MA Solar Carve-Out Chaos

So by now, most people in the solar industry know that the MA Solar Carve-out is done.  The big question on everyone's mind is "What's next?". The Massachusetts Department of Energy Resources (DOER) hosted a stakeholder forum to provide an update on future policy support for solar on June 7th. At this point, its still a little hazy as to exactly what the future program will look like, but DOER has significantly expanded on several ideas presented during the 3/22/2013 policy session, most notably the Solar Renewable Energy Credit (SREC) Factor (more on this later). 

The other big question is where to draw the line regarding eligibility in the current 400 MW Solar Carve-Out (SCO) program. The SCO was born through "Emergency Regulations" in January 2010 and it will close through "Emergency Regulations" as DOER needs a way to determine which projects will qualify for the 400 MW cap and which ones won't. Right now, they have more applications than capacity and will need to determine which projects make the cut and which ones will need to wait for the successor program. DOER has stated that they will expand the current 400 MW cap for projects that "are demonstrably well invested in the development cycle and for small projects to continue to proceed." This also means that the steady state SREC compliance obligation for years 2014 - 2022 will need to be adjusted upward to accommodate the expanded capacity ceiling of the SCO. Here is what we know so far regarding who will qualify for the existing SCO:

  • All residential and small commercial (<100 kW) projects will qualify until the regulations for the successor program are promulgated
  • All projects with utility Interconnection Service Agreements signed prior to June 7th, 2013 so long as they "meet proscribed project construction timelines" 
  • "Proscribed construction timelines" means: Authorization to Interconnect before 12/31/2013; or 50% of total construction costs are expended by 12/31/2013 and Authorization to Interconnect is granted by 3/31/2014.

As for the future, Energy Tariff Experts (ETE) is encouraged by the ambitious policy support for future solar build-out in MA. There are several good things in the current DOER proposal for the successor to the SCO. There are also some concerning aspects of the current proposal, namely the complexity of the proposed regime which at first glance seems like a highly complex, Rube Goldberg contraption that will be hard for many to grasp. There are also several inherent contradictions in the current proposal regarding stated goals and likely outcomes for ratepayers.

First, lets start with the good things. ETE is especially encouraged that the proposal for the successor program includes provisions for the following:

  • A long policy horizon to support the build out of ~ 1,200 MW of additional solar PV
  • Ten year term limits on SRECs
  • A Clearinghouse Auction price support mechanism
  • Forward SREC minting for small/residential PV installations
  • Consideration of plans to mitigate aggressive ground mount developments (e.g., cutting down forested land to build solar PV arrays) through land use criteria and/or inter-agency regulation.

Now lets discuss the contradictions. MA DOER states that they are concerned about ratepayers costs and want to achieve solar cost parity with the current Class I REC market. At the same time, they propose a mechanism to "manage supply" by limiting the amount of larger ground mounted systems accepted into the marketplace. By having a mechanism to "manage supply", DOER can keep SREC prices high and avoid "unfettered market expansion and oversupply." It seems that DOER is very concerned for the welfare of solar developers, but if there is to be a REC market why not let market forces drive the rate of build outs? Why should DOER have a mechanism to control growth? DOER's current proposal to manage the supply of larger ground mounted systems is worrisome because their proposed criteria are as follows: " Managed supply will be qualified competitively based on criteria including, for example, price (applicants bid SREC Factor), and non-price criteria such as land use attributes, tree cutting, development timeline and likelihood of success, local benefits, etc."  These non-price criteria could to open the door to politicization of the acceptance process, which would be a bad thing. If DOER is worried about solar ground mounts, they should promulgate regulations around land use criteria or limit the size of SREC eligible ground mount developments instead of creating an opaque mechanism for "managed supply."

