MSEIA COMPARATIVE STUDY OFSREC RATE IMPACTS BY PROGRAM

Lyle Rawlings, Vice-President, New JerseyDennis Wilson, President

PRELIMINARY RELEASEJanuary 12, 2012

PURPOSE OF STUDY:

To make a comparison of the likely rate impacts of the EDC programsand the unstructured SREC market, using industry financial modeling with consistent assumptions and target returns

METHODOLOGY:

• Financial modeling tool: Proprietary investment modeling tool of ASP

• What was modeled: 4 sizes of typical PV projects using typical 2012 costs and other assumptions

• Model was made to converge on the same target IRR (after tax) for each program

• Model was also made to converge on the same target cash flow for each program

• SREC costs were projected into the future at various rates of decline in the cost of solar power relative to fossil fuel.

ASSUMPTIONS Size, Cost and Performance 1. System Size (KWdc) Category Size, KWdc Residential 9 Small Non-Residential (0-150 KWdc) 150 Large Non-Residential (150-500 KWdc) 400 Very Large Non-Residential (500-2,000 KWdc) 1,175 2. Construction cost ($) Category Cost, $/wattdc Residential $4.20 Small Non-Residential (0-150 KWdc) $3.70 Large Non-Residential (150-500 KWdc) $3.50 Very Large Non-Residential (500-2,000 KWdc) $3.40 3. Construction interest, closing cost for financing, and similar “soft costs” ($) Category Cost, $ Residential $ 4,134 Small Non-Residential (0-150 KWdc) $ 19,650 Large Non-Residential (150-500 KWdc) $ 40,000 Very Large Non-Residential (500-2,000 KWdc) $122,850 4. Annual solar power generation - 1,241 KWH/year/KWdc, all cases 5. Annual degradation in power generated - 0.4% per year

Financing 1. PSE&G Loan rate - 11.3% interest, 15-year term 2. Cash equity input, (% of project cost after PSE&G Loan is subtracted): PSE&G Loan program all sizes: 50% JCP&L/ACE programs all sizes: 30% SREC Market program all sizes: 30% 3. Commercial or homeowner loan Interest rate (%) Category Interest, % Residential 4.5% Small Non-Residential (0-150 KWdc) 6.0% Large Non-Residential (150-500 KWdc) 6.0% Very Large Non-Residential (500-2,000 KWdc) 6.0% 4. Commercial or homeowner loan term (years) Category Term, years Residential 10 years Small Non-Residential (0-150 KWdc) 15 years Large Non-Residential (150-500 KWdc) 15 years Very Large Non-Residential (500-2,000 KWdc) 15 years

Key Rates 1. Avoided Electric power cost ($/KWH) Category Cost, $/KWH Residential $0.167 Small Non-Residential (0-150 KWdc) $0.134 Large Non-Residential (150-500 KWdc) $0.132 Very Large Non-Residential (500-2,000 KWdc) $0.120 2. Inflation rate of electric power cost - 1.5% 3. Inflation rate, general - 1.5% 4. Maintenance reserve, percent of construction cost - 0.3%/year 5. Combined tax rate - 40%

Tax Benefits 1. FITC - 30% of project cost 2. Bonus Depreciation - 50% of Project Cost 3. MACRS schedule (% of project cost) Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 20% 32% 19.20% 11.52% 11.52% 5.76%

SRECs 1. 3 Years of SRECs under contract for SREC Market cases 2. SREC prices after SREC contracts end (for JCP&L/ACE and SREC Market cases) ($/SREC): JCP&L/ACE programs $75/SREC in year 11 then declining by 4% per year SREC Market program $120/SREC in year 4 $90/SREC in year 5 $75/SREC in year 6 then declining by 4% per year

SUMMARY OF MODELED 2012 SREC PRICES BY PROGRAM

SOLVED FOR TARGET IRR4

Segment

Assumed Capacity

(% of Total)PSEG Loan1

JCP&L/ACE10-yr

Contract1,2

SREC Market(3-yr

Contract)3LCOE

Residential 18% 194 235 360 155Small Commercial 15% 185 248 387 168Large Commercial 27% 166 226 332 151Very Large Commercial 40% 169 229 342 154Weighted Average 100.0% 175 232 349 155

Notes:1. Does not include administrative costs2. Includes $35 cost recovery incentive3. Does not include transaction costs4. Prices adjusted to produce the same target Internal Rate of Return

SUMMARY OF MODELED 2012 SREC PRICES BY PROGRAM

SOLVED FOR TARGET CASH FLOW4

Segment

Assumed Capacity

(% of Total)PSEG Loan1

JCP&L/ACE10-yr

Contract1,2

SREC Market(3-yr

Contract)3LCOE

Residential 18% 194 216 410 181Small Commercial 15% 185 210 378 133Large Commercial 27% 166 192 318 121Very Large Commercial 40% 169 194 323 122Weighted Average 175 200 346 134

Notes:1. Does not include administrative costs2. Includes $35 cost recovery incentive3. Does not include transaction costs4. Prices adjusted to produce the same cumulative net cash flow in the year loan is paid off.

