Sol Systems has put together a prospective view of the supply and demand dynamics of the SREC II market in Massachusetts, based on the DOER’s recent presentation of proposed policies for the program. The principle takeaway for solar developers in the MA market is that the SREC Factor they bid in a competitive solicitation for projects in the ‘Managed Growth Sector’ will need to be determined at the time of bidding, as the SREC-II market dynamics will be ever-evolving. They should do this by analyzing the market using the project and SREC data that the DOER is promising will be extensive in the SREC-II program. This should give project owners assurance that they will not have to blindly determine a competitive SREC Factor to bid for their projects.
The DOER’s proposed solar targets and compliance obligations are listed in the table at right. Modeling the demand side of the SREC-II market was easy enough – we used the compliance obligation numbers proposed by the DOER, recognizing that numbers from 2016 onwards are only estimates. With the introduction of SREC Factors for different market segments, modeling the supply side of the market gets a bit trickier. For any year, the number of SRECs produced from the systems making up the cumulative installed capacity (capped at the MW targets set) will depend on the distribution of those systems across the SREC Factor categories proposed by the DOER.
For instance, if in 2014 the entire 143 MW of allotted solar growth were met with only residential systems, then the total amount of SRECs produced that year would be approximately 154,500, and the market would be oversupplied against an obligation of 129,338 MWh. However, if the entire allotment were made up of ground-mounted projects less than 500 kW in size, with less than 67% on-site electric use, the total amount of SRECs produced in 2014 would be approximately 120,000, and the market would be undersupplied. Whether and when the SREC-II market will be over or under supplied depends on the kind of systems that will ultimately make up the second program, since SREC Factors are assigned according to the characteristics of the system.
As a starting point in the analysis, we will assume that the distribution of systems across market sectors will be the same as in SREC-I (‘BAU’, for Business As Usual). The table below shows the market share data provided by the DOER on SREC-I installations, as well as the assumptions we made for the BAU view of the market.
For what we’re calling “middle-market systems” (10kW to 500 kW), we assumed that 80 percent of capacity will be systems that are not ground mounted or on landfills (assigned an SREC Factor of 0.9); that 10% will be built on landfills or brownfields (assigned an SREC Factor of 0.8); and that the remaining 10% will be ground-mounted projects up to 500 kilowatts in size, which use less than 67% of their annual electricity production on-site (assigned an SREC Factor of 0.7). The graph below demonstrates what the SREC-II market would look like with system size distribution similar to SREC-I, and estimated average SREC Factors for eligible >500 kW systems as shown in the table above. The results show that, on average over the period from 2014 to 2027, annual SREC oversupply would be around 160 SRECs.
The results shown below provide an interesting benchmark for our analysis, but one big question remains: what level should developers and owners of eligible projects bid in a competitive solicitation? Owners of projects over 500 kW in the Managed Growth Sector will need to think strategically about what a competitive SREC Factor for their project will be—i.e., what level they should bid in a competitive solicitation. Regardless of the way the solicitation is run, we think it’s safe to assume that the DOER will either aim to keep the market near equilibrium for as many years as possible, or perhaps allow the market to go a bit undersupplied at times to absorb any forward-minted volumes at favorable prices to small system owners, as well as any other periodic oversupply.
Since the new structure of SREC-II will create differing incentive levels for each market sector, we believe assuming that the distribution of systems across market sectors will resemble SREC-I is likely not realistic. Between the higher incentive levels for certain market segments, forward minting for direct-owned small/residential projects, and the nudge to build on landfills and brownfields, we think a more realistic market profile could be the assumptions in the following table:
With these Best Guess assumptions, the market would look more like the graph below, and average annual SREC oversupply would be around 1,000 SRECs during the period from 2014 to 2027.
This exercise provides a small glimpse into how the SREC-II market could look in future years, but ultimately, we will have to wait to see how the market unfolds. The numbers for market share and assumed SREC Factors will be constantly evolving once the program is live, not static as they are in a modeling exercise. Eligible projects over 500 kW that compete for inclusion in SREC-II will need to analyze the market at the time of bidding. However, the framework provided in this blog should be helpful to developers and owners of projects in the Managed Growth Sector. Sol Systems is available to assist in analyzing the market at the time of bidding, to help project owners determine the most strategic SREC Factor to bid. Learn more about our SREC Services by visiting our website.
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.