Solar developers, tax equity investors and lenders are trying to figure out what value to assign to renewable energy credits that solar projects receive in Massachusetts for generating electricity. The state is in the final stages of implementing its new SREC II program. Three experts talked about the new program during a webinar that Chadbourne hosted in late
March. The following is an edited transcript.
The panelists are Michael Judge, associate manager of the
Massachusetts Department of Energy Resources renewable
portfolio standards programs, Noah Pollak, a lawyer with
Chadbourne in Washington, and Alex Anich, director of
research at Karbone Inc. The moderator is Todd Alexander with
Chadbourne in New York. Market Insights
MR. ANICH: It helps to have an understanding first of how
prices for solar renewable energy credits have moved in the
past in Massachusetts and also to understand the binary
nature of markets with fixed targets under renewable portfolio
Most markets have tended to trade initially as undersupplied
markets. In an undersupplied market, prices gravitate toward
the alternative compliance payment, or the amount a utility
must pay as a penalty if it fails to turn in enough renewable
energy credits to meet the RPS target. In Massachusetts, credits
traded initially well above $300 a MWh and right up to $500 a
MWh, which is the alternative compliance payment, because
there were not enough SRECs available in the market. Buyers
either had to buy SRECs, bidding up the price, or pay the alternative compliance payment, called the SACP. Obviously, the
SREC price will not go above the SACP since buyers will pay the
SACP rather than buy more expensive SRECs.
Like many markets, Massachusetts went from a period of
undersupply to a period of oversupply as more and more solar
projects were built in the state. Prices dropped rapidly and
eventually fell below $285 a MWh, which was supposed to be a
floor of sorts under a clearinghouse price support mechanism.
The solar credit clearinghouse price support mechanism in
Massachusetts is unique. Where other markets also went from
periods of undersupply to periods of oversupply, SRECs in
Massachusetts — notwithstanding the fall in prices —
managed to maintain a premium above the value in other
markets. The New Jersey market is similar to Massachusetts in that it
has free market entry. Developers can build projects with few
limitations, and there is a relatively smooth approval process.
However, Massachusetts SRECs maintained a $100 a MWh
price premium over New Jersey SRECs when each market
moved into oversupply.
Pennsylvania is distinct from these other two markets in that
SRECs can be sold in that market from projects in other states
within the PJM grid. That meant that when other markets
moved into oversupply, the Pennsylvania market was flooded
with SRECs from neighboring states. This caused SREC prices in
Pennsylvania to drop below $50 a MWh. There was a very large
price premium for Massachusetts SRECs compared to
As we look ahead to the new Massachusetts SREC II program,
the key challenges that the program faces are price stability and
maintaining the SREC prices in the range of something called
the solar credit clearinghouse auction price support value. The
solar credit clearinghouse auction price support value will start
at $300. The Massachusetts SREC price support mechanism
functions based on supply and demand, so it does not guarantee a minimum floor price. If the market is oversupplied, then
prices could fall below the solar credit clearinghouse auction
price support value. Therefore, the first challenge facing the
SREC II market is to limit the oversupply. The SREC I market
went into oversupply because of rapid development of a
number of large solar projects in the commercial sector.
We are looking at two potential scenarios for the SREC II
market. In an undersupplied market, we expect the prices to
track above the solar credit clearinghouse auction price support
value, but below the alternative compliance payment. If the
market is oversupplied, then prices could fall below the solar
credit clearinghouse auction price
support value. These markets tend
over time to become oversupplied.
Another challenge facing the
Massachusetts SREC II market is the
net metering cap. This is the amount
of capacity that can be signed up to
supply electricity to the grid through
net metering. The current net metering cap is 663.4 megawatts, and there
are already 672 megawatts of projects that effectively received a statement of qualification
and have the potential to get built. Therefore, the
Massachusetts legislature is considering two bills to increase
the net metering cap. Net metering essentially allows projects
to sell power at retail rates and is essential for establishing a
strong SREC II market.
How the Program Works
MR. JUDGE: Let me give a quick overview of how the renewable
portfolio standard programs work in Massachusetts.
