Maryland's SREC Market: Nothing to be Crabby About
- May 13, 2015 2:30 am GMT
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Maryland SREC Prices – On the Rise
Despite consistently ranking in the top 15 state solar markets, Maryland has long flown under the radar for most developers. Due to moderate electricity prices and thin margins, the Maryland market does not command the same level of attention from developers as do the frothy markets of California, Massachusetts, or New Jersey. However, things may improve for The Old Line State’s market due to a rise in solar renewable energy credit (SREC) prices. Over the last six months, prices in Maryland steadily rose from $130 to $170 per SREC. Even more shocking than the 30% increase in pricing is the fact that 2016 forward SRECs are also trading at $170. All of this bodes well for the market, but many analysts are looking for answers as to why the Maryland market has seen such a pricing increase, and if this increase is sustainable. Has Maryland finally broken out as a star solar market, instead of the moderate performer it has always been or is this rise in SREC prices just a short-term fluctuation?
Why the Rise in Prices?
There are three competing theories as to why Maryland SREC prices are on the rise. No one explanation seems to be able to capture the entire phenomenon, indicating that perhaps the rise is due to a confluence of factors, or that the rise will be short lived. The three theories are:
1) The Maryland Public Service Commission (PSC) will only approve the Exelon – Pepco merger if Exelon agrees to invest in additional renewable energy infrastructure beyond what is required in the state’s renewable portfolio standards (RPS).
2) SREC supply is lagging behind demand, and therefore necessitating a rise in prices. However, even a review of the market fundamentals does not provide complete insight into the price rally. The installed capacity of solar in Maryland has kept pace with expectations, and the market has a similar SREC supply and demand relationship as what it saw in 2014, while maintaining a much higher price relative to the Alternative Compliance Payment (ACP). (The ACP is a fine levied against compliance entities if they do not meet their SREC purchasing requirements.)
3) Compliance buyers are purchasing SRECs ahead of the expiration of the investment tax credit (ITC) at the end of 2016. With the expiration of the ITC, most analysts expect that PV deployment will drop precipitously, and new projects will be few and far between. As the RPS continues to rise, compliance entities may be concerned that there will not be enough supply in the market to satisfy demand, and are purchasing SRECs now to avoid this outcome.
4) Project fundamentals will also be altering towards the end of 2015, as Maryland’s small, but not insignificant, $8.50 / MWh, renewable energy production tax credit expires.
While none of these theories fully encapsulates the rise in prices, perhaps when taken in sum, they can provide insight into market dynamics. It would appear that a combination of future price and market expectations is coupling with current market and design fundamentals to rally the price from $130 to $170. That said, perhaps the rise in prices is just a temporary blip, and will soon fall, finding resistance at or around where they originally started. If the pricing is indeed sustainable, it will help to reframe the market for developers, and could attract more attention in 2015.
What Does a Rise in SREC Prices Mean for PV Deployment?
Traditionally a rise in SREC prices correlates to a rise in solar deployment within a given market. The New Jersey SREC market is a good example of this relationship as it has experienced both a crash and resurgence in SREC pricing. The number of annual installs rose and fell with SREC prices as the New Jersey market nosedived from $600/SREC down to $80/SREC and then rallied back to its current price of ~$200/SREC. Maryland deployment will similarly increase with pricing if investors are able to acquire investment grade strips that lock in SREC revenues at a given price for a set number of years. While a rally in spot market pricing is good for the overall market, a project receiving traditional third party investment will need to acquire an SREC strip locking in prices for 3, 5, or even 10 years (preferably with an investment grade counterparty) in order to remain viable.
If developers are able to lock into SREC strips based on this pricing for the next several months, many marginal projects that did not pencil before the price rally will come online. Due to the increase, developers active in the Maryland market have resuscitated some previously dead projects with the hopes that they will be able to lock into a long term, forward contract and sell the project to an investor. Sol Systems is currently working on several such projects throughout the state. If the pricing is in fact, sustainable, commercial and utility projects alike will become more attractive to both developers and investors, and the market may grow from a middling solar market into one of the top players.