SMART start? Massachusetts utilities, solar at odds over proposed incentive program
SMART, an innovative declining-block incentive program, is drawing criticism from both sides over auction design and rates
Of all the efforts nationwide to find common ground between utilities and solar companies on net metering successors, Massachusetts’ proposed program is one of the most novel .
The state’s electric utilities and solar advocates agree the Department of Energy Resources did yeomanly work to design the SMART solar program. Even so, there remains significant disagreement about the design of the program that will replace the state’s volatile solar renewable energy credit (SREC) program.
“We appreciate DOER’s collaborative effort,” Ian Springsteel, National Grid’s director of retail regulatory strategy told Utility Dive before describing his issues with the design of the Solar Massachusetts Renewable Target (SMART) program.
The program aims to add 1,600 MW of various types of solar capacity, setting the base incentive price for the first 100 MW through a competitive bidding process.
The utility supports that, Springsteel said, but National Grid pushed for competitive auctioning of at least 400 MW, and is concerned that a lack of competition will result in higher prices for customers.
Solar advocates are pushing for changes to the program which they say will help better align solar deployment with the policy objectives outlined by Gov. Charlie Baker (R). But National grid and fellow utility Eversource are worried that special incentives for arrays that meet the policy objectives — such as installation on brownfields or service to low-income customers — will complicate the auctioning process so much that it will not be able to function properly.
The disagreements could come to a head in the coming months as both sides petition the DOER for changes to program design and auction parameters. If the Department of Public Utilities (DPU) approves the program by December, DOER could put SMART into effect in January 2018.
“The first auction will probably decide whether this program succeeds because it sets the base level incentive price, which some call the clearing price,” said Jim Kennerly, a consultant at Sustainable Energy Advantage, which assisted DOER through the development of the SMART program.
All about SMART
SMART fulfills the directive imposed on DOER by Chapter 75 of the Acts of 2016. Lawmakers, weary of debates over net metering and the SREC incentives, mandated a new policy to support “a stable and equitable solar market at a reasonable cost to ratepayers.”
After setting a base price for the first 100 MW of solar through a competitive auction, the program would allocate eight 200-MW blocks of solar energy over time and declining incentive prices.
Through SMART, solar projects of different types would be eligible for different incentives. Arrays of 1 MW or more in all utility service territories would be eligible for 100% of the first auction's clearing price. Projects of less than 1 MW would get from 110% to 230% of the clearing price.
Projects in the first 200-MW allocation block would get the auction base clearing price, fixed for 10 years for 25 kW systems and 20 years for larger systems. For each successive block, the incentive price would decline at a fixed pace.
Projects meeting policy objectives would be eligible for “adders” to the incentive price of between $0.02/kWh and $0.06/kWh. Arrays on public or private building roofs would get the smallest adder. Community solar projects and arrays on brownfields and landfills would get adders of $0.03/kWh to $0.05/kWh. The highest adders would go to solar canopies and arrays serving low income customers.
Projects that combine solar and battery storage would be eligible for a variable adder designed “to enable storage to be properly valued when paired with solar,” according to DOER. Battery systems that store the most solar output and deliver it over the longest durations would qualify for adders of over $0.07/kWh. Systems that store the least output and discharge for the shortest durations would get adders under $0.03/kWh.
The objective of the adders is to “align” incentive levels with the benefits offered by different types of solar, according to DOER. Benefits include shaving system peak, supporting system power quality, firming renewables, deferring upgrade expenditures, and increasing hosting capacity for distributed resources.
To further drive development toward policy goals, SMART also applies “subtractors” of $0.001 per acre or $0.0005 per acre to land use categories such as undeveloped greenfield sites, wetlands, and historic and archeological sites. Land treatment by developers would be subject to DOER regulations.
Arrays of 25 kW or less remain eligible for the Massachusetts NEM retail rate credit. SMART distinguishes between “standalone” and “behind-the-meter” facilities. A net metered standalone facility gets the NEM credit minus the value of its output at the incentive price. Non-net metered facilities and behind-the-meter arrays would get the value of their output at the incentive price.
The program includes an optional on-bill credit that would be an alternative to NEM. Eligibility would be uncapped. The basic service rate credit could, in the absence of NEM, be transferred to off-takers’ bills. This is regarded as an insurance program for the highly successful Massachusetts community solar sector.