We have three classes within the renewable portfolio standard programs. Class I, which has been in effect since 2003, is
for new renewables. Class II includes both new renewables and
waste-to-energy facilities. Finally, we have the alternative portfolio standard for combined heat and power facilities and other
Within class I is a subclass that we call the solar carve out,
which is a specific target for the amount of solar electricity
utilities are required to supply each year. It is a carve out from
the larger class I obligation. We are in the process of implementing a new carve out from class I, which will be the solar
carve out II program. When everything has been fully implemented, utilities will have an overall class I target for 2014 of
9% renewable energy, which includes the two separate carve
outs for SREC I resources and SREC II resources.
Solar has received special treatment in Massachusetts since
2010 when the solar carve out program was first implemented.
New solar construction was a little slow at first, but then really
picked up in 2011, and a lot was built last spring and summer.
Unlike other states, Massachusetts has an adjustable RPS
target — called a minimum standard — that is supposed to
keep SREC supply and demand in reasonable balance and
prevent prolonged periods of oversupply or undersupply that
have been issues in other SREC markets.
Often when an SREC market is created, the targets are set
by statute many years in advance. When the market moves
into an oversupply, the regulators administering those programs have no ability to make adjustments. In Massachusetts,
our regulations include a formula that adjusts demand based
on market oversupply. We also have a forward alternative compliance payment schedule. This allows market participants to
see the alternative compliance payment up to 10 years in
advance. We also have a solar credit clearinghouse auction account
that provides a soft floor price. It is not necessarily a hard or
guaranteed floor price. It helps maintain pricing in the market,
and I think you can make a strong argument that, because of it,
pricing in Massachusetts has been more stable than in some
other SREC markets that have experienced oversupplies.
So here is an update on the market. In May and June 2013, we
received about 800 megawatts of applications for about 200
megawatts of remaining capacity in the solar set aside
program. Given the wide variety of projects that were in front
of us, some of which had made serious investments and had
serious sunk costs, and others that were not at as an advanced
stage of development, we announced our intention to issue
emergency regulations that were filed on June 28 and
extended eligibility to projects that had met certain development milestones. Namely, any project over 100 kilowatts could
qualify if it had signed an interconnection agreement with the
local utility by June 7, 2013. Those projects were given through
December 31 to be completed. If they were not completed by
that date, then they had to demonstrate that 50% or more of
their construction costs had been incurred.
We have now passed the deadline. Some projects dropped
out. The majority of projects remain in the program. As of right
now, we have about 675 megawatts qualified, of which about
420 megawatts are operating. So we still have a little over
another 250 megawatts that are not operating, but they have
until June 30 to interconnect.
We are also still qualifying projects under 100 kilowatts until
the SREC II program goes into effect. Any such project that is
interconnected and submits an application to us by the time
the SREC II regulations go into effect will be eligible under SREC
I. Otherwise, no new projects will qualify for SREC I as of the
effective date of SREC II.
If any project over 100 kilowatts is currently qualified under
SREC I, it cannot be qualified for SREC II until it has withdrawn
its statement of qualification under SREC I and then reapplies
under SREC II. No project can be qualified for both programs.
Differences Between SREC I and II
There are a few key differences between the SREC I and SREC II
programs. SREC II is a much larger program. The program cap
will ultimately be 1,600 megawatts minus the final SREC I cap.
For example, if the SREC I final cap is 600 megawatts, then there
will be 1,000 megawatts of capacity available under SREC II.
There are no more opt-in terms. The opt-in term is the
number of quarters a project has the right to deposit SRECs into
the clearinghouse auction account. Instead, all projects receive
SREC IIs for 40 quarters from either the quarter in which they
qualify or the following quarter. Also, both the alternative compliance payment and auction price have declining forward
schedules. In SREC I, we had a declining alternative compliance
payment schedule, but a fixed auction price for the duration of
the program. In SREC II, that auction price begins to decline in
the fourth year of the program. Perhaps the biggest change
between SREC I and SREC II, is the introduction of “SREC
factors.” SREC factors offer different incentive levels to different types of projects. These were added to meet certain public
policy goals as well as to differentiate the incentives based on
differing economic needs of different sectors. Finally, the compliance formula has changed because, instead of growing a
market from scratch, we are now trying to maintain steady,
stable market growth. We are not trying to grow a market from
essentially zero to 10 megawatts a year to 150 megawatts a
year. We are trying to maintain it at about a 150-megawatt or
so range per year.
