nuts & bolts of transition from srec-i to...
TRANSCRIPT
Nuts & Bolts of Transition from
SREC-I to SREC-II
Tom Michelman
Principal
Sustainable Energy Advantage, LLC
Environmental Business Council of New England
Energy Environment Economy
Sustainable Energy Advantage, LLC EBC Renewable Energy Program
The Transition from SREC-I to SREC-II
April 29, 2014
Nuts & Bolts of
Transition from
SREC-I to SREC-II
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Begging the Questions
• Final size of SREC-I and its impact?
• Will SREC-II reach its 2014 goals and what happens if it does or does not?
• How might … impact SREC-II market – Exempt load
– Utility programs
• Auction mechanisms and impact?
• SREC-II Pricing?
• Affect of ITC changes?
• Political risks?
• To be answered by other speakers / panelists
– What is the status of net metering?
– How do you think Community Shared Solar will do?
– How about landfill / brownfield development?
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SREC-I Market Size History
• Original total SREC-I program goal was 400 MW (250 MW by 2017)
• Accelerated run-up to cap (Spring 2013)
– ~184 MW installed by EOY 2012
– Before DOER could shut the gate in an orderly fashion, over 900 MW had
applied for the 400 MW program
– DOER expanded targets to recognize developer commitments and that DOER
system for managing the run-up to the cap was imperfect (not upping target
would have stranded a lot of investment) allowed projects with
interconnection service agreements (ISAs) within a week of notice to qualify.
• Subsequent projects await start of more controlled “SREC-II” market
• 676 MW currently qualified for SREC-I as of March 17, 2013
– 423 MW installed
– 253 MW qualified but not yet operational
• Met 1st extension milestone (expended > 50% of total construction costs by 12/31/13)
• Unknown level of attrition expected, from projects failing to meet 6/30/14 COD deadline
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SREC-I Market Activity: A Snapshot
This reflects projects installed and reported thru March 17, 2014: 423 MWs 7
SREC-I Market Trends:
Installations by System Size • Diverse Market
• Evolving mix of project scales
Through March 17, 2014 8
SREC-I Build Rate over Time Growing but Erratic
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Race to qualify
as 400 MW
target
approached
Spike due
to expiring
Cash
Grants
One more
spike to
come
For perspective largest SREC-I quarter to date was 2013-Q4
with 115 MWs installed
423 MW
installed as of
March-17-2014
What Will be the Final Size of SREC-I?
• 2014-Q2 will end up with the most MWs installed of any quarter
• Additional MWs will qualify for SREC-I – One month extension for projects Broadway left in
limbo will help
– Projects that are all but interconnected may get an extension
– The last half of March 2014 was not included in the 423 MW reported as installed; two extra weeks to squeeze in more projects
• Prediction: ~590 to 650 MW will be installed as SREC-I qualified
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• Annual Capacity Goal for SREC-II will be determined by the final
size of SREC-I. The goal is for SREC-I + SREC-II to total 1600 MW
by 2020
– Table shows the stated capacity goals for SREC-II, given the final SREC-I tally
SREC-II Supply/Demand Mechanics & Expectations (1)
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Total SREC-II MW Incremental SREC-II MW
Year SREC I = 550 MW
SREC I = 600 MW
SREC I = 650 MW
SREC I = 550 MW
SREC I = 600 MW
SREC I = 650 MW
2014 85 85 85 85 85 85
2015 230 230 230 145 145 145
2016 397 380 364 167 150 134
2017 561 536 511 164 156 147
2018 725 692 658 164 156 147
2019 887 845 804 162 154 146
2020 1050 1000 950 163 155 146
SREC-II Supply/Demand Mechanics & Expectations (2) – Scenarios Based on SREC-I MW
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The final SREC-I market size will have a moderate impact on
SREC-II market size overall, but every MW difference will affect
the ultimate size of the MG sector in 2016 and thereafter
SREC-II Compliance Obligation
• Obligation fixed in 2014/2015 as follows:
– CY 2014: set @ 41,279 MWh
– CY 2015: set @ 161,958 MWh
• For CY 2016 and thereafter compliance obligation is set
by formulas that includes increases for historic banking
and clearinghouse auction participation
• So a predicted exceedance or shortfall by DOER for the
end of 2015 will affect demand for SREC-IIs via the
“Installed SREC-II Supply” component of the compliance
obligation formula
– Details further below
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Will SREC-II Reach its 2014 Goal of
85 MW / 41,279 MWh?
• Probably will reach 85 MW 2014 goal because… – Not a big reach. 2013 was largest year with 223 MWs installed, so need
a little over a third of that to make SREC-II goals
– If some SREC-I projects don’t make the SREC-I deadline (& those projects are not MG), then they could help attain goal
• But there is concern because … – Aggregate pipeline is murky
– Net metering availability
– Virtually all construction resources should be focused on SREC-I projects thru June 30, and even some thereafter
– While only 26 MWs of MG allowed for SREC-II for 2014 • Project <=2MW constituted 102 MWs or 46% of MWs installed in 2013
• This means some big community-shared, landfill, brownfield projects probably will need to take up the MG slack to make the goal, and we have heard of a lot of activity in that sector
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41,279 MWh implies ~mean install date during July for 85 MW. Most of
the 2014 SREC-II projects will be installed in Q3/Q4. Whether enough
SREC-II development occurs early enough in 2014 to make the MWh
compliance obligation goal is dicey.
