McLane Energy Alert – New Solar Incentives Proposed in Massachusetts

Overview

On Friday, January 3, 2014, the Massachusetts Department of Energy Resources (DOER) announced that it has filed proposed modifications to the 225 CMR 14.00 Renewable Portfolio Standard (RPS) Class I regulation. These changes, currently in draft form, pertain primarily to the establishment of the second phase of the RPS Class I Solar Carve-Out Program (SREC II), and also make several other revisions aimed at improving the existing RPS Class I program.

SREC II Program Capacity Cap: 1600 Megawatts

In May 2013, DOER announced that it had received Statement of Qualification Applications, representing a combined capacity of over 550 megawatts (MW), for in-state solar projects seeking to qualify under the existing Massachusetts RPS Class I Solar Carve-Out Program (SREC I). This unforeseen surge in Massachusetts-based solar energy development projects exceeded the 400 MW regulatory cap nearly four years earlier than anticipated, and prompted promulgation of this revised regulation that outlines the next phase of the Solar Carve-Out program.

In light of the rapid pace at which Massachusetts solar energy producers surpassed the 400 MW threshold, the proposed changes to 25 CMR 14.00 boost the combined eligible capacity of SREC I and SREC II Renewable Generation Units to 1600 MW through the year 2020.

Renewable Generation Unit Eligibility Under SREC II

In order for a Generation Unit to qualify as a SREC II Renewable Generation Unit under the proposed regulation, it must satisfy the following requirements:

•Use solar voltaic technology on-site;
•Connect to the electric grid in the Commonwealth of Massachusetts;
•Have a maximum nameplate capacity of 6 MW, where capacity is determined on the basis of the total combined capacity of SREC I and SREC II Renewable Generation Units located on a single parcel of land;
•Have a Commercial Operation Date on or after January 1, 2012.

Generation Units that have already qualified under SREC I cannot qualify under SREC II.

Solar Credit Clearinghouse Auction-II

In keeping with the existing auction-based model of SREC I, any entity that owns SREC II Renewable Attributes generated by a SREC II Renewable Generation Unit is eligible to make deposits into a Solar Credit Clearinghouse Auction-II Account.

By and large, the Solar Credit Clearinghouse Auction-II shares many of the design features of the existing Solar Credit Clearinghouse Auction framework implemented under SREC I, though there are some noteworthy exceptions:

• Aggregate Capacity Cap of 6 MW: The proposed regulation sets a 6 MW aggregate capacity cap for electricity generated by both SREC I and SREC II Renewable Generation Units located on a single parcel of land. Capacity in excess of 6 MW may only qualify for RPS Class I Renewable Generation Attributes.

• Diminishing Price Schedule of Re-minted Auction-II Account Generation Attributes: The draft regulation implements a diminishing incentive model. Whereas Re-minted Solar Credit Clearinghouse Auction Account Generation Attributes have a fixed auction price of $300 (subject to a 5% administrative fee) under the existing regulation, the clearing price of Re-minted Auction-II Account Generation Attributes under the proposed changes will vary each Compliance Year, starting at $300 in 2014, 2015, and 2016, and gradually decreasing to $199 by 2024. The auction price per Generation Attribute for Compliance Year 2025 will be announced by DOER no later than January 31, 2015 and will be updated annually thereafter.

•Two Types of GIS Certificates Issued: For each MWh of electricity generated, a Solar Carve-Out II Renewable Generation Unit will generate two types of GIS Certificates, coded as follows:

1.Solar Voltaic Certificates without RPS Class I Renewable Generation Attributes or SREC II Renewable Generation Attributes

2.Solar Renewable Energy Certificates (SREC II Certificates)

As is described in further detail below, the distinction between Solar Voltaic and SREC II Certificates is a crucial element in the program’s incentive structure.

Proportion of GIS Certificates Issued to SREC II Renewable Generation Units

Beginning with each SREC II Renewable Generation Unit’s RPS Effective date, and continuing for the next 40 quarters (10 years), the proportion of the two types of GIS Certificates will be determined in accordance with the following formulas:

1.  Solar Voltaic Certificates = `1 – SREC Factor` * `# MWh generated`

2.  SREC II Certificates = `SREC Factor` *`# MWh generated`

Once assigned, the SREC Factor will remain in force for the duration of the SREC II Renewable Generation Unit’s 40-quarter eligible generation period. After this period, the Unit will no longer generate SREC II Certificates, and it will be credited with RPS Class I Renewable Generation Attributes for 100% of the MWh it generates.

As set forth below, the SREC Factor assigned to a particular SREC II Renewable Generation Unit is the determinative factor in the proportion of Solar Voltaic and SREC II Certificates a unit will generate. A higher “SREC Factor” will necessarily yield a higher percentage of SREC II Certificates, which the Owner can then deposit in its Solar Clearinghouse Auction-II Account for sale at auction. Solar Voltaic Certificates, on the other hand, will be retired at NEPOOL GIS and cannot be transferred to any other party during the Unit’s 10-year eligible generation period.