The alternative compliance payment rate begins at $375 a
MWh, which is substantially lower than the $523 rate that is
currently in the SREC I program. So there has been a significant
reduction in the alternative compliance payment rate, which
will provide significant cost savings for ratepayers, but also less
upside to project developers. The auction price stays at the
same price level for the first three years as it is under SREC I,
and then begins to decline.
With the introduction of the “SREC factors,” the amount of
marketable SREC IIs produced by a project will be a function of
whether the project is in market sector A, B, C or “managed
growth.” Projects in market sector A receive an SREC factor of
1.0x. Projects in market sectors B and C receive SREC factors of
0.9x and 0.8x, respectively. Projects in the “managed growth”
sector receive an SREC factor of 0.7x.
Market sector A includes projects of up to 25 kilowatts in
size, solar canopies located on parking structures or pedestrian walkways, emergency power generation units that provide
power to critical infrastructure in the event of an emergency or
power outage, community-shared solar generation units, and
units that provide power or metering credits for low-to-moderate income housing.
Units mounted on buildings and ground-mounted units that
are larger than 25 kilowatts, but less than 650 kilowatts, and
that use 67% of their output on site are all in market sector B. If
these units use less than two thirds of their output on site, then
they fall within market sector C. Market sector C also includes
projects located on landfills and brownfields.
Finally, the managed growth sector is anything that does
not qualify in one of the other sectors. Therefore, managed
growth is primarily comprised of projects larger than 650 kilowatts that are virtually net metered and are not located on a
landfill or brownfield. These are the very large-scale developments that make up most of the megawatts that were
installed under SREC I. By giving these projects a lower SREC
factor, we are trying to limit the rate at which those projects
come into the market.
We revised the SREC II regulations in January. We held a
public hearing and collected comments in late January. An
updated draft of the regulations, based on review of those
comments, was filed with the legislature on February 11. We
received comments from the legislature in mid-March. We are
now reviewing the comments and making final revisions. We
expect to file the final regulations with the Secretary of State
on April 11, and we expect it to go into effect on April 25.
I should mention a couple other things quickly. In addition to
the SREC II program, we have an alternative compliance payment-funded support program for direct ownership of solar
systems from homeowners. We are setting aside $30 million of
alternative compliance payment funds to support direct ownership of residential solar. We see that it can be hard to get loans
for homeowners who want to buy solar systems, and we are
looking into designing a program. We are still in the early
stages, but have done some outreach and selected a consultant. The goal of the program would be to encourage banks and
other financial institutions to provide loans directly to homeowners. The state would offer credit enhancement, probably
either by buying down interest rates or establishing a loan loss
reserve. The final design has not been settled.
There is a lot going on with net metering in Massachusetts.
We are aware that many projects depend on net metering credits along with the SREC revenue. The
Massachusetts market is not uniform in the availability of netmetering credits from one utility territory to the next. Some
utility territories have more capacity available. Others have less.
It is a function of how great the load is in each utility territory.
Any change in the net-metering caps or aspects of the program
must be made by the legislature. There are currently two bills
under consideration by the legislature. It is unclear what direction the legislature will take ultimately, but there is a lot of dialogue taking place among the interested parties.
Finally, I want to highlight how successful some of the programs have been here in Massachusetts. The governor’s goal of 250 megawatts of solar capacity by
2017 was met four years early in 2013. A new goal was set of
1,600 megawatts by 2020. Solar is widespread throughout the
state: 348 of the 351 cities and towns have at least one solar
installation, and more than 130 municipalities are hosting a
project on town facilities or town land. Last year, more solar
was installed than in all prior years combined. That is the fourth
or fifth year in a row in which this has happened in
Massachusetts. We are ranked very well nationally: we were
fourth in solar capacity installed in 2013. We are sixth in total
cumulative installed capacity. We are third in commercial installations. We are fifth in residential. We are fourth in total solar
jobs, and sixth in per capita jobs.
MR. POLLAK: Let me focus on distributed solar projects briefly. Massachusetts SRECs are only awarded to solar projects that
are smaller than six megawatts and, thus, by definition most
SRECs go to distributed solar facilities. Cash flow from distributed solar projects in Massachusetts comes from two sources.
First, the solar company receives payments from homeowners,
commercial and utility customers. These payments may be
under a power contract, lease of the solar equipment or net
metering credit purchase agreement. Second, the solar
company receives SRECs that can be sold in the market.
It may be possible to make a forward sale of the SRECs.
