The Massachusetts Department of Energy Resources (DOER) has been in the process of rolling out the successor to the state’s Solar Renewable Energy Credit (SREC II) program for the past two years. This replacement, called the Solar Massachusetts Renewable Target (SMART) program, is scheduled to be promulgated by June.
The first phase of the SMART roll-out was to conduct a bidding process to set the floor for the incentive program. The bidding started in November and was due in early December of 2017. The results of the request for proposals were recently announced with some interesting results. The base compensation rates are as follows:
• $0.17/kWh in Eversource/NSTAR and National Grid/Nantucket territories
• $0.15563/kWh in National Grid and Unitil territories
• $0.14288/kWh in Western Massachusetts Electric Co. (WMECO) territory
Once the program is active, you can submit projects in Block 1 at the above rates, with the ability to have adders, like 2 cents/kWh for building-mounted projects, or 6 cents/kWh for carports. If you are building a project in NSTAR territory, for example, the table below applies on an AC kW basis:
If the project is a standalone 999 kW AC carport, the project will generate 18.7 cents/kWh plus the 6 cents/kWh adder for a total of 24.7 cents/kWh for the 20-year program. Using a <1 MW AC system which generated 1.15 MWh/year, this will be worth $284,050 per year for 20 years with some degradation thrown in – the total value is ~$5.1 million in revenue generation. With lower corporate tax rates, we at Beaumont Solar like this aspect of the program and think it will be a winner in helping reach SMART’s target of getting another 1.6 GW implemented in the state of Massachusetts.
However, in the same example, if the system is behind the meter and the site will consume most of the generation, the calculation is significantly more complex and surprisingly less attractive. The value of the power will be equivalent to the current retail rate the customer is paying for on-site consumption. For the power exported, the rules require you to use the average of the historical three-year value of power including distribution, transmission, transition, and basic service. Once this is done and calculated at, say, 18 cents/kWh, you then subtract that from the SMART incentive. In this case, the exported power would be 24.7 cents/kWh minus the 18 cents/kWh, equaling 6.7 cents/kWh net value for exported power. Anything behind the meter is at retail rates, which is likely lower than the SMART stand-alone incentive, so it seems stupid to go this way.
One other key point with the SMART program that is markedly different from the SREC program is that the power off-taker is the investor-owned utility (IOU), which is a credit-worthy entity, making the project’s finance structure a thing of beauty. This has been a real sticking point for projects in the past, off-taker credit worthiness, and the ability to find non-exhausted resources to align with geographic location, IOU and load zone. Effectively, with SMART, this is now moot. Unless, of course, you have a net metering reservation and have defined off-takers; then, you could get adders for options like community solar and affordable housing. Those named off-takers would then be the counterparty, which will require credit scrutiny by most lenders.
As organized, SMART is an eight-block program with a total of ~200 MW per block. Each successive block’s compensation rate and adders will decline by 4%. A chart below shows what will now be the remaining amounts in kW in Block 1 per distribution company for
systems >25 kW AC when the SMART program launches, now that the bidding block has concluded:
Although the compensation rates may not be as lucrative in all instances as SRECs, investors with stalled projects in utility territories where the standard net metering caps were hit will now have an option for moving their projects forward under SMART.
This exported rate is a predictable value of energy for 20 years regardless of energy prices. But this does still leave the unknown variable of where energy prices will go over the next 20 years. In addition, the declining block incentive levels are meant to complement assumed declining costs of solar over time.
The value proposition to a customer or investor will vary dependent on the load being serviced, size of system, and whether there already is a net metering reservation in place. In the case of a stand-alone, it will also depend on the off-taker make-up, if applicable.
Our conclusion is that the program does solve some problems with net metering and with off-takers, but it adds a significant amount of complexity to determine approach and revenue value. Given the 20-year revenue span with the income spread out much longer, this will add to internal rate of return calculations vs. the SREC II 10-year option. We think that customers will be challenged with the complexity at first, and this may cause the program to have a slow adoption by anyone other than the investor class.
Phil Cavallo is founder, president and CEO of Massachusetts-based Beaumont Solar, where he has overseen company operations for the past 12 years. The views expressed in this article are the author’s and do not necessarily reflect those of Solar Industry or its team.
Photos courtesy of Beaumont Solar