MA DPU, Post 400 MW Solar Program Policy Design Stakeholder Briefing, June 7th, 2013. Slide 20

MA DPU, Post 400 MW Solar Program Policy Design Stakeholder Briefing, June 7th, 2013. Slide 20

The proposed SREC Factor, while conceptually coherent, could prove to be very difficult to implement in practice. DOER's stated goal is to achieve cost parity between SRECs and Class I RECs. The SREC Factor is the mechanism they plan to use to achieve this as the SREC factor will be used in a formula that will determine the REC payment for the output of PV systems built in each year of the successor program. The easiest way to think about it is to compare it to a blending process. Each MWh of Solar PV will be split between SRECs and Class I RECs. At the beginning of the program, small systems will get 1 SREC for each MWh produced (see graphic). Over time, as costs decline for new systems, the SREC factor will decrease and small units will get less SRECs and more Class I RECs and therefore the dollars received through REC payments will be incrementally lowered each year for new capacity installations. Note that larger systems will start off with a lower SREC factor since they require lower SREC payments in order to be economic. The table below shows how DOER is thinking about this. They plan to assign progressively declining SREC factors for different classes of systems based up the cumulative MW of solar build out to date. 

MA DPU, Post 400 MW Solar Program Policy Design Stakeholder Briefing, June 7th, 2013. Slide 21

MA DPU, Post 400 MW Solar Program Policy Design Stakeholder Briefing, June 7th, 2013. Slide 21

The graphic to the right below provides a visual illustration as to how the SREC Factor will be used to determine the dollar value of the RECs generated for each MWh of solar PV production. The SREC factor is essentially the multiplier used to divide

SREC Factor Illustration.png

the 1 MWh up into Class I REC and SREC fractional components. Each fraction is then multiplied by the then current price of each REC type to determine the REC incentive that the owner of the solar PV system will receive. Now, the contradiction with this mechanism is that it looks less like a REC market and more like a Feed-in-Tariff (FiT) in disguise. DOER is very concerned with price stability and predictability, but creating a FiT is beyond the scope of what they can accomplish in the next few months to keep the solar industry going in MA. DOER seems overly concerned with a New Jersey style bust in the solar market and the price support mechanisms in the current proposal along with the declining SREC factors are meant to prevent a boom and bust cycle of development. The future solar regime in MA looks like it will be very friendly to developers and expensive for consumers (at least in the near term). At ETE we have simple advice, if you have a sunny roof in MA, go solar.

Mass Solar Carve-Out........It's Full

For most in the solar industry, it became apparent sometime in early March 2013 that the Massachusetts Solar Carve-out (SCO) was going to get filled up sometime before 2013 is over. Whereas in late 2012 many smart people (self included) thought that the SCO would run through mid-2014 based on the rate of solar build-out experienced during 2012. Unfortunately, we are currently facing a solar development train wreck in MA as the SCO now appears to be fully subscribed. MA DOER confirmed this in an e-mail sent out to stakeholders earlier today. The relevant excerpt is shown in the graphic below. 

DOER Excerpt.jpg

The DOER has been flooded with Statement of Qualification (SQA) applications since everyone has been racing to get their projects qualified before the music stops. There was supposed to be a queuing system for the SCO program, but the SCO filled up before it could be implemented.

At ETE, we've attended the hearings for the development of the post-SCO policy and Gov. Patrick's administration is very dedicated to advancing the solar industry in the state. The successor program to the SCO is expected to accommodate approximately 1,600 MW of new solar build and will likely be a REC based program that fits within the current Class I Renewable Portfolio Standard or some slight modification thereof.  

We should all learn a lot more about the future of solar in MA at the stakeholder meeting scheduled for June 7th. Although DOER is working with urgency on this, and they've moved quickly in the past (remember, the SCO was promulgated under "emergency regulations"), it won't be quick enough to prevent a major slowdown in solar development. Developers who require net metering under the private sector caps will likely continue with their interconnection processes, but nothing large is going to get financed until there is clarity regarding the successor solar program.