What Will Happen if SREC-II Exceeds its or Does
Not Reach its 2014 MWh Goal?
• Exceeds MWh goal? – SREC-II market will be long, SREC-II prices likely hover in
the $200-$250 range in the near-term, and excess SREC-IIs will be deposited into the auction
– Auction deposits will increase 2016 demand and may cause shortfall ripple effect and a bounce in SREC-II prices
• Does not reach MWh goal? – SREC-II market will be short, SREC-II prices likely to hover
just below SACP of $375
– Could decrease demand in 2016 and have smaller ripple effects thereafter if 2015 supply does not fully satisfy 2014 MWh deficiency and the added 2015 MWh obligation
15 Shortage or surplus in 2015 could exacerbate 2014 deltas
What is this about Exempt Load, and
Why Should I Care?
• Load of competitive retail contracts
executed or extended prior to April 25th
are exempted from SREC-II compliance
obligation for their duration
– LSEs may pay Class I ACP (~$66/MWh in
2014) in lieu of buying SRECs
– Doesn’t change SREC aggregate market
obligation
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SREC-II Load Exemption Wildcard
• SEA expects increased quantity of exemptions… but there will be no
official visibility into quantities until DOER 2014 Annual Compliance
Report issued ~ April 2016
• However, unlike SREC-I DOER left the door open to sign new
contracts between draft regs and final… & LSEs have been actively
marketing retail contracts pitching avoidance of the SREC-II cost
– Typically few retail supply contracts exceed 3 yr. term
• No explicit provisions to make purchases/retirements to balance the
exemption ‘missing SREC-II demand’ in final regulations
• Creates a ‘missing SREC-II demand’ issue can force SREC-II
surplus, and impact demand formula later
– Could cause soft demand and soft prices in early years, forcing SRECs into
auction in a manner that will increase subsequent demand to compensate
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Largest unknown of the SREC-II playing field. Significantly greater use of
exemption than during SREC-I would help create downstream market volatility
How Might Utility Programs Affect SREC-II?
National Grid Solar Program Phase II
• National Grid seeks to own 20 MW of solar DG systems with advanced inverters, reliability benefits, targeted to desired locations on the grid with high load density
• DPU opened Docket 14-01, under which National Grid seeks pre-approval of its range estimates for the upfront capital and ongoing annual costs – The docket is still open
• Seeking projects 60 kW – 1 MW
• RFP issued in January 2014
• Program is targeted to utilize the rest of statutory authorization to own projects in-service before statutory June 2015 sunset date, and will be SREC-II projects
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Every MW of the EDC ownership program decreases the
size of the addressable merchant market by a MW
Proposed Competitive EDC Program for Larger
Projects within SREC-II Creates Uncertainty • Proposed Competitive EDC Long-Term Contracting Pilot Program for MG
Sector/projects > 500 kW – Prompted by National Grid request, SREC-II regulations allow EDCs to petition to DOER to
establish a competitive program for all or some of the Managed Growth Sector’s annual
capacity block and other SREC-II generation units
– Provides long-term SREC-II price certainty, justified on cost reduction
• Could be extended to all solar classes/market sectors
• Program design TBD, but National Grid’s unofficial proposal: – Tariff-based competitive procurement offering EDC 10-20 yr purchase commitment
– Resembles combination of Rhode Island Distributed Standard Contract Generation Program
and the Connecticut LREC/ZREC Program
– Multiple classes of solar projects, annual target for entire program & targets for each class
– 3 solicitations per year
– Bid price value is received in the form of performance based incentives tied to 100% of
generator output over the term of the tariff
– Bids from larger classes used to determine standard performance-based incentives for small
& medium classes. (similar to Connecticut's LREC/ZREC program)
– EDCs resell SRECs to market, with savings passed through to all EDC wires customers
19 Growth of this program would decrease the size of the
addressable merchant market by the program increase
How Does the SREC Clearinghouse Auction Work
for a Participant?
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10 SRECs 1st
Auction
Deposit in
Auction
Account
Auction
Clears Paid $285 x 10
Auction Doesn’t Clear
2nd
Auction
Deposit in
Auction Account
Auction
Clears Paid $285 x 10
Auction Doesn’t Clear
Re-minted SRECs
get a 3 year life
span option to
sell in later years
when demand
formula will
accelerate, likely
driving prices
towards ACP
within 2-3 yrs.
SREC holders
then can monetize
SRECs above
floor. This is also
the incentive for
LSEs to buy from
auction instead of
being exposed to
higher prices.
