MA SREC II Update: The RECs Are Too Damn High

Its been awhile since we've provided an update on the rule making process in Massachusetts (MA) for the successor solar program to the Solar Carve Out (SREC I). The successor program under development is referred to as SREC II. Before we begin, a little background may be helpful. In early 2013, it became clear that the SREC I program was going to reach its program goal of 400 MW ahead of schedule. The MA Department of Energy Resources (DOER) began a public stakeholder process to create a successor program which is nearing its conclusion. There have been several proposals submitted for public comment and DOER issued draft regulations approximately six weeks ago. DOER will now take the input received from stakeholders in the most recent comment period and incorporate select comments into the final regulations. These final regulations will then be sent to the MA Joint Committee on Telecommunications, Utilities, and Energy for comment. The Joint Committee will then provide comments to DOER which will be incorporated into the final promulgated regulations that will take effect. DOER has made a webpage available where they have provided information on the process and regular updates.

Instead of ETE recapping the latest version of proposed regulations for the SREC II program, I'd recommend you read this summary on SRECTrade.com. It captures most of the important points of the new program design and ETE will use this blog post to focus on the process used by DOER in this rule making and our expectations regarding likely outcomes. 

In order to inform the process for creating the SREC II program, DOER hired a consulting team (Sustainable Energy Advantage, Meister Consultants, La Capra, and Cadmus) to produce several reports. The purpose of these reports were to provide an informed basis for the SREC II policy design and also to justify the levels of incentives required for various types of solar installations. You can download these reports from this DOER webpage. Although ETE is going to present information from various intervenors that are critical of these reports, ETE's feeling is that they were well done with the exception of report 3b. The shortcomings in report 3b, entitled "Analysis of Economic Costs and Benefits of Solar Program", in ETE's opinion, are largely due to a pre-determined outcome requested by the client (DOER) and a scope that wasn't sufficient to perform a fully comprehensive benefit to cost ratio for MA ratepayers. Although its easy to blame the consultants, the process wasn't designed to deeply vet the costs of solar. More on this later.

Although utility, ratepayer, and environmental groups have been voicing concerns about the expected costs and issues with the SREC II program, they became quite vocal during the January 2014 public comment period (download the zip file 1/3 of the way down the page). A quick summary of each type of intervenor and the nature of their comments are listed below.

Environmental Groups - Groups such as the MA Audubon Society, various municipal conservation commissioners, and clean water groups are very worried about forests and wetlands being cleared for ground mounted solar arrays. The restrictions and discounting via SREC factors of ground mounted solar arrays largely stem from environmentalists who are upset (rightly so) that many large ground mounted arrays have been built on sensitive ecosystems over the last four years, often exploiting agricultural zoning to build structures that would otherwise be prohibited.

Solar Developers - Although their comments were wide ranging, an important theme focused on the restrictions on managed growth. In late spring 2013, large scale solar development in MA came to a screeching halt when the SREC I program became oversubscribed. By many estimates, there are nearly 100 MW of shovel ready solar developments waiting to move forward and most of these would fall into DOER's managed growth category (500 kW ground mounted). The regulations state, in 14.05(9)(m)(1) that the managed growth category will accept 26 MW in 2014 and 80 MW in 2015. Stakeholders are concerned, and rightly so, that this is not enough capacity to accommodate the existing development pipeline for larger systems and will unnecessarily put a brake on solar industry growth.

Retail Energy Suppliers - The Retail Energy Supply Association (RESA), TransCanada, and ConEd Solutions all had critical comments. TransCanada provided a strongly worded, yet well-reasoned, take-down of DOER's 3b study regarding benefits of solar to ratepayers. ConEd Solutions argued that the SREC factors result in wasted RECs, arguing that a managed growth system receiving an SREC factor of 0.7 results in the wastage of the remaining 0.3 MWh that should be credited as a Class I REC. RESA focused on the uncertainty regarding future SREC forecasts, petitioned for more transparent forward looking SREC compliance forecasts, and highlighted the risk premiums borne by ratepayers as a result of the uncertainty regarding SREC purchase obligations for retail suppliers in future years. They also highlighted DOER's recent activities that have heightened uncertainty and risk premiums for retail suppliers in the marketplace, such as the June 2013 "emergency" regulations to deal with the over subscription of SREC I. They aren't the only ones berserk over DOER's perceived abuse of "emergency" regulation making.

