Smart-srec: a Stochastic Model of the New Jersey Solar Renewable Energy Certificate Market

Markets for solar renewable energy certificates (SRECs) are gaining in prominence in many states, stimulating growth of the U.S. solar industry. However, SREC market prices have been extremely volatile, causing high risk to participants and potentially less investment in solar power generation. Such concerns necessitate the development of realistic, flexible and tractable models of SREC prices that capture the behavior of participants given the rules that govern the market. We propose an original stochastic model called SMART-SREC to fill this role, drawing on established ideas from the carbon pricing literature, and including a feedback mechanism for generation response to prices. We calibrate the model to the New Jersey market, analyze parameter sensitivity, and demonstrate its ability to reproduce historical dynamics, while also inferring current expectations of future solar growth. Finally, we investigate the role and impact of regulatory parameters, thus providing insight into the crucial role played by market design. Acknowledgements. This research was supported by the SAP Initiative for Energy Systems Research at PENSA, Princeton’s Laboratory for Energy Systems Research. The authors would like to thank Gordon Bryant and NRG Energy for highlighting the issue, for the support and advice of Tom Nyquist and Ted Borer at Princeton University, and for helpful market information from Scott Hunter at New Jersey’s Clean Energy Program.