After more than a year and a half of deliberations, Massachusetts lawmakers finally passed net metering reform in April that will allow the commercial solar market to breathe a (short) sigh of relief. The resulting 3 percent increase to the net-metering caps (7 percent total for private projects) was an obvious boon for PV, as it unfroze hundreds of megawatts of commercial projects previously stuck on a long waitlist.
However, the reform introduces a revised credit mechanism that will put new community solar and other virtual net metering projects at risk. And as discussed in GTM and SEIA’s most recent U.S. Solar Market Insight report, these types of projects happen to be the biggest drivers of near-term growth.
More than 50% of the current SREC II pipeline is virtual net metering
Large off-site projects have historically been major drivers of commercial PV growth in the state. Looking ahead, a more diverse project development landscape shapes the SREC application queue. But as the below figure from the Q2 2016 U.S. Solar Market Insight reveals, more than 50 percent of those diverse projects are still reliant on virtual net metering. This includes community solar, which accounts for nearly one-third of the commercial pipeline expected to be built out over the next 24 months.
But “expected” is the key word here. For most virtual net metering projects, the effects of a new credit structure will put project economics at risk once the new program takes effect.
FIGURE: SREC-II Commercial Pipeline by Market Subsector
Source: MA DOER, GTM Research
How does reform impact virtual net metering projects?
The reform rolls back the value of net excess solar generation at the end of the billing period by 40 percent. For customer-sited solar, developers can optimize solar generation with customer load to minimize monthly net excess generation and maximize project economics.
However, for virtual net metering projects where PV production is 100 percent offsite, all of that system's production will be treated as excess generation and thus valued 40 percent less than under current NEM rules.
There is also considerable confusion around when the reform will take effect. On one hand, the Department of Public Utilities has noted that a project needs to receive application approval by a certain date. The DPU plans to set this notification date to July 29 or later. However, no one actually knows what that date will be, which puts serious pressure on early-stage development and project origination -- especially for virtual net metering projects that need the grandfathered rules in order to pencil out economically.
Further complicating this story, the 1.6-gigawatt target also puts into motion the end of the SREC-II incentive program. Under emergency regulations, commercial projects qualify as SREC II-eligible as long as they are completed by January 8, 2017. For net-metered projects also reliant on SREC revenue, this presents projects with an additional hurdle to jump in order to pencil out.
Massachusetts is on pace for a record 2016, but the future of virtual net metering is questionable after 2017
While GTM Research expects Massachusetts to install over 400 megawatts (DC) between 2016 and 2017 due to the current pipeline of projects that qualify for net metering, the composition of project types will likely change as we move through 2017 and the queue of virtual net metered projects diminishes.
Judging by a comparison of the respective net metering and SREC pipelines, nearly 500 megawatts (DC) of private projects have obtained SREC-II qualification that have not obtained a net metering cap allocation, casting doubt on their viability. While the share of systems with both SREC-II and net metering cap reservations will increase before the notification date is reached, lengthy commercial project development timelines and uncertainty around timing severely limit new project origination opportunities in the interim. This casts further doubt on the portion of SREC-qualified virtual net metering projects that will actually be built out.
FIGURE: Net Metering vs. SREC II Pipeline
Source: Mass ACA, MA DOER, GTM Research
With net metering cap extensions in place, the Massachusetts commercial solar market has secured short-term policy certainty in 2016 and into next year. But beyond 2017, the future of offsite and community solar projects -- the backbone of the Massachusetts commercial market -- will ultimately depend on the successor SREC program and how it incentivizes virtual net metering.
The quarterly U.S. Solar Market Insight report tracks state-level policy developments, installations and forecasts. Contact email@example.com for more information on the annual subscription.
Austin Perea is a GTM Research solar analyst covering the U.S. downstream market.