After two months of diligently reviewing comments submitted following the June 7th Solar Stakeholder meeting, the Massachusetts Department of Energy Resources (DOER) released its most recent version of the proposed program design for the next phase of the solar carve-out program (SREC-II) at a meeting held at the Massachusetts State House in Boston on Monday, August 12, 2013. The presentation with detailed information on the proposed program design has been made available on the DOER’s website.
What are the next steps?
The DOER will accept comments on their updated proposal through Monday, August 26th. They have asked stakeholders to consider and answer certain topics of interest and questions in their comments. At the conclusion of this comment period, the DOER will begin the process of translating the program design into a piece of legislation, which will effectively create the SREC-II Program. This could take anywhere from 2-3 months, with the hope of holding a third and final stakeholder input process by November 2013. The DOER’s goal is to then have the legislation for SREC-II promulgated by January 2014, to ensure a January 1, 2014 effective date for the SREC-II program.
What does SREC-II mean for solar project finance?
One of the main objectives of the SREC-II Program will be to manage market growth such that each market sector maintains the robust, yet steady growth seen in recent years, like 2012. The hope is to avoid unpredictable growth that can destabilize the SREC market, such as that seen in 2013. In an attempt to achieve this, the updated proposal introduces a few new features that may have substantial implications on project finance for commercial projects in Massachusetts.
The concept of forward minting would have 10 years’ worth of SRECs minted on the date of commercial operation for a given project Each SREC would be given the vintage of the year in which it is minted, and a 3-year shelf life. Currently, the proposal only provides this option for direct-owned projects. The DOER, however, is open to suggestions and comments as to whether or not third-party financed projects should also be eligible for this option.
If projects financed by third parties are allowed to forward mint, the number of minted SRECs available for sale could jump sporadically and it may become increasingly difficult to project market conditions, unless the DOER provides the transparency necessary to avoid this. In addition, these third-party project owners would take on immediate risk by being forced to sell the systems’ 10 years’ worth of SRECs in a limited period of time (three-year shelf life), regardless of current market conditions.
Another new feature of note, and one that has not been tested in other SREC markets, is the concept of an SREC Factor. The DOER is proposing that each solar project be assigned an SREC Factor upon acceptance into the SREC-II program, and that this factor be determined based on the market sector of the project —defined by size and other notable characteristics.
While one SREC will still be measured as 1000 kWh, the rate of accrual of kilowatt-hours towards an SREC will be reduced. The result is more production required to create an SREC, as compared to the SREC-I program in which all systems essentially have an SREC Factor of 1, or 100% of production. For instance, if a project is assigned an SREC Factor of 0.9, for every 1000 kWh of solar electricity produced only 900 kWh will accrue towards the minting of an SREC, and the remainder of generation will not be eligible for either SRECs or RECs.
Factors are pre-determined and fixed for the majority of market sectors, giving us clear insight into the DOER’s priorities and how they aim to level the playing field across sectors of the market. Those sectors with higher upfront build costs will receive a higher incentive than those with much lower costs. To start, the DOER proposes that the following systems be most heavily incentivized, at an SREC factor of 0.9:
- All systems smaller than or equal to 25 kilowatts
- Parking canopies
- Emergency power for public safety
- Residential or roof-mounted systems of any size
- Ground mounted systems larger than 25 kW with annual on-site electric use above 67%
Next on the DOER’s priority list will be projects on landfills or brownfields, which will receive an SREC Factor of 0.8. Ground-mounted projects with off-site use (less than 67% on-site electric use annually) up to 500 kilowatts in size will receive a factor of 0.7.
Finally, any ground-mounted projects that are over 500 kilowatts in size, and use less than 67% of their annual electricity production on-site (considered off-site projects), will not be assigned a pre-determined SREC Factor. Instead, the DOER is creating a fifth and final category called the “Managed Growth Sector”, and proposing that these systems participate in a competitive solicitation for the assignment of an SREC Factor.
Competitive Solicitations for the ‘Managed Growth Sector’
Much of the push for a competitive solicitation for this Managed Growth Sector results from the fact that, in the SREC-I program, systems over 500 kilowatts in size made up 80% of the market. The DOER suggests that solicitations be offered no less frequently than semi-annually, and that participating projects be evaluated based on both price (SREC Factor bid) as well as non-price criteria. The capacity sought in each solicitation will be evaluated and set based on the difference between the target cumulative installed capacity for future compliance years, and installation projections for all other market sectors.
The DOER has provided limited guidance on how these solicitations will be held, which leaves some big questions to be answered – will this competitive solicitation actually result in financeable projects winning and getting built? Or will this solicitation go the way of many others resulting in projects with unrealistic economics struggling to get financed? And, should the DOER have discretion on such a potentially large portion of the SREC-II market? As with competitive solicitations in other solar markets, it’s likely that more transparency and clarity surrounding the solicitation will lead to greater interest and confidence in the program. If there is a lack of transparency surrounding the solicitation, investors may shy away, and even greatly discount SREC Factors for projects in this market sector. In addition, the regulation prescribes the DOER limited discretion to adjust the SREC Factors for a given market sector, which may lead to even greater uncertainty surrounding this feature, and hesitation from investors to jump confidently into the market.
The fact that the DOER has provided such limited detail on this segment of the SREC-II policy leaves a significant amount of room for stakeholders to provide their input and potentially influence how this section of the market is structured.
Summary and Conclusion
The most recent proposal for the SREC-II program has set itself apart significantly from other SREC markets through the program’s ability to address the complex issue of different cost structures for the various types of solar installations. While this most recent and updated SREC-II proposal is less complicated than the original proposal, a few concerns still remain surrounding the newest features and additions to the SREC market in Massachusetts. The main concern surrounding the most recent proposal for the SREC-II program is complexity. While the DOER reduced complexity on a few of the above mentioned features from their original proposal, SREC Factors and forward minting will still create an even more complex structure around a seemingly inherent complex structure that is an SREC market. A second concern, which should be mitigated as a final proposal nears, is lack of detail and uncertainty surrounding the competitive solicitations, as well as some other features of the market. The hope is that these details will be clarified once the final proposal is announced, but these competitive solicitations may still create a certain level of uncertainty for developers, as well as investors in terms of how they can value these larger projects.
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 facilitated financing for thousands of projects and 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.