For a PDF copy of this analysis click here: Massachusetts SREC Market Update – June 2012

Introduction

The Massachusetts 2012 compliance year began on January 1, 2012. SREC issuance for Q1 2012 generation (January – March 2012) will take place on July 15, 2012. Solar REC under supply in previous compliance periods led to SRECs pricing just below the Solar Alternative Compliance Payment (SACP). Pricing right below the SACP is common in the early stages of a market with a Solar Carve-Out requirement in a state’s Renewable Portfolio Standard (RPS). As the market matures and attracts more participants, typically due to high SREC prices, the market sees an overbuild of solar which quickly turns to an oversupplied market and pricing declines.

As the Massachusetts 2012 compliance year moves on, the prospect of oversupply has become apparent. In March 2012 we provided an update on MA solar supply, taking a closer look at three different potential install scenarios for the 2012 period. This update takes a similar approach, analyzing how various project size categories are impacting the market and what the forecast scenarios mean for 2012 supply. Additionally, we will look at how these scenarios could impact the 2013 SREC requirements.

Solar Installed Can Reach Oversupply – Current and Historic Capacity

The chart below demonstrates the beginning balances of MW capacity (in gray), the added MW capacity (in green), and the total capacity (above each bar) on a monthly basis going back to January 2011. The balances below were derived from the Department of Energy Resources’ (DOER) RPS Solar Carve-Out Qualified Units report as of June 7, 2012. Monthly capacity balances are based on the Commercial Operation Date noted in the report.

Converting 2012’s SREC requirement to an average balance of online MW capacity, we estimate approximately 65.0 MW needed to be operational all year long. Note, this takes into consideration the exempt load resulting from the TransCanada settlement. Taking the beginning balance of capacity as of January 1, 2012 and the ending balance of capacity as of May 31, 2012, the average capacity online for the 2012 year to date is 61.2 MW. During this five month period, 21.5 MW were installed, compared to 10.3 MW, a growth rate of 109.0%, for the same period in 2011. Additionally, the DOER noted the MWh reported to the Production Tracking System (PTS) from January 2012 to May 2012.

As shown above, the MWhs reported through May 2012 are approximately 40% of this year’s SREC obligation. Historically, the MWh reported to the PTS have typically been understated as compared to the actual number of SRECs issued in NEPOOL GIS. With less than half way through the year, and some of the most productive months ahead of us, it appears that the generation reported and the expected remaining generation is in line to exceed this year’s obligation.

500 kW+ Projects See Growth – Projects Installed by Size Category

The last time we evaluated MA projects by size category, projects less than 500 kW saw substantial growth. In addition to continued growth in these categories, MA solar has also seen growth in projects greater than 500 kW. In the early stages of the MA SREC market, projects greater than 500 kW quickly have an impact on SREC oversupply. The table below shows operational projects based on their DOER reported commercial  operation date as of June 30, 2011 and June 1, 2012.

Three Cases Point to Oversupply in 2012 – Capacity Forecast Scenarios

Over the Last Twelve Months (LTM),  June 2011 – May 2012, average operational capacity installed has been 4.1 MW per month. The cases presented below apply three scenarios for the remaining months in the compliance period (June – December 2012):

1) Half of the LTM average capacity is added per month: This equals approximately 2.0 MW/month for the remaining months left in 2012. Note, the DOER’s June 7, 2012 data showed 2.3 MW installed in June alone, thus we can be assured that at least this capacity and likely more will come online in June.

2) LTM average capacity remains the same per month: This equals approximately 4.1 MW/month for the remaining months left in 2012.

3) Two times the LTM average capacity is added per month: This equals approximately 8.2 MW/month for the remaining months left in 2012.

As demonstrated in the cases above, each scenario forecasts oversupply for the 2012 period. Furthermore, adjusting Case 1 to reflect no solar installed in the 2nd half of the year, the market would still see oversupply of approximately 5,400 SRECs, or 7.3% of the estimated MA2012 requirement.

This outlook has had downward pricing pressure on both the 2012 vintage as well as future periods. 2012 SRECs have traded down from 2011 prices, recently trading around $300/SREC. Additionally, multi-year forward contracts for delivery beginning in 2013 are trading below the Solar Credit Clearinghouse Auction price; below $200/SREC.

Not Much Solar Needed in 2013 – Forecasting MA’s 2013 SREC Compliance Obligation

In August 2012, the DOER will release a statement announcing the 2013 compliance year obligation. The SREC compliance obligation is set by a formula per regulation 225 CMR 14.07 (2)(d). The formula for 2013 is currently set as follows:

Total Compliance Obligation 2013 = Total Compliance Obligation 2012 + [Total SRECs Generated (projected) 2012 – SRECs Generated (actual) 2011] x 1.3 – ACP Volume 2011 + Banked Volume 2011 + Auction Volume 2011

The table below estimates what the 2013 requirement may be under each scenario presented above. It is important to note the 2012 Compliance Obligation is presented without exemptions as it was done for 2011 when calculating the 2012 obligation. Additionally, the ACP volume for 2011 was determined using our estimated 2011 requirement after exemptions less 2011 actual generation, as this would be reflective of the full number of ACPs paid.

