Regulatory change raises expected Maryland SREC prices modestly

September 15, 2021
By 
Andrew Kinross & Wesley Stevens

Summary

  • On June 1, 2021, Senate Bill 65became effective which decreased the Maryland solar RPS and increased the ACP.  SREC prices immediately gravitated toward the new ACP schedule, and are expected to remain at about 98% of ACP for the foreseeable future.
  • While the latest change increased the ACP and reduced the RPS, the latter will have no impact on pricing, at least for years to come, since the reduction isn’t enough to create oversupply
  • The Maryland solar market remains an economic market for certain segments, namely virtual net metering,community solar and to some extent commercial and industrial.  Despite challenging economics, the residential market also continues to move forward.  
  • We expect build rates overall to continue at similar rates to the past 3 years, or perhaps increase slightly.  Under these conditions, the SREC market will remain undersupplied.
  • It’s likely that SB65 is not the last regulatory change for this market 

On June 1, 2021, Senate Bill 65 ushered in a slight tweak to the Maryland solar Renewable Portfolio Standard (RPS) and Alternative Compliance Payment (ACP) schedules. While the beginning and end points – 2021 and 2030 – were held constant,the RPS for the interim years was decreased slightly while the ACP was increased slightly (see Figures 1 and 2).

Figure 1: RPS Schedule – CEJA (2019) and SB65 (2021)

Figure 2: ACP Schedule – CEJA (2019) and SB65 (2021)

The prior legislation, the Clean Energy Jobs Act (CEJA) of 2019, substantially increased the solar RPS in Maryland from the then -2.5% rate up to 6.5% in 2020 and ultimately reaching 14.5% in 2030.  That spike in demand had created a major shortage of SRECs in the market and had driven up pricing to just under the ACP.  Once the SB65 legislation became effective, pricing immediately gravitated to the higher ACP levels.  In fact, it was on its way even before the effective date as the likelihood of the proposed legislation coming into effect became clearer in the days and weeks leading up to June 1, 2021.

For the foreseeable future, that likely isn’t going to change.

Historical build rate

In comparison to other states, Maryland is a relatively small solar state.  Figure 3shows new additions from 2009 to 2021 (YTD). The average over the past 8 years has been 161 MW per year.

Figure 3. New Additions, 2009-2021 (Year to Date), MW

Source:PJM GATS

With the significantly higher RPS, build rates would have to increase dramatically in order to cause an oversupply;otherwise, the SREC market would remain undersupplied, and pricing would remain near the ACP.

In order to forecast future build rates, Power Advisory evaluated the economics, and site availability, of different types of solar projects.  Our assumptions for this analysis are shown in Figure 4.

Figure 4: Key Economic Analysis Assumptions

Based on the above assumptions, our projections do not show major changes in economic viability over time – i.e.,the types of projects that have been very attractive in 2018-2020 are expected to continue to be attractive for years to come, while the types of projects that are currently unattractive will generally remain so.

VNM (Virtual Net Metering) and CS(Community Solar) projects in the service territories of all five utilities have been and are expected to continue to be very attractive. Due to higher avoided utility charges, projects in the service territories of BGE, Potomac Edison and Potomac Electric are especially attractive, projects in DPL and Southern Maryland somewhat less so; in fact,even assuming SREC revenue remains near the ACP, projects in DPL and Southern Maryland are projected to become slightly unattractive toward the very end of the30-year forecast period.

Wholesale projects are currently slightly unattractive, with costs currently exceeding revenues by around 6% for a typical project. This means that only the lowest-cost projects (with low land, construction,connection, operating and financing costs) are likely to be developed. This type of project is expected to become less attractive in the long term, as costs increase (though at less than the rate of inflation) while energy value decreases.

C&I (Commercial and Industrial) projects are currently slightly attractive (meaning that some potential projects will be quite attractive, but many others will not be economically viable). Projects in BGE’s, Potomac Edison’s, and Potomac Electric’s service territories appear especially attractive, while projects in DPL’s and Southern Maryland’s service territories are significantly less so due to differences in electricity rate structures. Over time, our projections show C&I projects in all areas gradually becoming less attractive.

