Massachusetts Finalizes SREC-II Program: Here’s What You Can Expect

The Massachusetts DOER expects the SREC-II Program to become effective late in April.

Massachusetts DOER expects the SREC-II Program to become effective late in April.

On April 11th, the Massachusetts Department of Energy Resources (DOER) announced that they have officially filed the final revisions for the SREC-II program with the Secretary of State’s office.  These final revisions will go into effect on April 25, 2014 once the rules have been promulgated.

To qualify for SREC-I, all systems less than 100 kW must both submit an application and demonstrate that they have been authorized to interconnect by April 25th.  For systems larger than 100 kW,  projects may receive an extension beyond June 30, 2014 only if the project can demonstrate that interconnection depends only on receipt of authorization to interconnect and such receipt is delayed only by the local distribution company or due to remaining steps required by other parties for safe and reliable interconnection. In addition, the DOER announced that they will be using a new online registration platform for all SREC II applications.  This new platform and application process will be made available to the public on May 6th.

As the solar industry awaits the promulgation of the Massachusetts SREC-II program’s final regulation, pricing expectations for the SREC II market remain largely a mystery. Currently, no market exists on which realistic pricing judgments can be made. Thanks to the hard work by the DOER to structure this program, SREC II is guaranteed to be a success, and will bring a large amount of solar to the Commonwealth. However, the current structure of the SREC-II program will, for various reasons, not have the same pricing expectations that solar industry stakeholders are used to seeing in SREC-I.

Lower and Declining Alternative Compliance Payments

One differentiating factor between SREC I and SREC II are lower Alternative Compliance Payment (ACP) values. The ACP acts much like a price ceiling for SRECs, and a lower ACP can therefore lead to lower SREC prices. The ACP is currently set at $375 for 2014, and will decline to $257 by 2024. This is lower than the ACP during SREC I, meaning it will naturally have a downward pull on prices over the long term.

One differentiating factor between SREC I and SREC II are lower Alternative Compliance Payment (ACP) values and the declining Clearinghouse Auction prices.

One differentiating factor between SREC I and SREC II are lower Alternative Compliance Payment (ACP) values and the declining Clearinghouse Auction prices.

Even more important is the scheduled decline in the Solar Credit Clearinghouse Auction (SCCA). Prices are set at $300 for the first few years, which is the same price as the current SREC I auction. However, SREC II auction prices will decline from $285 to $271 in 2017 and continue down to $189 in 2024. This will also have a downward push on prices.

With both the ACP and auction rate decreases over the next ten years, prices are clearly not going to have the same artificial support previously experienced under the SREC-I program. This means that only a stronger demand can make up for these dropping pricing guidelines.

Uncertainty Surrounding SREC II Supply

As with any SREC program, market pricing is determined by supply, demand, and the ACP — and uncertainty looms for the supply for SREC II. DOER’s current goal is to have the program effective on or around April 25th. The market will not begin to take shape until late April with the promulgation of the regulation, and even then, real understanding of the market may not happen until next year due to the built-in delay for minting SRECs. The DOER only mints SRECs on a quarterly basis and the actual minting date occurs nearly 3 and a half months following the end of the applicable quarter (i.e. Q1 SRECs will mint on July 15th of that year).

Poor weather conditions will also factor into supply. Based on conversations with our extensive developer network, we understand that many projects are facing delays in construction.  Though supply may rapidly expand in SREC-II given the overflow of projects that did not qualify for SREC-I, we question the number of projects that will actually become operational by the end of the year given these delays leading to a lower volume of SRECs in the current compliance year. Together, these factors make for an unpredictable SREC supply build.

Implementation of SREC Factors

Another significant change in the SREC II program is the addition of SREC factors which reduce the number of SRECs a given, normally larger, project can produce.  In the most recent SREC-II announcement, SREC production factors have actually been increased and fixed under the new program. The market has been divided into 4 sectors, highlighted in the chart here. The increase in factors will offset some of the decline in rates described previously; however, all remaining production in the 10 years a project is eligible to produce SRECs is now ineligible for SREC contribution, as opposed to originally qualifying under Class I, a blow to some extent for developers.  The original proposal for SREC-II allowed for this remaining production to qualify for Class I RECs (a class that includes RECs produced from other types of renewables like wind) to ensure all production can be monetized to some degree.  However, this language was struck in the current regulation and this means that the remaining production will not be monetized at all and project owners will lose out on production they would have been able to monetize otherwise.

In the most recent SREC-II announcement, SREC production factors have actually been increased and fixed under the new program.

In the most recent SREC-II announcement, SREC production factors have actually been increased and fixed under the new program.

The DOER has also implemented a fixed SREC Factor for the “Managed Growth” market sector, but not all projects within this sector will automatically receive approval.  A waiting list will be created throughout the term of the compliance year and a fixed number of MWs each year will receive approval.

The waiting list for the Managed Growth sector is determined by first the date a developer submits a State of Qualification Application (SQA) to the SREC-II Program. If more than one SQA is submitted in a day, the Interconnection Services Agreement’s execution date will be the next factor for consideration. For 2014, the Managed Growth sector will be comprised of 26 MW total.  To be eligible, a project must be 6 MW or less per parcel of land, and  projects that do not have their energy utilized on site will have to go through a competitive process to receive an SREC contract. This shifts the focus from size to on-site usage, and should not affect SREC prices to much extent.

Conclusion

In essence, there is still a lot to be determined regarding the practical implication of the Massachusetts SREC II market. Ironically, many of the mechanisms that may drag down pricing will also work to make the pricing more stable over time.  For example, a cap on managed growth and the fixed SREC Factors will limit supply spikes, which will help to mitigate price volatility.  Generally, as pricing becomes more stable and predictable, buyers in the market will become more willing to purchase longer term SREC contracts.  As these strips become more available, investors will become more confident in the market, and project financing should be easier.  To avoid this uncertainty and inherent volatility of SREC markets, Sol Systems recommends for developers to lock into fixed price contracts that minimize risk.

The Sol Systems project finance team can help provide developers with feedback on their current projects, and our SREC team can work with owners, installers, and developers to monetize SRECs. Our SREC team has a number of three-year and five-year contract options for Massachusetts SREC II projects. Please contact our project finance team at finance@solsystemscompany.com or (888) 235-1538 ext. 2 to see how Sol Systems can help secure financing and SREC contracts for Massachusetts solar projects.

Co-authored by Anna Noucas, Jason Cimpl, and Daniel Watson.

About Sol Systems

Sol Systems is a renewable energy finance firm that provides secure, sustainable investment opportunities to investor clients, and sophisticated project financing solutions to developers.  Founded in 2008, Sol Systems focuses on meeting the industry’s most critical solar financing needs, including tax structured investments, capital placement, debt financing, and SREC portfolio management. To date, the company has facilitated financing for thousands of distributed generation solar projects and hundreds of millions in investment on behalf of Fortune 100 corporations, utilities, banks, family offices, and individuals. For more information, please visit www.solsystemscompany.com.

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