A graphical overview of the clearinghouse mechanism

A graphical overview of the clearinghouse mechanism. Click the image for a larger view.

The Massachusetts SREC market is undoubtedly the most complicated solar incentive regime in the country. There are hundreds of financial models that have attempted to predict the value of SRECs on behalf of developers and investors based on expected future market dynamics. In other SREC markets like NJ, MD, and even DE, investors usually require an investment grade off-take guaranteeing the price of SRECs before financing a project. But by our estimates, 60-75% of the solar projects financed in Massachusetts have been financed without a long term SREC contract in place. Consequently, it is an understatement to say that solar project owners, and the solar industry at large, have been on the edge of their seats watching the Massachusetts SREC auction mechanism at work. Would the SREC auction clear at the $285 price, or would they be left to gamble on the riskier post-auction spot market? Adding to the bets on the table, once an SREC goes through the auction it cannot re-enter any following years’ auction, so the price support essentially disappears post-auction for that SREC.

Going into this year’s auction, pricing for 2013 SRECs was just above $200, with 38,866 un-sold SRECs entering the auction, hoping to receive the $285 net payment per SREC. The first and second rounds of the auction are all-or-nothing rounds; the entire volume must clear or no SRECs are sold. It was not a surprise to many that the first two rounds of the auction late last week and earlier this week did not clear. The final round, which took place on Friday, allowed for the first partial clear, with many expecting a significant portion of the SRECs in the market to clear.

After a week of anticipation and two unsuccessful rounds, the results are in. The 2012 Massachusetts Clearinghouse Auction cleared a mere 3 (three) of the 38,866 SRECs deposited into the auction. Many will see this result as a failure of the auction mechanism to provide monetization to the market. However, the DOER will have the final word on the success of the mechanism: they issued the following statement after the auction:

“DOER is hereby announcing its plan to offer to depositors with remaining un-cleared SRECs in the 2012 Auction Account the opportunity to sell all or some of their Re-Minted SRECs to DOER for a fixed price of $285/MWh.”

While this statement does not completely guarantee SREC owners the right to sell all of their SRECs to the DOER, it does sound like the DOER is willing to purchase the remaining uncleared SRECs. Sol Systems will continue to track this development as it unfolds.

The auction had a particularly hard time clearing this year because the RPS formula is best suited to keep a market in balance when it grows gradually or even slightly aggressively. However, the  Massachusetts market experienced slower growth of the market in 2010 and 2011, followed by incredible growth in 2012. This market growth curve has thrown the RPS formula into a multi-year oversupply scenario that likely dis-incentivized compliance buyers from purchasing SRECs in this year’s auction. Even with the increases to the 2014 RPS requirements due to the first two rounds not clearing, it is possible for both 2013 and 2014 compliance years to be oversupplied.

The question for market participants is will next year’s auction be more successful? We think it will. The 2015 compliance year looks by any scenario to be under-supplied, which will put increased pressure on buyers to make sure they are not paying the alternative compliance penalty (ACP) of $550. The next auction is in July 2014; by then buyers will more clearly see their choice between auction SRECs and ACP payments.  Will the DOER swoop in again next year and “save the day” for SREC owners?  It’s hard to tell at this point, as there is too much time for policy to change in the interim. For now, the auction and the price support it supplies to the Massachusetts SREC market will continue for another year.

The three 2012 vintage SRECs that were purchased in the auction will be distributed to their new owners, who can use them to demonstrate solar RPS compliance for 2013, 2014, or 2015.  SRECs that were not purchased will be re-minted with three years of shelf life, and returned to depositors.  These re-minted SRECs are not eligible to be placed into future years’ auctions, meaning owners will need to monetize them via the spot market within the span of their shelf life.

Currently, future year SREC prices are higher than they were at the start of the auction, with 2013 SRECs bid at $245 and 2014-2015 strips bid at $260. The market is likely buying these future SRECs in anticipation of an almost certain market short in 2015.

The Massachusetts market looks to be well-supported, and the SREC I program has been capped at approximately 400 MWs. SREC owners in program I have a victory on their hands and could be looking at sustained prices north of $200 for some time to come.

As for SREC II, the DOER is working diligently to design a second Solar Carve-Out Program to continue growing the solar market in Massachusetts by incentivizing with SRECs.  The DOER released its initial thoughts on an SREC II program at a stakeholder meeting in early June, with the promise of providing a more finalized proposal within the next few months.  The DOER is following up on this promise by holding a stakeholder meeting on Monday, August 12th from 1:00pm to 3:00pm in the Gardner Auditorium of the Massachusetts State House in Boston.

What the Auction Results Mean for Sol Systems Customers

Since this year’s auction finished with a partial clear in the third round, the DOER has announced the After-Auction Purchase Option, which will contract World Energy to purchase some or all of the uncleared SRECs on their behalf at the price of $285/MWh. The DOER said that we should expect to hear early this week as to next steps for the After-Auction Purchase Option, and we will contact our customers as we have more information.

Co-authored by Anna Noucas and Amber Rivera.

About Sol Systems

Sol Systems is a boutique financial services firm that offers investor clients direct access to the renewable energy asset class and provides developers with sophisticated project financing solutions. Founded in 2008, Sol Systems focuses on meeting the most critical needs of the industry, including SREC monetization, capital placement, tax equity, and New Market Tax Credits. To date, the company has arranged financing for thousands of projects and facilitated hundreds of millions in investment on behalf of Fortune 100 companies, private equity, family offices and individuals.

For more information, please visit www.solsystemscompany.com.