Investors and lenders will take the contracted SREC revenue
into account in a financing of a solar project, but the allocation of regulatory risks, the creditworthiness of the SREC
buyer and any credit support behind a purchase obligation
will affect the value they assign. Alternatively, project owners
may choose to play the spot
market and rely on the stability
that the solar clearinghouse
auction is designed to provide.
However, it is unclear how well
the clearinghouse price support
mechanism will function to
keep prices at or above the
target price and what credit, if
any, tax equity investors and
lenders will assign to contracted revenue when deciding
how much to invest or lend.
A key difference between
SREC I and SREC II is the weighting of SRECs through the “SREC
factors.” This mechanism is an effort by the Massachusetts regulators to promote smaller solar installations and to achieve
other public policy goals by giving those projects a higher SREC
factor. Thus, for example, projects under 25 kilowatts receive
one SREC for every 1 MWh of output. Brownfield and landfill
units have a 0.8 SREC factor. This means that brownfield and
landfill units receive 0.8 SRECs for each 1 MWh of output. The
large projects are in the “managed growth” category have a 0.7
SREC factor and receive 0.7 SRECs for each 1 MWh of output.
Another difference between the SREC I and SREC II programs
is in the process for qualifying under the programs. Under SREC
I, you needed an authorization to interconnect in order to
obtain a statement of qualification. Under SREC II, a statement
of qualification can be received merely upon submission of an
executed interconnection agreement and demonstration that you have the real estate rights and governmental approvals to
move forward with the project.
MR. ALEXANDER: Let’s turn to audience questions. Mike
Judge, why is the state giving the most encouragement to small
solar installations rather than utility-scale projects?
Why Only Small Projects?
MR. JUDGE: We would rather see development take place on
rooftops, landfills, brownfields and parking lots before other
types of open space.
The intent of the original program was to encourage distributed generation. It did not have to be solar. Distributed generation tends to mean smaller projects that are on the customer
side of the meter. So the program was aligned initially with the
net metering rules, and it still is aligned in many respects with
You can build up to six megawatts per parcel of land. There is
no intention to allow projects larger than that to qualify unless
you can find multiple parcels of lands that are next to one
another. Furthermore, virtual net metering rules in
Massachusetts prohibit projects, unless they are under a socalled public cap, from being larger than two megawatts, and
the rules actually discourage projects from being larger than
one megawatt. It is possible to build larger projects; you just
may be doing it without SRECs or net metering.
MR. ALEXANDER: Given that SREC prices can fall below the
compliance auction price, can you explain how this functions as
floor? How can a tax equity investor or lender get comfortable
with the potential revenue from SREC sales given such a
MR. JUDGE: There is no floor in a sense of a guaranteed
minimum price, but the auction mechanism helps. For every
SREC that gets deposited into the auction, the demand for the
following year is increased by one MWh. For every round that
does not clear, if you go to the third round of the auction, say,
then the amount of demand that is added as a result of the
auction doubles. So this coming year, under SREC I, there will be
about a 100,000 MWh oversupply in the market. If 100,000
SRECs are deposited into the auction, the demand for 2015 —
the next compliance year for which we are calculating the
demand — would be increased by 100,000 MWh. If that
auction doesn’t clear and it goes to the third round, demand is increased by 200,000 MWh.
The auction functions through a series of carrots and sticks.
The carrot is the SRECs are available and eligible to be used in
multiple years. The stick is if a retail supplier does not buy in the
early rounds, then it will face a potentially much higher compliance obligation and demand in future years and will probably
end up paying higher prices. The auction has been designed to
accelerate demand for SRECs. The auction is an opportunity for
retail suppliers to hedge against future demand increases and
future price increases.
MR. ALEXANDER: Noah Pollak, from your experience working
with investors and lenders on these projects, are they willing to
take future SREC revenues into account? What do they view as
the biggest risk to try to mitigate? MR. POLLAK: They will invest or lend against contracted
revenue. Otherwise, they are left trying to understand how the
floor mechanism will work going forward.
MR. ALEXANDER: Are they giving much credit to uncontracted SRECs?
MR. POLLAK: It is a negotiation.
MR. ALEXANDER: Alex Anich, when developers come to you
looking for help getting value for their SRECs, are you able to
find them long-term contracts or what other types of strategies do you offer them?