Utilities - Northeast Utilities (NU) and National Grid both weighed in with several comments on the proposed SREC II framework. National Grid has been vocal in airing its concerns regarding the costs of the program and used the December 2013 Raab Roundtable to propose an alternative approach where the utility would have a tariff based solicitation that would ensure stable and predictable revenues to a solar installation for a period of ~ 15 years and align the payment rates with the revenues required to secure financing. National Grid has been using this model with success in Rhode Island and has been able to procure solar at much lower costs than those envisioned in the SREC II program. NU goes further than National Grid and states that the SREC II program is not a market for RECs, but instead a contrived construct that will keep SREC costs artificially high. They shred DOER's 3b report regarding the cost benefits of solar. Specifically, NU states that the estimated avoided transmission cost benefits from solar development are inaccurate because they are lifted out of a study regarding avoided transmission and distribution costs associated with energy efficiency (EE), which is inappropriate for solar since EE resources tend to be coincident with system peak loads and solar is less so. NU also correctly notes that many systems installed in places without onsite load (e.g., ground mount) result in increased transmission and distribution costs associated with interconnection. NU explained that their experience in Connecticut with the LREC/ZREC program illustrates that a long term REC contracting regime lowers the cost to acquire solar resources relative to the proposed SREC II framework. 

Our thoughts - It appears likely that the regulations will be implemented in something very close to their current form. There are a number of key takeaways regarding the future of solar in MA.

  • There will be a knockdown drag out fight over net metering later this year as the statutory net metering caps for each utility will be reached soon. The National Grid presentation at the Raab Roundtable in Dec. 2013 hints at this, but the utilities are adamant that distribution generation be sized according to the on-site load. In addition, any expansion of Virtual Net Metering credits for ground mount systems will be less generous that the current regime. Expect some very solar friendly legislation that expands the net metering caps in the MA Legislature that quickly becomes contentious.
  • SREC II will be limited in its ability to build out new MWs of PV if the net metering issue isn't resolved quickly
  • The Solar Clearinghouse Auction is a price support mechanism, NOT a floor price, how in the world don't people understand this???
  • The SREC Factor approach discards a portion of the REC that would otherwise qualify as a Class I REC. The dual minting approach was included in prior iterations of DOER's SREC II proposal and our guess is that it was discarded due to complexities in implementation in the NEPOOL GIS attributes tracking system used to mint and retire RECs.
  • The current MA approach to solar is very customer friendly in that anyone can go solar. Your average customer can look in the Yellow Pages for solar installers, get multiple quotes, and then move forward based on their own purchasing process and timeline. In the auction procurement methods proposed by National Grid and NU, the customer needs to partner with a developer in order to submit a bid to the utility. In the MA model, the customer is in the driver's seat whereas in the auction model the customer is captive to the solar developer unless they are highly sophisticated. 
  • New Jersey and Maryland are both seeing new solar PV builds with SREC prices below $200/MWh. What are they doing differently and why shouldn't MA copy them?
  • The MA DOER has a lever to reduce costs three years into the program in that they can reduce the SREC factors per section 14.05(9)(l)(4) of the proposed regulations. 

What will this cost you?

2015 Forecast RPS Costs.png

The SREC II will look very similar to SREC I in that it is a carve-out of the Class I Renewable Portfolio Standard (RPS). By 2015, SREC I compliance costs will have stabilized and SREC II compliance costs will be starting to creep into the supply portion of your electricity bill. Section 14.07(3)(d) states that the 2015 SREC II compliance obligation for electricity suppliers will be 161,958 SRECs which translates to 8/10 of a mil per kWh in extra supply charges. This isn't a big deal for the average residential ratepayer, but if you are a hospital, data center, or large industrial this will be a noticeable cost. In the table to the right, we've broken down the expected cost impact of the MA RPS in 2015 when SREC II will begin to show up in consumer supply charges. Although SREC II doesn't seem all that bad, it will continue to grow and the overall RPS charges will be near a penny per kWh by 2015.

In recent weeks, there have been several articles in the MA press that have been critical of the costs associated with expansion of solar. Commonwealth Magazine ran a story regarding how certain prominent politicians are ducking the issue and even the Globe ran an article that aired the cost concerns of many stakeholders. So far, the debate hasn't devolved into an emotional screaming match........yet.

In summary, we like the decentralized approach to solar taken by MA as opposed to the more centralized programs in RI, CT, and NY, but the costs of SREC II seem higher than warranted. New Jersey is a similar state in many respects (at least from a cost perspective) and they are building out solar at a steady rate at lower costs. Most of DOER's market design is thoughtful, but we think they need to exert more cost pressure on the industry. As we've stated in the past, renewable energy costs money and MA's decision to transition to a more renewable generation mix is a policy choice, endorsed by MA voters, and embraced by politicians that has associated costs and benefits. The benefits are cleaner air, the costs are buried in your electric bill. The only way to dodge these costs is to go solar yourself and get on the receiving end of these programs. 

