New State Incentives Favor Systems On Commercial, Residential Properties

The Massachusetts solar market has been one of the hottest in the country, which might seem counter-intuitive given the fact that “sunny” is not typically one of the first words used to describe our weather, especially during the winter months.

Several market factors, however, have made investment in solar projects quite attractive, including high electricity prices and progressive federal and state incentives; indeed, the Solar Energy Industries Association (SEIA) reports that in 2012 alone, Massachusetts had the sixth-highest installed capacity in the United States.

While the growth has been led by large ground-mount projects that cost millions of dollars, recent state-level regulatory changes may slow the pace of larger projects. Nonetheless, the outlook for solar in Massachusetts remains bright and will be driven by a shift towards rooftops and smaller solar systems directly tied to homes and businesses.

DISTRIBUTED SOLAR

There are two distinct electric-generating markets. The more traditional model is the “utility” market where large generating companies and utilities buy and sell electricity at the wholesale level and distribute it across regional and local transmission systems to the end consumer. In the second model, known as the “distributed” market, electricity is generated by systems installed on-site – or “behind the meter” – which enable the hosts to reduce the amount of electricity they need to buy from the utility. This new market is rapidly evolving around technologies like solar and combined heat and power.

In general, distributed facilities tend to be more expensive per unit than larger utility systems because of higher installation, material procurement and transactional costs. This cost disparity previously limited investment in distributed solar, but reductions in overall project costs, coupled with modified state-level incentives, will provide significant returns on investment and likely help to expand the solar market.

INCENTIVE CHANGES

There are three key elements to the economics of a solar project in Massachusetts:

  • Revenue from electricity sold, or savings from electricity not purchased;
  • Revenue generated by selling Massachusetts Solar Renewable Energy Certificates (SRECs);
  • A reduction in project capital costs from federal tax benefits.

The key for large utility type solar projects has been the combination of state-sponsored SRECs and the federal tax benefits. The tax benefits can reduce the capital cost of a project by as much as 50 percent, and SRECs effectively acted as a multiplier on the price of power. The SREC program created a secondary market, which granted certificates to a system owner for generating electricity from solar facilities.

The initial target that Massachusetts regulators set for installed solar capacity was 400 megawatts and SRECs were a major part of the program; the target is now on pace to be eclipsed and will cause the value of those SRECs to drop because there will be more supply than program-created demand. The supply and demand of SRECs is carefully managed by sophisticated regulations, such as an auction for excess SRECs, but despite some program stability, there remains uncertainty about future SREC values. It should be noted, however, that these concerns are much less acute for distributed projects that can benefit from special program carve-outs.

COMMERCIAL REAL ESTATE OPPORTUNITIES

For commercial property, the immediate opportunity is for distributed projects less than 100 kilowatts – or approximately 10,000 square feet of roof space – which can qualify for the earlier, higher-priced SRECs if certain criteria are met before Dec. 1.

Looking forward to 2014 and beyond, proposed Massachusetts regulations to create the SREC II program will allow for a distributed project on a commercial property to be any size, provided a percentage of the energy is used on-site in order to qualify for new SRECs. The new SRECs for such distributed projects on commercial property will be priced higher than those of associated utility-scale projects and will provide fixed pricing for the life of the solar project (which is greater than 20 years), thus eliminating market uncertainty and making investment and debt for the project easier and less costly to secure.

The overall SREC program is complex and there will be challenges in the market for large projects, but significant benefits exist in the new SREC program for distributed solar. These benefits, combined with relatively high electricity prices, decreasing costs to install distributed systems and an improving set of tools for fully realizing the value of the federal tax incentives, will encourage the continued growth of solar projects for commercial real estate in Massachusetts.