house are in favor of the new proposal.

Longer Term Outlook

Long term we expect the OSW wind to come online and the market to become oversupplied driving prices down. But the timing of that remains uncertain. And for a market that remains unpredictable in the long term, there may be some surprises in store!

[1] “Tri-Qualified” means that the REC is eligible to sell into three markets: NJ Tier 1, MD Tier 1 and PA Tier 1

[2] As an indication of the broad base of eligible assets geographically, there are 17 states with generating facilities that are registered and eligible to sell into MD Tier 1. In 2021, compliance entities retired RECs from 16 of those 17 states.