DOER will need to be sensitive to the needs of REC purchasers and therefore an entirely new REC program or carve-out is unlikely. REC purchasers are deregulated energy suppliers, investor-owned utilities, and other load serving entities. A new REC program would constitute retroactive rate making and would probably lead to a lawsuit (per the TransCanada suit of 2010). As a result, the REC "factor" approach within the Class I REC program mentioned by DOER during the March stakeholder meeting seems like the path of least resistance as REC compliance buyers would likely not view that as a change in law or retroactive rate making. 

If you are building a commercial scale solar array that you will own yourself and are comfortable with an IRR around 10%, it still makes sense to go forward as you are likely to get REC prices north of $100/MWh in the new regime and the provisions for 50% bonus depreciation on solar assets sunset at the end of 2013 (unless Congress decides to renew it again on Jan 2nd of the new year like they did in 2013).

Anyhow, the SCO filled up really quick and caught us a little off-guard. Hopefully the regulations for the new solar program come out really soon.

Solar Firms vs. Electrical Contractors - Who is Best to Install Your PV System?

We've noticed a trend in the last year where electrical contracting firms seem to be getting much more active in the solar installation market. It makes perfect sense because many have been doing work for solar developers as subcontractors for a few years now and have learned the business well enough to become solar Engineer, Procure, Construct (EPC) firms themselves. In addition, installing solar PV systems is not particularly difficult and falls directly within the capabilities of many electrical contracting firms.

A few weeks ago, we decided to go through the MA Dept of Energy Resources (MA DOER) list of solar installations qualified for the Solar Carve-Out as of 3/13/2013. We divided systems up by size and determined what type of firm did the installation (solar developer, electrical contractor, engineering firm, or construction firm). Although the full results of our analysis are too voluminous for a blog post, the big news is that we found electrical contractors offer a significant cost advantage vs. solar developers. The chart below shows the stated system cost per Watt for residential size systems ( <10 kW ) installed in MA over the last three years.

Residental EC vs SolarFirm.png

We hope our readers will excuse the PivotChart, but the results are striking. In the residential marketplace, electrical contractors offer a significant cost advantage over solar developers. As 2013 progresses, we expect to see this trend continue. Electrical contractors tend to have a lower cost of sales since they have an existing customer base and their business model is based on labor, so they are experts at keeping staff utilized.

This trend is also seen in the small and medium commercial market. The graph to the left shows the average system costs per Watt for systems sized between 25 kW - 100 kW. Note how electrical contractors have become more cost competitive in this market segment over time.

Med Com EC vs SolarFirm.png

It's likely that this trend will continue and based on what we've seen recently, installed costs for 2013 should be considerably lower than 2012. We've observed bids on large jobs approaching $2.00/Watt and prices for smaller systems should end 2013 below $4.00/Watt.  

Once installation sizes cross the 100 kW threshold, solar firms regain their cost advantage and this advantage becomes significant in installations above 500 kW in size.  The larger systems require economies of scale and really require sophisticated EPC capabilities. Although most solar firms buy equipment direct from manufacturers, this dynamic is changing for smaller systems. Firms such as Northeast Electric Distributors now stock everything you'd need to build a small to medium size solar PV system and electrical contractors prefer buying from distributors over purchasing equipment direct from manufacturers. We expect the solar equipment supply chain for smaller projects to increasingly move towards distributors vs. the current paradigm where most firms buy equipment direct from the manufacturer.

Its likely that electrical contracting firms will continue to expand their share of the solar marketplace. Firms like Broadway Electric have demonstrated that electrical contractors can handle the largest of jobs at very competitive price points. On the surface, this may seem counter-intuitive as Broadway is staffed with high cost labor from IBEW Local 103, but their experience in the marketplace has demonstrated that the highly trained union workforce can be very efficient and perform high quality work. The union labor model is based on labor utilization and the workers are very familiar with aggressive project schedules. This stands in contrast to many of the solar firms that jumped into the MA market when things really began to take off two years ago.

This is an exciting marketplace that continues to evolve. If you need help evaluating proposals from solar developers, give us a call.