Auctions, adders spark disagreement
While both utilities and solar companies applauded DOER’s intent in the SMART solar program design, both would like significant changes to the auctions.
The state’s utilities want to see more competitive auctions for each 200-MW block of solar incentives, while solar advocates see problems with the the price structure.
The initial competition, introduced by DOER late in the program design process, will bring the base incentive level down to a market-based price, National Grid’s Springsteel said. “But there should be an element of competition in every year of the program.”
The solar advocates, meanwhile, point out that Act 75’s also requires DOER to promote “investor confidence through long-term incentive revenue certainty and market stability."
To meet the Act's requirements, the auction’s current bid ceiling of $0.15/kWh for larger arrays and $0.14/kWh for smaller ones must be altered, said Janet Gail Besser, executive vice president at the Northeast Clean Energy Council (NECEC). It should have “a ceiling and floor price” that assures solar developers of a “viable market” but provides “an upper limit on ratepayers’ cost exposure,” she said.
A number of solar and clean energy groups including NECEC sent a letter to DOER outlining their proposed changes to the program. It describes these controls as a “price collar” that would keep bid prices from going too high, which would harm ratepayers, or too low, which could encourage developers to drop out.
David Gahl, director of state affairs for the Northeast Solar Energy Industries Association (SEIA), acknowledged that DOER’s attention has understandably been on controlling costs to ratepayers to this point.
"But there is a balance they need to strike,” he said. “They also have to maintain a robust Massachusetts solar market that will keep delivering jobs and economic benefits.”
The solar advocates calculated a proposed collar with an $0.1135/kWh floor and a $0.1755/kWh ceiling, Gahl said. These define “the sweet spot between controlling costs and assuring economic development.”
National Grid, however, does not see the collar as necessary, Springsteel said.
“Everybody likes price protection on the bottom end but we don’t think a floor price is needed,” he said. “If the program is designed with an appropriate ceiling price and appropriate threshold criteria, bidders will try to get as close to the ceiling price as they can while still being competitive and earning a decent return.”
Springsteel applauded DOER’s intent to keep the price as low as possible for ratepayers. “If people can build ten-cent solar, why shouldn’t they be able to bid ten cents?”
Besser said solar advocates also see the need to reconsider two other auction parameters. One is that developers whose projects are eligible for adders should not be allowed to bid in the auction.
Those developers might submit bids that are not “an accurate reflection of the real price to build a project,” she said. Too many bids like that could “distort the clearing price and limit the program’s success.”
“If bids are from developers whose projects won’t get adders, the base incentive level will be closer to the market price for solar,” Gahl added. “If developers with projects eligible for adders bid, they might back down their bids and skew the result toward a lower base incentive level.”
Springsteel and National Grid, however, do not share the solar industry’s concern.
The solar sector’s worries are “more to a problem with the adders than with the bidding structure,” he said. “If the adder is right, there would not be a problem with the underlying bids.”
The utility does not “object entirely to adders,” he said. But the community solar and low-income project adders should be lower, and adders for rooftop solar are not necessary.
Solar is being built in Rhode Island and Connecticut on buildings without an adder, and landfill systems are being developed in Rhode Island under standard competitive procurements, he said. “When projects are able to bid and get paid at that bid, the project becomes affordable.”
National Grid is “fully supportive” of rooftop solar because that is a low-impact, cost-effective way to site solar, Springsteel said. “A rooftop is a natural place to build solar. We just don’t support an adder for it.”
Solar advocates raised further concerns about the 4% reduction of the clearing price and the reduction of adders with each successive 200 MW block.
“Costs have come down for solar but other costs in Massachusetts, like siting, labor, and interconnection, are higher,” Besser said. “A more accurate clearing price reduction would be 1.5% to 3% per block, not 4%.”
And the amount of the adders should not decline between blocks, she added. “There is no reason to think the extra cost for adder-eligible projects will decline over time or as the solar installed capacity increases.”
National Grid understands the use of adders follows from the program design and legislatively mandated policy objectives, Springsteel said. “If DOER had a much different design, I don’t think you would even need adders.”
Common ground on auction bidding criteria
Springsteel did agree with the solar industry about bidding criteria.
The auction parameters do not include strong enough bidder qualification criteria, the solar advocates' letter argued. This deficiency also threatens the validity of developers’ bids, Besser said. “If the bidding threshold is too low, bidders might drop out when they discover they cannot build at the price they bid.”