SUMMARY OF MODELED 2012 SREC PRICES BY PROGRAM

AVERAGE OF IRR AND CASH FLOW METHODS4

Segment

Assumed Capacity

(% of Total)PSEG Loan1

JCP&L/ACE10-yr

Contract1,2

SREC Market(3-yr

Contract)3LCOE

Residential 18% 194 226 385 168Small Commercial 15% 185 229 383 151Large Commercial 27% 166 209 325 136Very Large Commercial 40% 169 212 333 138Weighted Average 175 216 347 145

Notes:1. Does not include administrative costs2. Includes $35 cost recovery incentive3. Does not include transaction costs4. Prices averaged between those determined by IRR and those determined by cash flow

WEIGHTED AVERAGE PRICES BY YEAR - PSEG LOANDECLINE IN SOLAR COSTS PER YEAR = 6%

Energy Year

Proposed A4226

RequirementIncrement

GWHMW New Constr.

PSEG Price

PSEG Price

PSEG Price

PSEG Price

PSEG Price

PSEG Price

PSEG Price

PSEG Price

PSEG Price

PSEG Price

PSEG Price

PSEG Price

PSEG Price

PSEG Price

PSEG Price

Weighted Avg. Price

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 by year2011 306 2012 442 136 118 175 175 2013 896 454 395 175 165 167 2014 1,072 176 153 175 165 155 164 2015 1,315 243 211 175 165 155 145 160 2016 1,550 235 204 175 165 155 145 137 155 2017 1,757 207 180 175 165 155 145 137 128 151 2018 1,916 159 138 175 165 155 145 137 128 121 148 2019 2,158 242 210 175 165 155 145 137 128 121 114 144 2020 2,344 186 162 175 165 155 145 137 128 121 114 107 141 2021 2,518 174 151 175 165 155 145 137 128 121 114 107 100 137 2022 2,773 255 222 175 165 155 145 137 128 121 114 107 100 94 133 2023 3,123 350 304 175 165 155 145 137 128 121 114 107 100 94 89 127 2024 3,499 376 327 175 165 155 145 137 128 121 114 107 100 94 89 83 122 2025 3,910 411 357 175 165 155 145 137 128 121 114 107 100 94 89 83 78 117 2026 4,416 506 440 175 165 155 145 137 128 121 114 107 100 94 89 83 78 74 112

FUTURE YEAR CALCULATION MATRIX FOR PSE&G LOAN PROGRAM

WEIGHTED AVERAGE PRICES BY YEAR- JCP&L/ACE 10-YR. CONTRACTDECLINE IN SOLAR COSTS PER YEAR =6%

Energy Year

A3520 Requirement

GWH

A3520 increment

GWHMW New Constr.

JCP&L/ACE Price

JCP&L/ ACE Price

JCP&L/ ACE Price

JCP&L/ ACE Price

JCP&L/ ACE Price

JCP&L/ ACE Price

JCP&L/ ACE Price

JCP&L/ ACE Price

JCP&L/ ACE Price

JCP&L/ ACE Price

JCP&L/ ACE Price

JCP&L/ ACE Price

JCP&L/ ACE Price

JCP&L/ ACE Price

JCP&L/ ACE Price

Weighted Avg. Price

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 by year2011 306 2012 442 136 118 216 216 2013 896 454 395 216 203 206 2014 1,072 176 153 216 203 191 203 2015 1,315 243 211 216 203 191 179 197 2016 1,550 235 204 216 203 191 179 169 192 2017 1,757 207 180 216 203 191 179 169 159 187 2018 1,916 159 138 216 203 191 179 169 159 149 183 2019 2,158 242 210 216 203 191 179 169 159 149 140 178 2020 2,344 186 162 216 203 191 179 169 159 149 140 132 173 2021 2,518 174 151 216 203 191 179 169 159 149 140 132 124 169 2022 2,773 255 222 116 203 191 179 169 159 149 140 132 124 116 158 2023 3,123 350 304 109 109 191 179 169 159 149 140 132 124 116 109 137 2024 3,499 376 327 103 103 103 179 169 159 149 140 132 124 116 109 103 127 2025 3,910 411 357 97 97 97 179 169 159 149 140 132 124 116 109 103 97 122 2026 4,416 506 440 91 91 91 179 169 159 149 140 132 124 116 109 103 97 91 117

FUTURE YEAR CALCULATION MATRIX FOR JCP&L/ACE 10-YR CONTRACT PROGRAM

WEIGHTED AVERAGE PRICES BY YEAR- SREC MARKET (3-YR. CONTRACT)DECLINE IN SOLAR COSTS PER YEAR = 6%

Energy Year

A3520 Requirement

GWH

A3520 increment

GWHMW New Constr.