A Generation Unit’s SREC Factor is assigned on the basis of its market sector:

Market Sector A = SREC Factor of 1.0

*Any Generation Unit with a capacity equal to or less than 25 kW
*Solar Parking Canopy Generation Unit
*Emergency Power Generation Unit
*Community Shared Generation Unit

Market Sector B = SREC Factor of 0.9
*Any building or ground mounted Generation Unit with a capacity of greater than 25 kW, for which 67% or more of its annual electric output is used on-site

Market Sector C = SREC Factor of 0.8
*Any Generation Unit with 50% or more of the equipment used for generating power installed at an Eligible Landfill or Brownfield
*A Generation Unit with a nameplate capacity of less than or equal to 500 kW for which less than 67% of annual electrical output is used on-site

Managed Growth Sector = SREC Factor of 0.7
*Any Generation Unit that does not meet the requirements of solar Market Sectors A – C
*Subject to annual capacity blocks that set forth the number of MW that may qualify for each Compliance Year:
–  26 MW for 2014
–  80 MW for 2015
–  The annual capacity block for the Compliance Year two years in the future will be announced on the DOER website no later than June 30 on each ensuing Compliance Year
*Allocation of applications to annual capacity blocks will be based on the order in which administratively complete applications are reviewed by DOER

The SREC Factor framework thus creates differentiated financial incentives based on size, with enhanced incentives for smaller scale solar generation projects. Whereas a Sector A Generation Unit will generate 100 % SREC II Certificates, a Generation Unit in the Managed Growth Sector will only generate 70% SREC II Certificates, with the remaining 30% of Certificates coded as Solar Voltaic without RPS Class I Renewable Generation Attributes or SREC II Renewable Generation Attributes. This emphasis on smaller scale generation projects stands in contrast to the larger projects that benefitted from the previous SREC I Program.

Once the regulation is promulgated, DOER will conduct a review of the SREC Factor Guidelines no later than March 31, 2016. This review will take into account available market data, analysis pertaining to growth rates, market penetration of the market sectors, and external changes in state and federal policies and global markets, with an eye towards reaching the SREC II Program Capacity Cap by 2020 and reducing the cost of the program to ratepayers. Any changes to the SREC Guidelines will be open to public comment and will go into effect on or after January 1, 2017.

Assurance of Qualification

The existing regulation precludes a SREC I Renewable Generation Unit from obtaining a Statement of Qualification unless it has received approval from the local distribution company to interconnect with the electric grid.

To mitigate risk and encourage investment in SREC II Renewable Generation Units, the proposed regulation permits DOER to grant Assurance of Qualification or queuing position to a Generation Unit that has not yet been granted approval to interconnect with the grid, but can provide evidence of the following:

•An executed Interconnection Service Agreement with the local distribution company;
•Adequate site control (i.e. a sufficient interest in real estate or a contractual right to construct the Generation Unit); and
•All necessary governmental permits and approvals to construct the Unit, not including ministerial permits and notwithstanding any pending legal challenges to one or more permits or approvals.

Further guidance outlining the process for providing Assurance of Qualification, as well as accommodations for small generation units and a queuing system for units awaiting Assurance Qualification will be forthcoming from DOER.

New Financing Options for Residential Owners and Not-for-Profit Organizations

The proposed regulation directs DOER to establish a program to enhance the availability of ownership financing options for SREC II Renewable Generation Units. The focus of this initiative is on Generation Units installed on residential buildings and on the premises of other not-for-profit organizations.

Increasing Annual Compliance Obligation

In pushing towards the ultimate goal of 1600 MW of capacity, the aggregate SREC II Compliance Obligation for Retail Electricity Suppliers is slated to rise each year:

•For Compliance Year 2014, the total compliance obligation is set at 41,279 MWh
•For Compliance Year 2015, the total compliance obligation is set at 161,958 MWh
•Going forward, DOER will announce the Minimum Standard on or before August 30 of the preceding Compliance Year.

In coming weeks, DOER will publish a Guideline on its website that will provide clear and precise methodologies by which it will calculate the Compliance Obligation. DOER is also charged with collecting and maintaining the up-to-date, publicly available data that serve as inputs to these calculations.

Forthcoming Guidance from DOER

The changes to the regulation  requires DOER to establish three sets of Guidelines. The SREC Factor Guidelines, detailed above, are currently available on the DOER Website. The remaining Guidelines referenced below will be posted on the DOER website for stakeholder review as they become available:

•Assurance of Qualification Guideline

•SREC II Compliance Obligation Guideline

More information on the development of the SREC II program and the ongoing rule-making process can be found on the DOER website.

Hearing

As part of the rulemaking process, DOER will conduct a public hearing to solicit oral and written comments on the proposed amendments on January 24, 2014 from 1:00 to 3:00 PM in the Gardner Auditorium, Massachusetts State House, Boston, MA 02133. A redlined copy of the proposed changes to the RPS Class I Regulation can be downloaded here, and the official version of the draft regulation will be published in the Massachusetts Register on January 17, 2014.

Written Comments

Written comments will be accepted beginning on January 3, 2014 and ending at 5:00 PM on January 29, 2014. These comments can be submitted electronically to [email protected] or to Michael Judge, via mail to the Department of Energy Resources, 100 Cambridge Street, Suite 1020, Boston, MA 02114.

Promulgation of the Final Regulation

We believe, based on the timing of the hearing and subsequent review process, that DOER will likely promulgate the final regulation in the late first quarter or early second quarter of 2014.

Questions

McLane, Graf, Raulerson & Middleton, Professional Association has been providing legal services to energy clients for more than 80 years. Our attorneys have a wide range of skills and expertise relevant to the energy industry, and we will continue to monitor developments in the SREC II Program as the rule-making process continues.

Should you wish to obtain additional information about the Renewable Portfolio Standard Class I Solar Carve-Out II Program, please contact Richard Kanoff or any one of the attorneys of our Energy Practice Group.

Contact Information

Richard Kanoff, Co-Chair, Energy Practice Group
300 Trade Center, Suite 7000
Woburn, MA 01801
781-904-2685
[email protected]