3rd
Auction
Deposit in
Auction Account
Auction
Clears Paid $285 x 10
Auction Doesn’t Clear
10 Re-Minted
SREC
Paid $285 x 6
4 Re-Minted
SRECs
Auction
Partially
Clears (60% of
deposited
SRECS
purchased)
SREC-II Compliance Obligation Modified Supply-Responsive Demand Formula
• For CY 2016 and thereafter, compliance obligation equals:
• Thus CY 2016 market size will be a function of: – Size of the market for 2016 estimated in August 2015, plus
– Results of 2014 banking, plus
– Results of 2014 auction that takes place in July / Aug 2015
• If market does not meet goal, the SREC-II compliance obligation reacts more or less commensurate with the difference from growth goal – Longer SREC lifespan from auction deposits for all participants creates
options to wait for the price increase from additional demand to be harvested
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Installed
SREC-II
Supply +
Qualified but
not Installed
SREC-II
Supply
+ Projected New
Supply +
Re-minted
Auction-II
Generation
Attributes (CY-2)
+ Third Round
Auction Volume
Doubling
(CY-2)
Banked SREC-II
Generation
Attributes(CY-2)
Theoretically the method should support prices
Prediction of Where SREC-II Prices will Go? Perspective: SREC-I Spot Price History
22 Source: SRECTrade http://www.srectrade.com/srec_markets/massachusetts
Swing
from
shortage
to surplus
Price holding
at time-value
of $ discount
to price floor
One Possible Future of Many Modeled
Potential SREC-II Price Trajectory
• Assumptions / Drivers – Auction behavior
– SREC-I size
– Initial long / short
– Retail exemptions
– Net metering status & changes
– Evolving economics • Utility rates
• Extension of ITC
• Install costs
– Organic growth of Sectors A, B & C
– Varying SREC Factors
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How Will the Expiration of a 30% ITC Affect
MA Solar Development? 1-DOER’s Levers
• Modified Supply-Responsive Demand Formula and the interaction with SREC-II Clearinghouse Auction provides a formulaic market size
adjustment
• Control of Build Rate
– Assurance of Qualification and Statements of Qualification provide
gating
– While market Sectors A-C are allowed to grow organically DOER will
set annual MW constraints on Managed Growth sector to fill gap
between annual MW targets and projections of Sector A-C
unconstrained development
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DOER has enough controls and levers now to make sure the SREC-II
market does not stray wildly long or short for long time periods
How Might the Expiration of a 30% ITC Affect MA
Solar Development? • SREC factors initially set based on economic analysis (projections
of differential required economic incentives)
• DOER will review market performance in 2016, may choose to
adjust SREC factors (up or down) to catalyze or depress market
growth according to their goals and schedule.
– Changes would take effect 1/1/17 at the earliest
• For example if ITC is not extended (and / or net metering cap is
constraining growth) and the market supply is falling behind, DOER
can:
– Adjust upward across the board as response to loss of ITC &/or net
metering
– Make differential adjustments to balance economics of desired sectors
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TBD if increasing the SREC Factors would be sufficient in a
flagging market, and if DOER could / would be willing to have a
SREC Factor(s) > 1 (DOER has indicated that Factors > 1 not
allowed per GIS rules; how difficult to change those rules?)
What are the Political Risks to SREC-II?
• Gov. Patrick, a strong renewable energy supporter, not running for re-election in 2014 – Neither Democratic front-runner Martha Coakley nor Republican front-runner
Charlie Baker are known as strong renewable energy advocates
– SREC program costs are a constant concern for political backlash
• SREC market is a regulatory creation of DOER – Thus, MW / MWh goals, SREC Factors, even the choice of solar technology
can be changed by the executive branch
– Nonetheless, the legislature has been very supportive of the SREC market construct and DOER actions, and MA has history of not undermining current investments
• So regulatory risk to SREC-II (and SREC-I) is likely one of emphasis rather than dismantling SREC market structure (e.g., adjusting SREC factors more to the liking of a new administration's preferences)
• The compromise legislation being discussed could change the future market structure; it would likely grandfather current investments within current SREC structure with no or modest changes
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Overarching risk: With no new legislation, additional market segments
will hit their net metering caps and market growth will be stunted
Looking Forward
• Major Market Factors Are Uncertain: – Federal ITC
– Net metering
• Potential Market Trends: – A high quantity of load exemptions
– Market may be long or short based on each year’s solar generation vs. historic output
– Phase-out of ITC may cause construction boom at end of 2016 trying to beat the deadline, and a construction bust at the start of 2017
• In the long-run: – Potential transition to competitive-procurement policy
– Technology continues to exert downward pressure on SREC prices
– The passage of an industry / utility consensus bill could be a game changer
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SREC-II’s ability to quickly and effectively
adapt to market changes will be put to test
SEA Contact Information
• Tom Michelman: 508-665-5854
• More about Sustainable Energy
Advantage, LLC at www.seadvantage.com
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