How real is the Massachusetts SREC II crunch?

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Blog by Colin Murchie, senior director of project finance, Sol Systems

You’ve all heard about the rush for allocations in the Massachusetts SREC-II market.  The outstanding question is just how real the project queue is. We feel there are two categories of projects likely to churn out of the program, creating an initial source of massive churn in the next few weeks and an ongoing source of more limited churn for what could be as much as a year.  Projects that are, in fact, holding on to a quality interconnection agreement and ready for near-term construction start have more than a glimmer of hope for successful SREC-II qualification.

Churn #1 – The Unbaked

As we discussed in our previous blog entry on this subject, there’s been a massive rush of applications over the last 4 weeks:

1.    On Tuesday, January 5th, the Massachusetts Department of Energy Resources (DOER) announced that 120MW would be set aside in the SREC-II program for projects under 25kW. This left a little over 250MW for those greater than 25kW.

2.    On Monday, January 25th, that 250 became 100.

3.    On Monday, February 1st, that 100 became 22.

4.    On Monday, February 8th, that 22 will become 0. And so begins the wait list.

So: about 450 MW of applications in a month. These all could be legitimate and headed for ultimate approval! But that would be unusual.

Take a look at this graph below. On the far left, applications “under review”, with no qualification date. Next to them, “pending” applications of greater and greater age. (Unlike the slug of January applications currently piled up at DOER, pending applications have passed at least initial review, have an interconnection agreement, and have received an Assurance of Qualification. They haven’t, however, gone online. You can see the approved portion of the rush of applications here in the 0 – 30 and 30 – 60 bins.)

GraphFinal1

The graph is sorted by 30 day bins of age.

Now, let’s look how quickly real, complete, projects go online in a typical Massachusetts month – backwards looking, over the last year, for systems bigger than 25kW. It looks like a typical month of C&I buildout in Massachusetts is in the neighborhood of 15 – 20MW.

GraphFinal2

Short version, in the most recent 60 days? Almost 450MW of applications hit the program when you’d expect to see about 40MW of ones that turn into real projects.

It seems unlikely that the number of fully-baked, ready-to-roll, shovel-ready, choose-your-metaphor-indicating-completeness projects has increased by a factor of 10 in the past few weeks.

You should probably assume a significant proportion of the unapproved applications are eliminated in just the next few weeks – a conservative guess would amount to wiping out today’s “negative” cap, but not taking many new applications off of the waiting list. For applicants as of perhaps right now, this “Churn #1” likely takes the program from “oversubscribed” to “fully subscribed.”

Churn #2 – The Unfinished.

Now, keep in mind that there are two ends of the approval process where a project can fail. Projects that do have a compliant and complete application are in the light blue bins above, aging away. Qualification starts a 9 month clock to completion, and we all know that not every solar project makes it. Though DOER has historically proven reasonable in offering extensions to projects that are very close to completion, you should anticipate that as projects march down this “conveyor belt” to the right, some will fall off for not being even close. Currently there’s 340MW on this part of the conveyor, and of them, 40MW are more than 270 days beyond their SQA date. We don’t know how many are subject to some modest extension, but not all of them will get these extensions, and this bin grows all the time as projects “move to the right” without “disappearing” due to completion.

In fact, you have to wonder how many projects in the 200MW that jammed in the SREC door in the last 60 days were hoping to not obtain their SQAs until later in the development process. These projects could have other critical pieces missing or delayed (e.g. PILOTs, permits, financing, or just as critical and limited net metering approvals), and had been hoping not to start that 9 month clock until their hand was forced. They’re probably more risky than the typical applicant.

All we can say is the 0 – 30 and 30 – 60 bins are each 100MW when again a typical number would be 20. That’s another 180MW of projects above the average we’d expect. Of course there will be some “pull through” that increases throughput above the average, and  no matter what we’ll only get to see these “freed up” as many as nine months from now.

The Takeaway

GraphFinal3

Massachusetts just saw a giant surge of SREC applications  – enough to cap out the program and start a 10 month waiting list beyond that .  However, interconnection agreement execution and other bottlenecks mean we don’t think that this correlates well to a giant surge of projects – and while applications take up room for a while, only real projects ultimately cap out the program.

Over the next 2 to 6 weeks, historical numbers would suggest that the industrious dairymaids at DOER churn the program down from the 190MW+ backlog to zero, and in fact better than zero – up to perhaps a few months of typical headroom (Up to 6 months if they’re all utterly noncompliant, but we have concerns that some may be “Hail Mary” applications with interconnection and key permits but not much else going for them). I’ve marked this as “Churn 1″.  Anticipate it to cut down in a big way – and soon – but not cashing in all the “excess” projects.

As that is being put to use, another few weeks of typical installation should be expected to free up in the next month or so as a subset of the oldest unbuilt approvals lose their status. Here, I’ve marked these “Churn 2”, with a total reprieve now expected through perhaps June.

Unfortunately, another ~ 6 months of program room will be occupied by the “Churn 3” projects, which will continue to take up room whether they are likely or not until perhaps October – and their owners will have little incentive to give up their spots.  Further, some “Churn 1” projects won’t be immediately released, but will stall here, again until the summer.

The real question will be how this intersects with Massachusetts’ legislative timeframes for a more permanent fix.  It could also be too optimistic if there’s major “pull-forward” and the state’s typically 15 – 20 MW monthly C&I market surges forward.

This blog originally appeared on the Sol Systems website. Read this and other updates on the solar finance industry and more at www.solsystems.com/blog/.