Bids should only be allowed from developers who understand development costs well enough to prevent “phantom bids,” Gahl said.
There should be four minimum bidding criteria, the solar industry argued. Bidders should have acquired site control, secured permits to build, obtained an interconnection agreement, and paid at least 25% of the interconnection costs. Also, if a phantom bid is withdrawn, its capacity should automatically go to the next highest bidder to prevent the clearing price from being impacted.
The solar industry’s concerns are real and the minimum criteria it proposed match National Grid’s competitive bidding process requirements, Springsteel said.
“Bidders need to know what they are getting themselves into,” he added. “Those criteria prevent unreasonable bidding that results in extreme attrition.”
Land use issues
Solar advocates also raised concerns about land use subtractors in the SMART program.
Solar companies understand the environmental concerns in the land use parameters, Besser said. But certain adjustments could effectively respect the intent in state zoning regulations without unnecessarily limiting solar growth.
Per-acre subtractors are imposed on ground mounted projects built on land that is not zoned for commercial-industrial uses and on previously undeveloped (greenfield) land zoned for commercial-industrial uses. Therefore, Besser said, DOER must better define terms like “acres impacted” and “previously developed.”
The amount of the subtractors should be halved and should not be applied to lands designated by local authorities for solar development, she added. And projects already permitted when SMART goes into effect should not be subject to its new restrictions.
Finally, DOER must better define the objectives of its performance standards. “They are overly prescriptive without specifying the objective,” Besser said. “This could drive up costs without a clear benefit.”
As part of the state’s Office of Energy and Environmental Affairs, DOER is legitimately concerned about synchronizing SMART land uses with land preservation and habitat protection, Besser acknowledged.
“Solar respects that but Massachusetts is one of the more difficult places to site infrastructure,” she said. “DOER should recognize that solar has significantly fewer impacts than something like a shopping mall and should not face stronger restrictions.”
The utilities were not involved in land use discussions, Springsteel said. “We are supportive of additional direction to protect open space and environmental resources. There are few enough of them in Massachusetts.”
On-bill credits, the NEM cap, and the SREC program
Gahl said solar advocates are "pleased" DOER offered an on-bill credit option for non-net metered customers. “It is an alternative that could allow the solar industry to move forward if the net metering caps are not raised.”
But DOER has not yet clarified how the option will be applied or what the compensation rate will be, he added. More importantly, the NEM cap, which has supported the installation of 1600 MW of solar capacity, should be raised “to ensure there can be another 1600 MW installed,” Gahl said.
Besser agreed. Having an on-bill credit that enables community solar where NEM credits are no longer available could be important, she said. “But we are not confident it will work. The net metering cap should be lifted or at least increased.”
DOER is not convinced of the need to raise the caps, a spokesperson told Utility Dive, particularly when there is 100 MW of capacity remaining in utility territories and small systems under 25 kW are exempt from the cap.
The agency is watching the status of the market and waiting to see if the legislature acts to increase the caps, the spokesperson added.
National Grid’s Springsteel agreed the details of the on-bill credit option need clarification. He did not address the net metering caps.
SEA’s Kennerly said much of solar project economics, especially for the community solar sector, “may depend on whether the on-bill credit is available and workable.”
Community solar project subscribers cannot use the solar generation from their portion of a centrally located array, Kennerly said. Without a bill credit, developers would have to deliver a potentially taxable payment to each customer and that "would erode the value proposition.”
The on-bill credit will not be a full retail rate credit or a full clearing price incentive but could be the avoided cost to the utility of energy and capacity if it's not at the "Basic Service" or "G" rate, Kennerly said. “Its workability will depend on solar economics, which differ for each market segment.”
Springsteel’s concern is the existing SREC program, which will be extended until SMART is in place. There may be hundreds of SREC-qualifying MW added beyond the allocated 1600 MW before the SMART program is implemented, he said. “Those MW should be subtracted from the 1600 MW allocated to the new program.”
Kennerly agreed many developers are likely to push to qualify for the SREC program. They understand it and low solar costs low make its economics are workable despite low SREC prices, he said.
“And it is not clear the new program will be in place in January 2018,” he added. “The things that have to happen are heavy lifts for government agencies.”
Kennerly is nevertheless confident SMART “will ultimately work,” he said. “It will be different and more complex. It will require developers to be on their game. That is what more competition and lower incentives will do. But ultimately it is going to be the thing that helps Massachusetts solar transition.”