MR. ANICH: We have had a huge interest from third parties
who are looking to get 10-year deals, not only in the SREC I
program but also in SREC II. The SREC price in a 10-year deal is a
discounted price because the buyer is being asked to take price
volatility risk. The longer the period he is asked to assume this
risk, the higher the discount. We are also seeing a 20% discount
in SREC II prices compared to SREC I prices under 10-year contracts. The reason is the SREC II rules are still going through a
MR. ALEXANDER: I know from having worked on a bunch of
projects in New Jersey that the discount for longer term contracts is steep. Anybody who is going to contract for SRECs for
more than a year or two in advance demands a very steep
MR. ANICH: We cannot really talk about a set market price or
anything along those lines yet in Massachusetts. New Jersey
functions through an auction for retail electricity supply that
runs on three-year cycles. Most of the liquidity there is bounded
by that three-year cycle, and the retailers only have to hedge
their compliance for SRECs for three years.
Massachusetts is very different. Massachusetts has a
10-year opt-in term and other
factors that create a different
term structure of liquidity for
the bid side for SRECs.
MR. ALEXANDER: Mike Judge,
if the SREC factors are adjusted
in the future, would the adjustments apply to all projects,
including retroactively to projects that are already in operation? Or would they only apply
to the incremental capacity installed after the change in SREC
MR. JUDGE: They would only apply prospectively. If there
were an incremental capacity addition, the new factors would
apply to the addition. The regulations say we will review the
SREC factors no later than March 2016. Any changes to the
SREC factors that come from that review would be implemented starting in 2017.
MR. ALEXANDER: Do solar canopy installations of any size fit
into market sector A?
MR. JUDGE: Yes, as long as 75% of the modules being used
are on a parking surface or pedestrian walkway. The installation
could be up to six megawatts.
MR. ALEXANDER: What happens to the residual percentage
of the SREC where your SREC factor is less than one? MR. JUDGE: Let’s say you are managed growth and you get a
0.7 factor, so you receive SREC IIs for 70% of your output. The
other 30% would result in creation of certificates at NEPOOL
that would be automatically retired. The NEPOOL certificate
can’t be used by anyone. They are accounted for the purpose of
tracking solar generation, but they have no RPS eligibility associated with them, they are automatically retired in the NEPOOL
GIS trading system.
MR. ALEXANDER: Can you address how the net metering caps
are calculated by utility territory?
MR. JUDGE: Net metering is a statewide program, but it is
implemented by the investor-owned utilities, and each utility
has a cap. The overall state cap is just over 660 megawatts —
about 330 for private and 330 for public — but the amount that
is available in any particular utility’s service territory is different.
National Grid and NSTAR have similar amounts of capacity
available in their service territories. Western Massachusetts
Electric has much less capacity because it has a smaller electric
load. So there is a lot less space available under the net metering caps in the Western Massachusetts Electric territory, even
though there is a lot more space to develop projects in the
western part of the state.
The public caps have been reached in terms of applications
received and approved in the National Grid service territory and
Western Massachusetts Electric service territory. There still is
space in NSTAR’s service territory.
So there are different amounts of capacity available in each
utility territory and that information is available on the Mass
ACA website at www.massaca.org. Even within utility service
territories, the net metering rate varies depending on the type
of meter that you are connecting to. If you are connecting to an
industrial meter, you get the net metering credit for the industrial rate in that utility service territory. If you are connecting to
a residential meter, you get the residential rate. There is also a
small commercial rate. The variation in net metering credits
across utilities is due to different rates in different utility service
MR. ALEXANDER: Will the state consider allowing older projects that are pre-2012 into the SREC II program?
MR. JUDGE: The cutoff date in the most recent version of the
regulations is January 1, 2013. So, no, we do not have any intention to allow older projects that were either eligible to participate in the SREC I program or receive substantial rebates or grants prior to the SREC II program being
in effect to qualify. However, those projects would remain eligible to quality for general class 1 certificates.
MR. ALEXANDER: Can projects that interconnected before
April 25 apply under SREC II if they do not apply under SREC I?
MR. JUDGE: Yes. The cutoff date for SREC II is January 1, 2013.
Any project that came on line January 1, 2013 or later that did
not qualify under SREC I and meets the other program eligibility
criteria would be eligible to participate in SREC II. We do not
expect a lot of that. We expect most such projects to come on
line and apply for SREC I.