Much has been made of Governor Hogan’s recent veto of the Clean Energy Jobs – Renewable Energy Portfolio Standard Revisions bill (SB0921/HB1106) and its implications for the long term health of the state SREC market. Market weakness due to fundamental oversupply has been exacerbated by uncertainty as to the likelihood of the Maryland legislature to expand state renewables markets in step with increasing supply. With the Maryland SREC market trading at all time lows, we feel that it is important for market participants to be able to base their opinions on accurate empirical data. As such, we have updated our supply and demand scenario models to reflect the most recent available capacity information made available by PJM GATS.
Our updated Maryland capacity presentation can be found here.
Through May 2016 there was approximately 156,682 SRECs left over from compliance years 2014 and 2015. Thus far in 2016, 144,133 CY2016 SRECs have also been issued. Assuming that the observed average monthly build rate of 19.6 MW/month continues through the year, we project that 556,507 additional SRECs will be generated in compliance year 2016. Taking together the existing inventory of available prior-period SRECs together with the projected production for the remainder of 2016, we foresee an oversupply of 425,535 SRECs by the end of 2016.
In this latest capacity analysis update we have included parallel analyses for the projected supply/demand balance in future years. Looking out to 2022, we demonstrate how that balance would evolve under both the currently adopted RPS as well as under the recently proposed RPS. We have also made a slight change to the range of scenarios we present. Whereas we typically present this analysis extending the current trailing twelve month average build rate through the full term of the analysis, and two more scenarios where the build rate both increases and decreases slightly, we have chosen to adjust our methodology. The current build rate of 19.6 MW/month is quite strong relative to historical averages, influenced primarily by above average build numbers for December 2015 through February 2016. This increase may have been caused by the “ITC cliff” confronted at the end of 2015 or by stronger SREC prices in the summer and fall of 2015. Whatever the cause, those factors are no longer relevant for the purposes of this analysis, and it is reasonable to believe that monthly build numbers will decrease from here. Our case 1 and 2, therefore, are reflective of a build rate that is 50% and 75% of the trailing twelve month average.
While the market is clearly oversupplied under almost all scenarios we think it is important to note that the proposed RPS significantly decreases the percentage oversupply in later years, decreasing the oversupply by almost half in some instances. We point this out to illustrate that the current state of the market may not be as dire as some market participants believe. We maintain that an oversupplied market is not necessarily a broken market. One of the advantages of a market-based mechanism is that price fluctuations provide price signals to market participants considering whether to initiate additional projects. Ideally, the low level of SREC pricing today will lead a significant portion of the current project queue to wait on adding new capacity until the supply and demand balance normalizes.
With that said, the greatest uncertainty as to the future health of the Maryland SREC market is what portion of the PJM interconnection queue will ultimately be built. There are several large utility scale projects with nameplate capacity of 100 MW or more that could drastically change the supply and demand balance to a point where the only solution would be legislation to either increase the state RPS or restrict eligibility to the existing market. Our analysis does not account for this potential outcome but we acknowledge that it is certainly a plausible scenario.
We will continue to monitor the state of the Maryland SREC market as more data is made available regarding trends in monthly build rates and new projects that are awarded SREC eligibility. We will also continue to publish information regarding the Maryland legislative process and the status of the solar carve out. Please reach out to the SRECTrade team with any questions or feedback.
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