The forecast figures demonstrate that a substantial amount of generation, ~36,300 SRECs, would be reduced from the 2013 requirement given the volume of ACPs paid for 2011 compliance requirements. In Case 3, this would put the market at oversupply prior to the beginning of 2013, while Case 1 and Case 2 would need less than the current LTM average installed capacity per month to be installed in 2013.

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For a PDF copy of this analysis click here: Massachusetts SREC Market Update – March 2012

The MA2012 SREC compliance year began in January 2012. There has been a lot of attention on the Bay State’s solar carve-out program and installation activity continues to pick up. A substantial under supply in 2010 and 2011 vintages resulted in SRECs pricing just shy of the alternative compliance payment (ACP). Moving forward many stakeholders are closely watching how supply will impact 2012 and future period valuations. The analysis below takes a look at current capacity levels and provides some insight into how the market may shape up in 2012.

As of March 6, 2012, the MA Department of Energy Resources (DOER) posted updated total qualified solar capacity figures. The DOER noted that due to a delay from MassCEC, the entity that approves all renewable projects in the Commonwealth, the project-level details of the total qualified capacity is not yet available. As of this writing, the DOER was still awaiting the information from MassCEC and noted an updated report would be published when available.

The total qualified capacity noted as of the update is as follows:

– Total Qualified Capacity (3/6/12): 63.6 MW (1,704 projects)
– Total Operational Capacity (3/6/12): 52.6 MW (1,671 projects)
– Total Operational Capacity (1/1/12): 48.3 MW (1,595 projects)

Based on the historic capacity that has come online since December 2010, below is some analysis demonstrating capacity that could be expected to come online throughout the 2012 compliance period.

The table above demonstrates the amount of operational capacity as reported by the DOER based on the dates indicated. Note, these figures are (and were) readily available on the DOER’s public website.  Looking at the last 12 DOER reported periods (which we’ll refer to as Last Twelve Months, or LTM for our purposes), the average MW added per month was just above 4.0 MW.

Using the January 1, 2012 starting capacity of 48.3 MW and the March 6 operational capacity of 52.6 MW, we have inferred that on average 2.2 MW became operational in January and February 2012. The analysis below demonstrates 3 cases. In each case, a different capacity scenario is presented based on the average amount of added capacity over the LTM. Case 1 assumes only half of the LTM average capacity is added per month; Case 2 assumes the same amount of LTM average capacity is added per month; and Case 3 assumes two times the amount of LTM average capacity is added per month. Note, these forecast figures were derived simply based on historic rates. The figures do not take into consideration the amount of capacity currently in the interconnection pipeline. Many factors can impact these figures, including the timing associated with interconnection, changes in federal incentive policies, and pricing and liquidity in the MA SREC forward market, to name a few.

*Note the Estimated Production Factor per Period is based on a 1.13 MWh per installed kW per year adjusted for seasonal impacts.

The 3 cases presented herein demonstrate a market that is slightly undersupplied (Case 1), a market that is slightly oversupplied, or almost flat (Case 2), and a market that is oversupplied by approximately 30% (Case 3). Also, it is important to note that expected volume in each case presented could change if the roll out of additional capacity is not evenly disbursed. Depending on each scenario, SREC prices will adjust accordingly.

Through the Q3 2011 issuance period (1/15/12), 19,257 MA2011 SRECs have been minted. Additionally, more than 7,000 MWh have been reported to the PTS during Q4 2011. The Department of Energy Resources (DOER) projects approximately 29,000 SRECs to be generated in 2011, leaving the market short approximately 33,900 SRECs. As a result of this substantial undersupply, MA2011 SRECs have traded close to the 2011 ACP value of $550/SREC. In recent trading, the MA2012 market has priced at approximately 65% of MA2011 spot prices. Additionally, bidding for multi-year forward contracts beginning with 2012 delivery is currently below the Solar Credit Clearinghouse Auction price.

Projects Installed by Size Category

Given the relatively smaller MW capacity requirements in the early stages of the MA SREC program, the installation of larger scale (>1 MW) projects can easily have a substantial impact on the SREC requirements. Looking at the various cases presented above, they demonstrate that the installation of enough >1 MW projects could easily tip the market into oversupply. Additionally, it is possible that commercial size projects ranging from 100kW to 500kW could have an impact as well. While >1 MW projects quickly meet the 2012 requirements, many of these projects take much longer to come to fruition. The design, interconnection, construction, and financing processes for these projects can take several months. Installers and developers in MA have recently noted that smaller, multi-100kW commercial projects are much faster from inception to power generation. It is common that these projects are financed using all equity capital or debt sourced from an existing banking relationship established and backed by a corporate entity’s balance sheet. Considering these factors, it is very possible the multi-100kW size category will have a meaningful impact on the MA2012 SREC market.

The table below analyses various size categories of systems and the number of projects installed and how these categories grew from DOER reported data as of July 11, 2011 vs. January 25, 2012.

As demonstrated above, both the residential (<50kW) and commercial (>50 kw to 500kW) categories grew at substantial rates during the periods presented. Given these historic growth rates and the amount of current solar development interest in MA, it is expected that we will continue to see more growth in these size categories throughout 2012.

The final MA2011 issuance period for Q4 2011 SRECs is April 15, 2011. The first MA2012 spot trades will commence after the Q1 MA2012 issuance period on July 15, 2012.

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