The new ground rules for the SREC-2 program are expected in the near future with the final announcements from the Massachusetts Department of Energy Resources. The second Solar Renewable Energy Certificate (SREC) program is drastically different from the first, and represents significant market shifts that could potentially change the way solar is financed in Massachusetts.
The Department of Energy Resources announced at their public hearings that the second program would push for small-scale commercial and residential solar, and try to provide an equal playing field for those projects to develop. The majority of projects in the SREC-1 program were dominated by massive ground-mounted arrays that exported power to a virtual consumer. These mega-sites ate up the allowed SREC capacity, and quickly helped flood the solar market. As part of the new SREC-2 program, DOER has set up tiers of SREC productions based upon the type of solar project that is to be constructed.
To manage the growth of solar in a responsible manner, DOER has classified solar systems into various categories. Each category has its own respective “SREC factor,” which determines the number of SRECs that would be produced. Residential, canopies, emergency and small-scale systems under 25 kW will be given full SRECs based on their production. Systems under 500kW or solar projects sited with 67-percent on-site consumption will be given 90 percent of their SREC production. Brownfields and landfills will be given 80 percent of their SREC production. Lastly, any other systems that do not fall into those categories will be entered into the “Managed Growth” sector and will be given 70 percent of their SREC production. Based upon these SREC factors, there is a clear financial distinction towards which type of projects would yield the highest returns.
The nail on the coffin for large ground arrays that export power is the cap on net metering. The net-metering policy is essential since it allows solar fields to virtually export their power from the production site to an off-site off-taker or consumer. Local utilities are required to provide net-metering production credits, but only to the amount of 1 percent of their peak historic load. That requirement has been met in almost all locations. Without a raise on the cap, there is no way for ground arrays to export power at a subsidized rate. Although there is talk in the legislative branch to raise this cap, the process would be lengthy, and investors will be commit funds for solar projects that do not have the potential to sell its power.
In consideration of the two market conditions, financing parties will look towards niche solar market sectors to maximize their returns. There are three possible sectors that would fit the needs of any financing parties: residential projects, commercial rooftop projections under 500 kW, or behind-the-meter (on-site consumption of power) projects with no capacity limits. The two latter types present risks that financing companies must be familiarized with. In most cases, these projects are located on roofs of buildings belonging to commercial business owners. These buildings are subject to mortgage foreclosures, and a written non-disturbance agreement from the mortgage banks is required for site control. Additionally, the credit rating of individual business owners must be taken into consideration for the sale of power to their entities.
How To Mitigate Risk
The financing risks of these commercial roof-top solar can be alleviated with a bifurcation of investors into two groups; a cash investor, and a tax investor. The cash investor’s position will allow them to take all non-tax related benefits (electricity and SREC revenue), and the tax investor will benefit from the depreciation of the asset and federal investment tax credits. This model takes away the counter-party default risk from the tax investor, and the cash investor’s risks are rewarded with a higher than market return rate. The cash investor’s risks are very similar to those of traditional commercial mortgages. With the current mortgage market in decline, the understanding of solar risks allows institutional investors to diversify their current investment portfolio into the renewable sector.
Structuring solar projects in Massachusetts under this model will allow the development of solar to continue without hesitation and hindrance from financial investors. The new SREC-2 program is poised to reopen a lucrative investment market that can provide long-term stable cash-flows that can easily subsidize the current mortgage lending market. Investors will look toward these projects to satisfy their financial goals, and help standardize the way renewable finance takes place in the commonwealth.
Tom Wu is chief executive officer of Invaleon Technologies Corp. Invaleon Technologies, based out of North Andover, develops utility scale solar projects in the U.S. for commercial and government entities.
