State Market Assessment: Solar in Massachusetts
by Hannah Flint, Staff Contributor
The Massachusetts solar market has experienced a boom in recent years due to the state’s implementation of strong renewable energy policies. As a result of this impressive growth, the state quickly exceeded solar targets, creating some market uncertainty about future solar development. Since April 2014, the state legislature has enacted changes to its solar policies to sustain market growth and stabilize future development, likely also leading to additional changes. While development hurdles exist, Massachusetts’ solar policies continue to drive demand for solar and provide favorable project economics, particularly in small-scale solar projects. This memorandum provides an assessment of Massachusetts’ state-level solar policies.
I. State-Level Solar Policies
A. Renewable Portfolio Standard; Solar Carve-Out
The Green Communities Act of 2008 significantly expanded the state’s renewable portfolio standard (RPS) and established a two-tiered program: Class I (new resources) and Class II (existing resources). The Class I standard is designed to encourage the development of new renewable sources and mandated a minimum standard of 7% in 2012, increasing 1% each year (15% by 2020). In 2010, a solar carve-out (Solar Carve-Out I) of the broader RPS was added to Class I, which capped solar capacity at 400 MW, exceeding Governor Duval Patrick’s goal of 250 MW by 2017. Adjustable minimum standards are set using a formula (e.g., 0.3833% of the Class I standard in 2013).
The SREC-I program is a market-based incentive program intended to ensure market stability and balance as more solar sources are developed. A small percentage of compliance renewable energy certificates (RECs) are required to come from solar renewable energy certificates (SRECs), with one SREC representing the attributes associated with one megawatt-hour (MWh) of qualified solar PV generation. While SREC prices are determined primarily based on market availability, the Department of Energy Resources (DOER) provided some market stability by establishing a forward alternative compliance payment (ACP) schedule, the penalty for noncompliance, and the Solar Credit Clearinghouse Auction for SRECs to be sold at fixed prices if they cannot be sold on the open market. The opt-in term for SREC-I gives a project the right to sell unsold SRECs into the Auction for ten years to assure the floor price. These mechanisms create a transparent price floor and ceiling and thus provide price stability for developers and investors.
This program proved hugely successful, attracting approximately 659 MW of solar and exceeding its goal of 400 MW four years early. In April 2014, the Solar Carve-Out II program was established to sustain solar growth and stabilize installations to 100-200 MW per year in order to meet the Governor’s new goal of 1,600 MW by 2020. The Program supported an additional 941 MW of solar capacity. The creation of the SREC-II program closed the application period for SREC-I, and new projects must be eligible for SREC-II going forward.
In an effort to stabilize installations, the SREC-II program’s incentive value declines over time through a ten-year forward schedule of Auction prices and ACP rates. In addition, it created four Market Sectors and assigned differentiated financial incentives (SREC Factors) across Market Sectors: Market A – Factor of 1; Market B – Factor of 0.9; Market C – Factor of 0.8; Managed Growth – Factor of 0.7. The SREC Factor means that the resource will receive that number of SRECs for every MWh it generates (e.g., a project in Market B will receive 0.9 SRECs for every MWh it generates). In addition, the DOER allocates a prescribed annual capacity for the Managed Growth Sector (i.e., larger projects) based on how the other market sectors are expected to perform. While the available capacity for the Managed Growth Sector was 26 MW in 2014 and 81 MW in 2015, the DOER recently shocked developers by proposing 0 MW for 2016, essentially resulting in no new projects being eligible for SRECs. In response to stakeholders’ concerns, DOER later adjusted its allocation to 20 MW.
SREC-II’s design gives financial preference to smaller projects, through higher SREC Factors, and provides less support for larger projects, through lower SREC Factors and capacity allocations for Market Growth projects. Even though DOER increased the allocation for Market Growth projects, only a few developers with projects high on the 2016 waiting list are expected to benefit, and this trend is likely to continue. Since updated policies make smaller projects more competitive, developers will likely begin shifting their focus to Market Sectors A-C.