Power Plant of the Week - Mars Hill Wind

Most recent PPotWs have been older fossil plants so we thought we'd shake it up a bit and profile a utility scale renewable generating asset. First Wind's Mars Hill Wind Farm is a great place to start. Its located in Aroostook County, Maine and was the first utility scale wind project constructed in New England. Mars Hill has 28 1.5 MW wind turbines with a nameplate generating capacity of 42 MW and is owned and operated by a First Wind subsidiary called Evergreen Wind Power, LLC. Emera, the Canadian utility that owns Bangor Hydro, is an equity partner in the project. It came online in March 2007 and has been reliably generating energy ever since.

Mars Hill wind turbines. Photo originally appeared on Xconomy.com

Mars Hill wind turbines. Photo originally appeared on Xconomy.com

First Wind is the company formally known as UPC Wind and they began initial work on the Mars Hill project in 2003. By 2005 they were ready to build, but the looming expiration of the wind Production Tax Credit (PTC) put the project on hold. The uneven lapses and renewals of the PTC have been a chronic problem in the wind industry for years and have created havoc and inefficiency throughout the wind supply chain. In the second half of 2005, President Bush signed EPACT 2005 and the PTC issue was resolved. In addition, First Wind had sorted out issues regarding the eligibility of the Mars Hill project for Class I Renewable Energy Credits (RECs) in CT and other New England states. 

The reason for the uncertainty in REC eligibility was due to the fact that Aroostook County, ME is not connected to the ISO-NE power grid. Its served by Maine Public Service (MPS), which is connected to the New Brunswick, Canada grid. The output from Mars Hill is connected to the MPS system via a 69 kV transmission line and primarily serves local native load. The REC issues were ultimately resolved and the project was constructed in 2006 and brought online in 2007. 

Although the Mars Hill project is largely considered a success, it has had its share of controversy. Wind developers and regulators are still learning how to assess, prevent, and mitigate noise and acoustic issues related to wind turbines. While newer designs tend to be quieter, the issue isn't going away. Here is a link to an article regarding the complaints of certain Mars Hill neighbors who claim that the noise from the turbines is having a negative impact on their properties and well-being. 

Although Mars Hill was first, several other wind developments quickly followed in ME and the region has several additional pending projects. ME's sparse population, good wind resources, REC markets in New England states, and proximity to load centers in ISO-NE make it a great place for wind development. You can keep in touch with First Wind via their Facebook page.

Why Can't I Buy New York RECs?

Have you ever wondered why you can't buy RECs for New York State? The reason is because they don't exist, at least not in the wild. There has been a vigorous debate in renewable energy circles about the most effective way to spur renewable energy development. Places like Ontario have embraced feed-in tariffs. many states have adopted REC markets, and some states have pursued a central procurement mechanism to buy renewable energy.

New York has embraced the central procurement mechanism or centrally awarded grants/incentives to spur development of renewables. There is a system benefit charge on all electric bills in New York State that say "Renewable Energy...". The exact wording varies a little by utility, but this line item collects funds for the New York State Research and Development Authority (NYSERDA) from all rate payers to support NYSERDA's energy programs. NYSERDA, in the proud tradition of New York State quasi-governmental authorities, has been the main driver of renewable energy development in the state for many years. While New York has developed a significant amount of wind capacity, it has lagged behind its neighbors New Jersey and Massachusetts in solar development.

Governor Andrew Cuomo vowed to accelerate the adoption of solar for large consumers via the NY-Sun Initiative. Although NYSERDA has historically had several solar incentives, NY-Sun is unique because it involves a competitive award process for systems greater than 50 kW. The results of the first solicitation seem to be encouraging and NY will serve as a great test case of the central procurement system as a mechanism to drive solar development.

Luckily for small scale and residential solar systems, NYSERDA also has a decentralized incentive program so that you can install solar without partnering with a developer in an auction process. In addition, New York State has a very generous tax credit for solar and certain cities, New York City in particular, offer a property tax abatement for investments in qualified solar energy systems. If you are thinking about a small scale solar system, New York state is a pretty attractive place to buy one presuming that you have a tax liability. The graphic below lays out hypothetical costs for a solar PV system installed in New York City.

New York State Solar Incentives.png

As you can see, after taxes and incentives, the cost of the system is less than 25% of the sticker price. The NYSERDA incentive is formulaic in that it's a set $/Watt value, but it can't exceed 40% of system costs after tax credits have been applied. One really good aspect of the NYSERDA incentive is that it isn't considered taxable income if it goes right to the solar developer. Instead, it represents a discount on the system price and isn't subject to income tax. You'll note in the graphic above that the Federal and State income tax credits may be slightly overstated. When the customer does their taxes, the tax basis for the system would be adjusted downward by the NYSERDA incentive, but you won't know the exact amount of the NYSERDA incentive until you apply. For ease of calculation, I just presumed the tax basis was the sticker price.

All of the New York State electric utilities have net metering so honestly, there is no excuse for New Yorkers to be lagging their neighbors in solar deployment.