Residential projects in all service territories appear to be slightly to very unattractive in purely economic terms. Some projects continuet o be completed, indicating that either these projects are unusually low cost(in energy terms, due either to low capital costs per watt, or unusually high production), or that the hosts desire solar generation for non-economic reasons. In the service territories of DPL and Potomac Electric, which have especially high residential rates, our analysis shows residential projects shifting to becoming marginally attractive (i.e., somewhat more projects will be attractive, and somewhat fewer will be unattractive) between 2022 and 2036.Residential projects in BGE’s and Potomac Electric’s service territories are expected to improve during that period, with the typical project remaining unattractive. In Southern Maryland, residential projects are, and are expected to remain, unattractive.

Impact of build rate on pricing

Based on our assessment of projects economics and of site availability we believe that it’s most likely that there will be a continuation of the 2018-2020 installation levels.  It’s possible that these levels may increase,but it’s highly unlikely that they will triple, which would be required inorder to create an oversupplied situation by 2030.

Pricing in an undersupplied market

When the market is undersupplied, which weexpect for many years to come, the price gravitates toward the ACP, which actsas a price ceiling. As of September 8, 2021, 2021 SRECs were pricing at $78.38,or $1.62 below the ACP, while 2022s were pricing at $58.94, or $1.06 below theACP (Figure 5).  Since SB 65 becameeffective on June 1, 2021, 2021s have been 98.1% of ACP on average, while 2022shave been 98.7%. We have assumed that in a clearly undersupplied market, SRECstrade at 98% of ACP.

Figure 5: 2021 and 2022 SREC Pricing

Source:S&P Capital IQ
Pricing in an oversupplied market

When the market is oversupplied, the SRECprice can go as low as the Tier I REC price, which acts as a floor.

The PJM Tri-Qualified Tier 1 REC price is the theoretical effective floor price since SRECs are equally eligible to sell into that market. If SREC prices were to dip to low levels then Maryland resources generating SRECs could instead sell RECs for Tier 1 compliance.   Currently, these RECs are trading in the $13-$14/REC range and have an ACP of $30 in 2021 which declines to $22.50 by 2028.  Longer term, these prices could go in a number of different directions depending on build rates, regulatory policy, electric vehicle uptake, and load growth.

Potential regulatory changes

The rules governing the Maryland SREC program are subject to change through regulatory changes. In fact, the Maryland market has been one of the most fluid markets as the ruleshave changed many times since the program began (see Figure 6). The RPS programwas enacted in 2004, and the first year of compliance with the solar carve-outwas in 2008.

Figure 6: Summary of Legislation Involving Solar

Source: Adapted from Final Report Concerning the Maryland RPS as Required by Chapter 393 of the Acts of Maryland General Assembly of 2017, published December 2019.

There are many stakeholders in this market (policy makers, trade associations, industryplayers, investors, etc.) who have an interest in making changes to the rules.Currently, there is a Republican governor, Larry Hogan, who while supportive of solar is opposed to new taxes and views the SREC program as a tax on constituents. Should a governor that is more supportive of solar be elected in the future, program rules might change in ways that are more favorable to the solar industry.

Since SB 65 has just recently been enacted, we don’t expect changes to happen in the short term, but we certainly do expect some changes over time given the track record of prior changes. Furthermore, the program currently has no end date and at some point,the program may sunset.

We expect the solar industry stakeholders to continue to advocate for improvements to the program,most notably an increase in the ACP schedule since market participants generally indicate that the current schedule is not sufficient to compensate solar.

Program changes occur through legislation, with the Maryland PSC typically not making any decisions on its own but rather just implementing legislation.

Besides state regulatory changes, there are also federal regulations. It’s possible that federal regulations (e.g., a national clean energy standard or carbon tax) could impact the price of SRECs, or could even replace the SREC markets altogether.