B. Net Metering
Three classes of facilities qualify for net metering (NEM): Class I; Class II; Class III. Solar NEM customers are credited at the full retail rate for excess generation, providing significant cost savings over the project’s life. NEM caps for public and private solar projects above 25kW are set in statute. However, these caps are now being reached, impacting the economic feasibility of projects. Consequently, the legislature recently raised NEM caps, from 3% to 4% for private facilities and from 3% to 5% for public facilities. Taking into account projects already in service, allocated, and pending, 206.3 MW and 234.5 MW will become available for private and public systems respectively. The legislature recently created a Task Force charged with examining NEM policies, with the goal of recommending incentives that drive the state towards its new solar goal. Projects that are fairly far along in development are more likely to access the remaining NEM allocations because significant project milestones must be met to be eligible, and projects currently on the waitlist will have priority for new capacity. There is a risk that new projects, subject to NEM caps, will be unable to access NEM allocations. Residential solar, however, will be largely unaffected since systems at or below 10 kW in a single-phase circuit and at or below 25 kW on a three-phase circuit are not subject to NEM caps.
Massachusetts allows customers to participate in NEM through neighborhood net metering, where a group of ten or more residential customers in a single neighborhood can own a system that serves their needs. NEM customers can also participate in “virtual net metering,” where customers sell their NEM credits to other customers within the same utility territory.
C. Other Policies
While SREC-II and NEM are the primary incentives that drive the state’s solar market, Massachusetts has several other solar incentive programs. First, Commonwealth Solar II is a non-competitive program that provides rebates for homeowners and businesses that install solar systems under 15kW. The program provides a base rebate of $250/kW and “adders” for systems using components manufactured in the state, individuals with moderate income or home values (residential projects only), and those who are rebuilding after a natural disaster. Although residential systems are capped at $3,500 per residential property, the rebate provides a valuable upfront financial incentive in addition to SRECs and NEM.
Massachusetts also allows a variety of tax incentives. System owners receive a 15% state tax credit, up to $1,000, for residential systems. If the credit is greater than a resident’s tax liability, the excess credit may be carried forward for up to three years. It also provides a 100% property tax exemption for 20 years and a 100% sales tax exemption. Massachusetts has also created a variety of solar programs, such as “Solarize Mass,” aimed at increasing small-scale development in participating communities, and the “SunShot Initiative Rooftop Solar Challenge” (RSCII), a regional effort to reduce the “soft” costs associated with residential and commercial solar.
II. Residential and Commercial Solar Development
Given the state’s updated policies, developers will likely begin shifting their focus to small-scale residential and commercial solar development in Massachusetts. The state’s solar policies provide developers steady revenue streams and cost savings, reducing costs per installation, and providing attractive low-risk returns for developers and investors. SREC-II provides revenue for ten years, with the potential to sell RECs at the end of the opt-in period when the project no longer generates SRECs. Local utilities are also required to purchase excess generation over the life of the system through NEM bill credits (or virtual net metering), and systems under 25kW are not subject to NEM capacity caps. In addition, solar rebates, tax credits, and tax exemptions significantly reduce the upfront costs of residential and commercial solar installations.
Cost savings allow developers to install small-scale systems at competitive prices, driving demand for solar installations. Massachusetts’ retail rate is currently higher than the national average, and rates are set to increase 37% due to last winter’s polar vortex. Developers can offer third-party solar ownership options (power purchase agreements; leases) at prices lower than retail rates and with little to no upfront cost, options that are attractive to many homeowners and businesses trying to lower energy costs. These financing options allow developers to lock in additional long-term and low-maintenance cash flow, while also taking advantage of the financial incentives associated with owning the solar system.
The state’s solar policies reduce installation costs and provide long-term revenue stability, increased profit margins, and low-risk returns. While developers are already involved in a range of projects, including residential, landfill, commercial, and on schools, adequate demand exists for residential and commercial solar development in the state.
 For example, the 2014 Auction price was fixed at $300/MWh minus a 5% administrative fee (floor) and the 2014 SACP was set at $523/MWh (ceiling)
 Eligibility criteria: 1) system size of 6 MW of less; 2) some generation must be used on-site; 3) interconnected to electric grid; 4) commercial operation date of January 1, 2013 or later.
 Market A: at or below 25 kW, parking canopy, emergency power generation, community shared solar; Market B: building or ground-mounted above 25 kW with 67% or more of output used on-site; Market C: landfill or brownfield, or unit at or below 500kW with less than 67% of output used on-site; Managed Growth: unit that does not meet criteria of Markets A-C.
 Class I: Any generator at or below 60 kW. Class II: solar (among others) between 60 kW and 1 MW. Class III: solar (among others) between 1 MW and 2 MW.