Posts Tagged ‘state solar laws’

Why other states should take note of the Massachusetts SREC program

Posted November 8th, 2010 by SRECTrade.

On the heels of the Conference On Clean Energy in Boston last week, it is worth drawing attention to the Massachusetts SREC program. Though the market is still in the very early stages of development, the program has been well-conceived and one that may serve to be a template for future SREC markets. (And yes, SREC markets are coming!)

Solar is nothing new to Massachusetts, but SRECs were only introduced in 2010. Prior to the solar carve-out, solar owners had to rely on large upfront incentives and the sale of Class I RECs that had limited value.  The solar carve-out set the stage for an SREC program that will provide a market-based incentive to help subsidize the cost of solar today. Though any homeowner or investor would prefer an upfront cash grant from the state for their solar system, the reality is that both society and the industry have suffered from a reliance on these programs that are at the same time costly and incredibly volatile in availability. The beauty of the SREC program is that it creates a market-based subsidy that is not paid out by the state government, but by the electricity companies that supply the state. Though the price paid for SRECs may vary, the payments made to solar owners for SREC sales can be viewed as a tax levied on the suppliers of dirty energy. As such, once implemented, the program does not require the additional allocation of state funding to subsidize projects. As solar proliferates in the state, the market-based SREC price will come down over time. Meanwhile, solar businesses that adapt to the SREC program will find comfort in the continuity it provides, especially after years of boom and bust periods driven by upfront subsidies.

This fluctuating SREC price is at the heart of the greatest challenge that participants in the solar industry face when confronted with an SREC market. Addressing this uncertainty is precisely why Massachusetts stands out from any other SREC market in the U.S.  Instead of setting fixed long-term targets that may or may not be achieved, Massachusetts has set up a formula that publishes a new target each year based on the conditions in the market the previous year. This formula is designed to ensure that the state is setting goals that are neither too aggressive nor too weak.  As a result, it should be easier for developers to finance solar projects based on the price of SRECs.

This is very different from what we’ve seen in other states. In New Jersey, the state goals increased so aggressively that the market could not keep up and SREC values remained high. This isn’t entirely a bad thing for New Jersey since the state earned ~$700 for each SREC that electricity companies fell short last year. Though that money was intended to fund clean energy projects, Republican Governor Christie was able to use it to balance the state budget. Although the next few examples highlight the opposite extreme, the shortfall in New Jersey in 2010 could very easily happen to any of the other SREC states 5 years from now. At about 255 MW required this year, New Jersey dwarfs every other state that followed in implementing a program.

In the smaller state markets, the problem in the early years is the disproportionate impact that a large project could have on a single market. In 2009 the Delaware market was threatened by a 14 MW Delmarva project that would have collapsed state SREC pricing if it weren’t for state intervention.  Meanwhile, in the next few years, the announcement by AEP of a 50 MW project in Ohio could place a significant burden on the in-state solar industry that only has about a 45 MW requirement for 2011. New Jersey was able to protect the SREC program in the early years by placing a 2MW maximum on qualification. It lifted that restriction in 2010 to feed the exponential growth needed to meet the RPS solar requirement. Hopefully Ohio, Pennsylvania and the other budding state SREC markets realize the impact these large projects will have on a solar industry that is just learning to thrive off of SRECs.

Meanwhile, back in Massachusetts, it seems the state has already thought through a lot of these issues. The aforementioned formula for determining the requirement each year provides certainty that an influx of large projects won’t collapse SREC pricing for everyone else.  In addition, though it recently raised the cap on system sizes from 2 MW to 6 MW, the cap should be enough to ensure that an industry is built, not a few large solar farms. Finally, in case the flexible requirement and 6 MW cap weren’t enough to help participants feel comfortable, the state implemented a program with a floor price of $300 per SREC.  As a result, SRECs in Massachusetts will trade between $300 and $600.  In the unlikely event that there is an oversupply, the state will host a fixed-price auction that will give buyers a chance to purchase the SRECs at $300 to get an early start on the next year. If the SRECs don’t sell after a couple rounds, the state will put them back into the market with an extended life, while at the same time, increasing the requirements proportionally.

In summary, if all goes as planned with the Massachusetts solar carve-out, the state requirement should increase enough each year so that there is never an oversupply.  In the event that there is an oversupply, the state will host an auction for buyers at $300.  If any SRECs go through the auction unsold, the state will increase the requirements to make sure that buyers will be willing to pay more than $300 for them.  For someone looking for certainty in SREC prices, a gaping oversupply will be very unlikely, an unsuccessful last-chance auction will be extremely rare, and if both those scenarios exist, the possibility that a buyer is not willing to pay at least $300 per SREC is unimaginable under the rules put forth by the state of Massachusetts.

Hopefully all the other SREC states, current and future, take note of the Massachusetts Solar Carve-Out.