Is Massachussetts The Next Solar Hotbed?
Greentech Media
Following in the footsteps of states like New Jersey, Pennsylvania, and Maryland, Massachusetts is about to implement a Renewable Portfolio Standard (RPS) solar requirement.
Like other solar RPS states, Massachusetts will spark solar demand bycreating a market for Solar Renewable Energy Credits (SRECs), each ofwhich represents one megawatt-hour of solar electricity generation. Andlike other solar RPS states, Massachusetts will set a requirement thatutilities source a certain amount of their electricity portfolios from solar power, either through ownership of solar generation or the purchase of SRECs from privately owned projects.
But that’s more or less where the likeness ends. Outside these basiccharacteristics, the new Massachusetts program contains two elementsthat set it apart from other states. First, it creates a uniquemechanism to enable long-term project financing based on SREC revenue,an issue which has been a thorn in the side of other RPS carve-outprograms. And second, it contains a series of self-correctingadjustments to maintain a growing solar market without causingoversupply.
These elements make the Massachusetts program worth understanding ingreater detail. If successful, the Massachusetts SREC market couldprovide an example for new state policies emerging over the next fewyears.
Program Basics and History
RPS solar carve-outs have been instrumental in driving demand for PVin most of the major state markets outside California, includingArizona, Colorado, and Nevada. On the East Coast, New Jersey,Pennsylvania, Delaware, New Hampshire, Washington, D.C. and Marylandall have solar RPS carve-outs. Most of the East Coast programs(particularly in New Jersey, Pennsylvania and Maryland) have high-valueSRECs markets, with prices typically ranging from $100/MWh to $500/MWh.
Massachusetts passed its RPS solar carve-out in the Green Communities Act of 2008, which dictated that the state Department of Energy Resources(DOER) determine standards for the carve-out. The DOER went through astakeholder review process and released final design guidelines inDecember 2009.
Basic requirements for projects:
- Projects must be located in Massachusetts
- Projects must be 2 MW dc or smaller
- Projects that have received substantial ARRA funding, other than the cash grant in lieu of ITC, are ineligible.
How Big Will the Market Be?
In contrast to most RPS carve-outs, which set a percentage ofelectricity sales to be sourced from solar power, the Massachusettsprogram identifies a total amount of solar generation in MWh anddivides it among utilities according to their proportion of total statesales. This requirement is known as the Minimum Standard. The programbegins with a Minimum Standard equivalent to 30 MW of capacity in 2010,and increases by 30 percent more each year than it did the previousyear. For example, if the Minimum Standard jumps from 30 MW in 2010 to70 MW in 2011 (a 40 MW jump), the 2012 Standard will increase by 130percent of 40 MW, or 56 MW.
The Minimum Standard is capped at 455,520 MWh, which will enablearound 400 MW of total capacity. After this point, new applicationswill be transferred to the general Massachusetts RPS program. See thechart below for our early projections of market growth.
Each year, the Minimum Standard is adjusted based on alternativecompliance payment (ACP) volume from the previous year (indicatingundersupply of SRECs) and banking volume from the previous year(indicating oversupply of SRECs). This is the first self-correctingmechanism to keep the market near equilibrium.
Alternative Compliance Payment (ACP)
The alternative compliance payment is essentially the penalty that autility must pay if it does not meet its RPS obligation in a givenyear. In practice the ACP sets a ceiling price on SRECs, as utilitieswill find it more economically efficient to pay the ACP if SREC pricesrise above it. The Massachusetts RPS carve-out has a 2010 ACP of$600/MWh, among the highest in the nation. The state has the ability toreduce the ACP each year, but never by more than 10 percent in a givenyear.
Bankability Through SREC Price Certainty
The most innovative element of the Massachusetts program is itsmechanism to provide the option for long-term SREC price certainty forproject investors while still allowing the market to determine mostSREC pricing. It accomplishes this by setting up an Auction Account,into which any qualified solar project can place its SRECs. Here’s howit works:
Auctions occur once a year. If SRECs are placed in the auction, theyimmediately become "extended-life" SRECs, which have a shelf life oftwo years rather than one. This creates an incentive for utilities topurchase SRECs from the auction. The auction is for a fixed price of$300/MWh, and utilities bid on volume rather than price. If a utilitypurchases a generator’s SRECs, the generator receives the $300/MWhminus a $15/MWh Auction fee.
If the total bid volume doesn’t clear all SRECs in the system, theremaining SRECs’ shelf life is increased to three years and the auctionis repeated. If bid volume still doesn’t cover all SRECs, theutilities’ Minimum Standard automatically increases by the same amount,essentially requiring utilities to purchase the remaining volume.
Projects are guaranteed the option to opt-in to the Auction for aset term of years following the beginning of the project’s operation.This term begins at 10 years in 2010, but can be adjusted annuallydepending on whether the market is long or short. For each full 10percent of the Minimum Standard met by the Auction, the Opt-in Term isreduced by a year, with a maximum reduction of 2 years annually. Thisterm will not go below five years for the first seven years of theprogram.
There is also a short market adjustment such that, if more than 5percent of the total obligation is met through ACP payments, the opt-interm is re-set to 10 years. Like built-in adjustments to the MinimumStandard, these mechanisms are designed to ensure that the marketdoesn’t suffer from significant over- or under-capacity as it grows.
The auction mechanism gets a little bit confusing, but here is whatmatters. If you own and operate a solar project in Massachusetts,you’ll be able to sell the project’s SRECs through a long term contractor on the spot market, just as you can in other SREC states. But if along-term contract is unavailable (as it usually is) and you still needrevenue certainty in order to finance the project, you can opt-in tothe Auction. If your project comes online in 2010, you’ll have avirtually guaranteed 10-year revenue stream of $285/MWh, more thansufficient to enable project financing. And if this proves to be soattractive that the market shows explosive growth, later projects willbe ensured fewer years of revenue.
The Outcome
In addition to the RPS program, Massachusetts has just re-launched its Commonwealth Solar Rebate program (now deemed Commonwealth Solar II),a valuable incentive that was closed in late 2009 due to fullsubscription. The Commonwealth Solar Rebate II will provide incentivesfor projects up to 5 kW through $4 million in ongoing annual statefunding. There will also be a dedicated $8 million in funding from theARRA for projects between 5 kW and 200 kW. This program will expirewhen the $8 million has been allocated, but the residential rebate isexpected to continue "for the foreseeable future." These projects willqualify for the RPS as well as rebates.
As we predicted in the recent GTM Research report The United States PV Market: Project Economics, Policy, Demand and Strategy Through 2013, Massachusettswill never approach California’s market size, but it will be animportant secondary demand center for PV over the next few years. Thesuccess of the solar carve-out program remains to be seen, and it doescarry the danger of being overly complex. But if I were a gambler, Iwould bet that the Massachusetts program will provide the model forfuture RPS solar carve-outs.
Greentech Media is an integrated online media company designed to deliver the highest-quality content in the industry, whether it is research, news or critical networking events. Greentech Media is headquartered in Cambridge, Mass., with operations in New York City, San Francisco and Munich.