Prepared in collaboration with Sol Systems Intern Mark Noll
On September 29, the Illinois Power Agency released its draft 2015 Procurement Plan regarding renewable portfolio standard (RPS) compliance for the state’s two regulated utilities, ComEd and Ameren – and then, on the very same day, decided to release a second “Supplemental” Procurement Plan for solar PV. The two plans both share great intentions for the best of interventions – and could bring projects with the right entrepreneurial conditions to glory.
Both plans call for the Illinois Power Authority to procure solar renewable energy credits (SRECs), but that’s where the similarities end. They differ with regard to funding, project eligibility, contract lengths, system requirements, and other factors. Sound confusing? It’s OK. We’re here to clear up the confusion.
The First Illinois Plan: Of the Four Procurements, Only Three Matter
The first, “regular” plan sets out the IPA’s 2015 plan for procuring power from renewables for those customers of the state’s two main utilities who have not “shopped” for electricity (most of Illinois’ residents actually have shopped for energy on their own, thanks to electricity market deregulation, and rely on their retail electricity suppliers for compliance). In addition, the IPA has set up a procedure for spending the hourly “alternative compliance payments” (ACPs) the agency has collected from retail suppliers. This is because unlike in many states, some amount of these ACPs are collected each year whether or not the suppliers are otherwise in compliance. It proposes to use ~ $13M of this funding to procure ~80,000 SRECs in one-year contracts.
A one-year procurement of 80,000 SRECs is significant to the REC markets, but as the IPA itself acknowledges, almost certainly too high a risk to support any real, new projects. Not only does filling in a long row of question marks after the first year not do much to improve a solar project pro forma, the timing of the procurement means solar developers would need to fully develop any such projects and produce their REC requirements in the portion of 2015 remaining to them. Moreover, the IPA does not have to solicit bids from new projects; if enacted, the regular procurement plan will likely “siphon up” SRECs from existing projects in and around Illinois (and IPA may need to go far afield indeed to find the 60MW of installed, uncommitted capacity required to do so).
The Second Illinois Solar Plan: Strength – Training Through Supplements
The second “supplemental” plan, despite the name, is the real driving force of the procurement, and the one adequate to support real solar development in the Land of Lincoln. It represents the one-year version of what we hope will be a longer-term fix to the IL RPS distributed generation scheme (a “glitch” in the Illinois law’s wording means that the IPA cannot currently spend some $50 million of solar-dedicated funds it collects annually). The Supplemental Plan schedules three procurement events, each for an auction of five-year fixed price REC purchases.
In this supplemental plan, the IPA will enter into five-year SREC contracts for new projects, with “new” meaning any projects that go operational after the date of the procurement event.
Not all systems are created equal – IPA has been instructed by law to get at least 50% of all RECs from systems with less than 25kW in nameplate capacity, but curiously, this is a “target” and NOT a binding minimum requirement. As such, IPA has proposed a different set of rules for the two categories of solar arrays: those under 25kW, and those from 25kW to 2MW. Bids from systems larger than 2MW won’t be considered. The “target” of 50% sub-25kW will come into play if the pace of new small-scale installations is slower than expected; in this case it might be possible for a sub-25kW bid to be selected over a system with more than 25kW, even if an owner of the larger system submits a more competitive (i.e. cheaper) bid, to meet the fifty percent target.
Another difference lies in the detail that each category will have a different “benchmark” price – in effect, a price ceiling. This (secret) benchmark is ultimately up to the discretion of the “procurement administrator” and will based on factors such as “observed market prices adjusted for expected local costs to develop and operate systems, available incentives, market returns on capital, and term of contract.”
Following the June 2015 procurement event, the IPA will publish the weighted average winning bid price each of the segments (remember, systems are divided into sub-25kW and 25 to 2000kW segments) so as to provide future bidders with more information, but how the benchmark will actually be determined (especially in the first auction) will remain a mystery and represents a significant gray area of the plan. Market participants might well be concerned about what appears to be yet another attempt on the part of an incentive administrator to reinvent the solar pro forma and have to go through the learning process of getting a few assumptions wrong (incentive taxability, insurance costs, etc.) out of the gate. Our advice? SAM exists – learn it, love it.
