MA SREC prices have rallied since mid January, with Vintage 2012 prices increasing from $205 to trade as high as $235 in March. Over the same period the vintage 2013 SRECs rallied stronger than 2012’s, moving from $155 to as high as $230, with the spread narrowing from $50 to $5.
The timing of this run up seemed to coincide with the issuance of two large RFPs in late February and mid-March for a total of 2,250 and 10,500 SRECs for 2012 and 2013 respectively. Last week, the market saw some pull back in prices with the front end of the curve reportedly trading south of $220.
Key Factors in the Market
The MA market currently has three uncertainties that require clarifying. In the short-term, the focus is on which proposed rule changes will be adopted, and how the Solar Credit Clearing House Auction (SCCHA) will play out. In the medium/long-term, parties are concerned with what happens when the market hits the 400 MW cap. This analysis will seek to analyze these uncertainties.
On March 22, the MA DOER hosted a public meeting to discuss proposed rule changes. The relevant changes in the rulemaking include the following:
Potential Market Impact of Rulemaking
Solar Credit Clearing House Auction (SCCHA)
An approach to evaluate potential outcomes of the 2013 SCCHA is to ask a simple series of questions.
The general sentiment in the market is that none of these questions will receive a yes answer. There is only one caveat, there may be someone who is willing to enter the auction to purchase a small volume in the belief that this transaction may cause the whole SREC price curve to shift up in the market. While large shifts down in SREC prices have resulted from thin volumes of trades, the market has only recently seen shifts up, but not to the degree of the shifts down in 2012. However, the auction will publish the final volume purchased; this transparency will prevent any misconceptions about market wide SREC price impact.
Game Theory and Post 400-MW Cap
Once the SREC program reaches the 400 MW cap, assumed to be in 2015 for our analysis, each year’s minting of SRECs must be purchased by compliance entities, as mandated by the post 400 MW cap compliance obligation formula. At this point, several regulated buyers who must either purchase SRECs or pay the SACP, and many sellers who need to sell SRECs to finance their projects, will define the game.
Four key parameters will define the market when the 400 MW cap is reached:
Fundamental SREC Price
Karbone has modeled the Fundamental SREC Price based on the current installed cost of solar and the marginal cost of solar in MA required for 7% unlevered IRR, taking advantage of tax equity to capture the benefits of the ITC, MACRS and bonus depreciation. We estimate that the current break-even Fundamental SREC Price for the most cost efficient developer is currently $150 for 10 years and declining. $150 will be used as reference point for our analysis.
The buyer wants to avoid paying the SACP and buy at the $150 Fundamental SREC Price, assuming symmetric market information about installation costs. The $300 fixed price SCCHA does not provide a guaranteed method to avoid paying the SACP as it runs in July following the compliance year close at the end of June. However it does create a theoretical price cap as an alternative to buying in the open market. As sellers only get $285 from the SCCHA, why would the buyers let the DOER capture the $15 difference? The buyers would prefer to pay the seller directly close to $285 and save $15. Given this, we believe the price cap for the market is $285.
The seller wants to get paid at a minimum the Fundamental SREC Price of $150. Only if the market is severely oversupplied would the seller accept a price less than $150. As the market has a cap of 400 MW, there is no possibility of a severely oversupplied market. As we stated above, the price floor has now become a cap for the market. $285 is the most a seller could expect to receive in the market.
The optimal strategy for the seller is to sell for $285 and for the buyer is to pay $150. The key to the game is understanding how the balance of negotiations play out in the market when there are few buyers and many sellers and the majority of sellers must sell each year. If all sellers cooperate, they can force the buyers to accept a price closer to $285.
Breaking the Cooperative Pact
With many sellers needing to sell each year at only $150, the buyers only need to get one party who must sell to break the cooperative pact to set the price in the market at $150. Given the historical activity of sellers in other markets such as New Jersey, this outcome is highly likely in Karbone’s opinion.
The Threat – Shifting the Balance
Given that all SRECs minted in any compliance year post 400 MW have to be purchased, if a seller has a strong balance sheet, many SRECs to sell and does not need to sell, then they can hold on to their SRECS and use the threat of the buyers paying the SACP to force them to negotiate a price closer to the $285 cap. Given the credible threat of the SACP and the threat avoidance method of the SCCHA, we expect that the buyers and sellers will settle on a future price from $150 to $285, the midway being $220.
Downward Price Pressure
If the Fundamental SREC Price shifts, then this midmarket price will also shift. With installed costs of solar still falling, the general pressure on SREC prices is downward. We expect in 2015 the midmarket price for strong balance sheet sellers could settle below $200.
It is unclear whether the market price will be set at the Fundamental SREC Price or the price negotiated by the strong balance sheet sellers. Historically the lowest price seller has set the price.
Karbone is full service firm specializing in the Renewable Energy and Environmental Markets. Based in New York, with offices in London and Istanbul, the firm offers a unique combination of Capital Advisory, Brokerage, and Analytical Research services. Karbone differentiates itself through a uniquely integrated service approach, enabling our Capital Advisory, Brokerage, and Research teams to add value to each segment of the project value chain.
For Karbone's research and downloadable pdfs, please go to: www.karbone.com
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