SREC Market 3-Yr Price

SREC Market 3-Yr Price

SREC Market 3-Yr Price

SREC Market 3-Yr Price

SREC Market 3-Yr Price

SREC Market 3-Yr Price

SREC Market 3-Yr Price

SREC Market 3-Yr Price

SREC Market 3-Yr Price

SREC Market 3-Yr Price

SREC Market 3-Yr Price

SREC Market 3-Yr Price

SREC Market 3-Yr Price

SREC Market 3-Yr Price

SREC Market 3-Yr Price

Weighted Avg. Price

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 by year2011 306 2012 442 136 118 347 347 2013 896 454 395 347 327 331 2014 1,072 176 153 347 327 307 326 2015 1,315 243 211 289 327 307 289 309 2016 1,550 235 204 271 271 307 289 271 280 2017 1,757 207 180 255 255 255 289 271 255 263 2018 1,916 159 138 240 240 240 240 271 255 240 246 2019 2,158 242 210 225 225 225 225 225 255 240 225 230 2020 2,344 186 162 212 212 212 212 212 212 240 225 212 216 2021 2,518 174 151 199 199 199 199 199 199 199 225 212 199 203 2022 2,773 255 222 187 187 187 187 187 187 187 187 212 199 187 190 2023 3,123 350 304 176 176 176 176 176 176 176 176 176 199 187 176 178 2024 3,499 376 327 165 165 165 165 165 165 165 165 165 165 187 176 165 168 2025 3,910 411 357 155 155 155 155 155 155 155 155 155 155 155 176 165 155 158 2026 4,416 506 440 146 146 146 146 146 146 146 146 146 146 146 146 165 155 146 149

FUTURE YEAR CALCULATION MATRIX FOR UNSTRUCTURED SREC MARKET

CHANGE IN RESULTS FOR FUTURE YEARS   Example calculation:

Weighted Average SREC Price, yr.3 = [(SREC Price in yr.4 for projects built in yr.1 x MW built, yr.1) + (SREC Price in yr.4 for projects built in yr.2 x MW built, yr.2) +

(SREC Price in yr.4 for projects built in yr.3 x MW built, yr.3) +

(SREC Price in yr.4 for projects built in yr.4 x MW built, yr.4)] Divided by (Total MW built, yrs.1-4)

2012 2014 2016 2018 2020 2022 2024 2026 -

50

100

150

200

250

300

350

400

FIGURE 2PREDICTED RATE IMPACT (WEIGHTED AVERAGE SREC PRICE) BY YEAR

4% DECLINE IN SOLAR COSTS PER YEAR

PSEG LOAN

JCP&L/ACE 10-YR CONTRACT

SREC MARKET(3-YR CONTRACT)

LCOE

Energy Year

We

igh

ted

Av

era

ge

SR

EC

Pri

ce

, $

2012 2014 2016 2018 2020 2022 2024 2026 -

50

100

150

200

250

300

350

400

FIGURE 1: PREDICTED RATE IMPACT (WEIGHTED AVERAGE SREC PRICE) BY

YEAR6% DECLINE IN SOLAR COSTS PER YEAR

PSEG LOAN

JCP&L/ACE 10-YR CONTRACT

SREC MARKET(3-YR CONTRACT)

LCOE

Energy Year

We

igh

ted

Av

era

ge

SR

EC

Pri

ce

, $

2012 2014 2016 2018 2020 2022 2024 2026 -

50

100

150

200

250

300

350

400

FIGURE 3PREDICTED RATE IMPACT (WEIGHTED AVERAGE SREC PRICE) BY YEAR

8% DECLINE IN SOLAR COSTS PER YEAR

PSEG LOAN

JCP&L/ACE 10-YR CONTRACT

SREC MARKET(3-YR CONTRACT)

LCOE

Energy Year

We

igh

ted

Av

era

ge

SR

EC

Pri

ce

, $

2012 2014 2016 2018 2020 2022 2024 2026 -

50

100

150

200

250

300

350

400

FIGURE 4PREDICTED RATE IMPACT (WEIGHTED AVERAGE SREC PRICE) BY YEAR

10% DECLINE IN SOLAR COSTS PER YEAR

PSEG LOAN

JCP&L/ACE 10-YR CONTRACT

SREC MARKET(3-YR CONTRACT)

LCOE

Energy Year

We

igh

ted

Av

era

ge

SR

EC

Pri

ce

, $

• The policy choice between EDC programs and the unstructured SREC is a bet on one of two paths: over time, one will be cheaper than the other.

• The lowest risk to ratepayers lies in choosing the one that can most reasonably be expected to be the cheaper one, using the best available data and analysis.

Possible confounders in this study:

1. Rate of decline in the relative cost of solar

2. Investors make irrational decisions in the SREC market or 10-yr contract solicitations

- Desperation- Misinformation- Irrational exuberance

• SREC market is not highly competitive

• 10-year contract solicitations are not highly competitive

High-risk investments always carry a premium cost.Therefore, high-risk market designs carry a premium cost.

Summit Blue study finds that the lowest-risk market designs (Feed-in Tariff and “Auction-Standard Contract”) will carrythe lowest ratepayer impact.

The highest-risk market designs willcarry the highest ratepayer impact.