Yet another boost to small installers is that bids for systems in the sub-25kW procurement process will allow for speculative bids – that is, SREC aggregators will be permitted to submit SREC bids without already having identified specific systems. This is in contrast to bids from arrays in the 25kW to 2MW range, which must be identified beforehand, and are subjected to various types of development security designed to keep speculative bidders from eating up capacity in the auction without a project locked up. Further, IPA requires a credit deposit of $25/REC ($125/kW, since IPA is only accepting five-year contracts) for speculative systems and $10/REC ($50/kW) for confirmed systems, but will refund this upon SREC delivery.)
When Will the Illinois Solar Market Take Off?
Now, for the timing of procurement events: The IPA has divided the process into three separate blocks:
- The first, scheduled for June 2015, has a budget of $5 million; the maximum bid size is 5,000 RECs for bids in the sub-25kW category, with a maximum system size of 500kW. That may seem strange – but keep in mind bid quantities are expressed as a five year total. Thereby, a 100kW system would submit a 500 REC bid – and before you email us a PVSyst run with a lot of exclamation points scrawled on it, see below for the mandatory estimated production figure.
- For the second event, in November 2015, the IPA raises the max system size to 2MW and has set aside $10 million for procurement, with no maximum bid sizes.
- The March 2016 event will provide $15 million for procurement, and a future contingency event is planned in case Ameren and ComEd cannot meet their RPS requirements in the first three blocks (i.e. IPA can’ find enough in-state projects).
A strange oversight is that bids are standardized for production – and may be standardized too low. Each MW of systems is estimated to produce exactly 1 MWh per year; clearly this is approximately 20 – 25% low for a real world Illinois system, but if bidding is all relative, the practical effect should be more limited….IPA may just find itself creating a growing pool of uncontracted SRECs year over year from this overproduction, and/or may correct the number to a more typical level in final plans. A revision of the plan expected today may alter this.
Illinois Solar: Muddying the Waters
There’s an additional complication, which can create complicating additional complications to the (potentially redundant) complicated supplemental additional complications elucidated and enucleated above.
That is, the Illinois Department of Commerce and Economic Opportunity offers a rebate program that could play into existing bids. Under the rebate program just closed, DCEO offers homeowners a rebate of $1.50/Watt, and commercial building owners $1.25/Watt. Standing alone, these are reasonably market-level incentives. To the extent any of these systems enter the auctions, however, they create the potential for already-subsidized “super systems” whose bids can be significantly lower than those of any developer relying just on the REC contract. Hopefully, these should be relatively limited in numbers, and play only into the first (June) procurement, and by next year IL DCEO and IPA are able to coordinate and remove this source of uncertainty from the market.
Outlook for Illinois Solar Market
To sum up: for prospective solar owners and developers, the IPA’s “Supplemental Procurement Plan” is what you want to pay attention to. A revised plan addressing public comments is due on October 28th, so until then, we recommend you keep an eye out for opportunities in Illinois, since there will finally be an in-state demand for SRECs. More encouragingly, the scheduled procurement events and future ones (if Illinois gets its act together and fixes the “glitch” in its RPS law) should lead to a spurt of growth in new residential projects in the state. Come on! Feel the Illinoise!
Link to the Full Plan
Link to the Supplemental Plan
About Sol Systems
Sol Systems is a solar energy finance and investment firm. The company has facilitated financing for 165MW and over $600 million of distributed generation solar projects on behalf of Fortune 100 corporations, insurance companies, utilities, banks, family offices, and individuals. It has over $300 million in assets under management as of September 2014. Sol Systems provides secure, sustainable investment opportunities to investor clients, and sophisticated project financing solutions to developers. The company’s tailored financial services range from tax structured investments and project acquisition, to debt financing and SREC portfolio management. For more information, please visit www.solsystemscompany.com.