2020 MA-SREC Post-Mortem

Predictable MA SREC 2020 Vintage Price Volatility that Many Didn’t Predict at the Cost of Millions $$$

Written by: Tom Michelman, Senior Director & Distributed Energy Resources Practice Lead; Toby Armstrong, Senior Analyst; and Eric Pinsker-Smith, Analyst

Publish Date: December 13, 2021

Estimated Reading Time: 6 Minutes

Forecasting 2020 Vintage MA SREC Prices: A Post-Mortem Introduction

You might or might not know that Sustainable Energy Advantage has been providing an unbiased market fundamentals analysis of the MA SREC I and SREC II markets since 2014 via our Massachusetts Solar Market Study (MA-SMS). In our market fundamentals analysis, we conduct an in-depth examination of supply and demand to forecast how prices should settle at the end of the trading period following each compliance year given the supply-demand dynamics.

If you are familiar with the MA SREC markets, you might think that predicting the supply-demand dynamics and then theoretically deriving the market close prices would be a relatively easy endeavor because the SREC I market in practice has been closed to substantial additional projects entering the program since late 2015, and the same for the SREC II program since late 2019; but we can tell you it isn’t. Often the market is caught by surprise when prices settle at the end of a trading period. For instance, between April 15 and June 15, 2021, the 2020 vintage SREC I and SREC II market price dropped 19% and 9% respectfully. For SREC I, this drop represented a price shift from close to ACP (maximum) levels to the price floor (in-practice minimum).

Below we provide an assessment of our MA 2020 SREC I and MA 2020 SREC II forecasts, and then provide information about a limited time offer so you can get our latest forecasts at a discount from the full rack rate list price.

MA SREC I 2020 Vintage Spot Price Retrospective

In the graph below:

  • The top solid yellow line denotes the alternative compliance payment price (ACP), the theoretical market price ceiling.
  • The bottom green line represents the annual volume auction net price, just think of it as a soft floor, a price the market rarely falls below.
  • The black dots are (on more or less a quarterly basis) average MA SREC I 2020 vintage spot prices (contemporaneous with our forecasts, and since January 2018, conducted a few days prior to the quarterly minting of the SRECs).
  • The dashed lines denote the low and high bounding price cases from our market fundamentals analysis.
  • The red triangle indicates the MA SREC I 2020 vintage average closing spot price of $284 in June of 2021.

As can be seen by the black dots, the MA SREC I 2020 vintage market bounced between $325 and $375 from October 2018 through April 2021. As of October 2020, all our modeling cases (four or five depending upon the market situation) forecasted that MA SREC I 2020 vintage prices should end near the soft floor net price of $275. Indeed, this is what happened. The average market spot prices dropped from $351 in April 2021 to approximately the soft floor price of $284 when the market closed on June 15, 2021; a $67 (19%) drop in prices in two months.

For a typical 5 MWDC project with a 14% capacity factor, the price drop may have translated into a $400,000 drop in revenue.

What Did We Know That the Market Didn’t about the 2020 MA SREC I Supply-Demand Dynamics?

Although the supply-demand dynamics of the SREC markets may appear simple at first, the dynamics of banking, auction volumes being carried over to the following compliance year, weather impacting SREC production, and load growth (or reductions, in the case of 2020), make for a complicated picture. All these variables are accounted for in SEA’s supply-demand and price forecasts.

From our in-depth analysis and forecasting we strongly believed that the 2020 SREC I market was oversupplied. For example, as of October 2020, depending on the supply and demand drivers, we forecasted that the SREC Is available to fulfill the 2020 compliance obligation market would be oversupplied between 5% (with low supply/high demand) and 15% (with high supply/low demand). As of April 13, 2021 when we provided our last analysis prior to the 2020 vintage market closing on June 15, 2021, we had cemented our proprietary predictions at a single level between that 5% and 15% level of oversupply, enough oversupply to drive prices to near the auction soft floor price.  The graph below displays “a close-up” vintage 2020 and 2021 of SREC I spot prices, where one can see SREC I prices dropping off the table between April 15, 2021 through June 15, 2021. 

Prior to April 13, 2021, we didn’t know what the market was thinking, or if it was thinking. We’ve heard that many load serving entities (LSEs) leave much of their compliance obligation purchases to the last couple of months to preserve cash flow. When those LSEs as buyers went out to the market, they (or their brokers) found a lot of supply available, and as a result a softening of prices. Those buyers who had the fortitude to wait until the last possible day, were rewarded with the lowest market prices; conversely, those generators or speculators who held on to their 2020 SREC Is to the last moment were punished by ever decreasing prices.

For 2022 onward, these dynamics will be made even more complicated, as the Department of Energy Resources (DOER) has introduced new regulations which will cut significant portions of SREC I supply off, with necessary adjustments to the Compliance Obligation. SEA has been modeling the impact of these rule changes since they were first proposed in 2019. On top of those changes many small projects are at risk of no longer reporting SREC production, when 3G is phased out in 2022, which could depress supply.

MA SREC II 2020 Vintage Spot Price Retrospective

In the SREC II graph below you can see the market metrics as described above for the SREC I graph.

As can be seen by the black dots, the MA SREC II 2020 vintage prices were bouncing between $275 and $300 from October 2018 through April 2021. As of October 2020, we had bounded our estimates as follows:

  • For a low supply / high demand case, we were predicting a slightly undersupplied market (which would lead to prices near the ACP).
  • For a high supply / low demand case, we forecast the market to be oversupplied sufficiently to theoretically lead to market ending prices below the soft floor price.

As of April 13, 2021, all our proprietary model cases were estimating oversupply, but significantly less oversupply than our contemporaneous SREC I 2020 market forecast.

As can be seen the SREC II 2020 vintage market did soften from an average spot price of $301 in mid-April to $275, a $26 drop (9%) drop.

For a typical 5 MWDC project with a 14% capacity factor, the price drop could have translated into a $110,000 to $160,000 drop in revenue depending upon the project’s SREC II Factor.

Why Did the SREC II 2020 Vintage Prices Market Drop, but Not as Much as We Forecasted?

The SREC II 2020 vintage prices dropped because the 2020 SREC II compliance market was oversupplied…duh. The real question is why it didn’t drop as much as we forecasted. One or more of the following reasons could have contributed to why our market fundamentals forecast overshot the price drop seen in practice and include:

  • The market was oversupplied, but not as much as we forecasted for 2020 or future years (e.g., our estimates of production or banked SREC IIs might have been too high or the number of SREC IIs never actually retired was too low).
  • Our price formation algorithm is incorrectly aligned with market drivers (e.g., our implied value of money discount factor might be off).
  • Our market fundamentals analysis results in a theoretical price forecast and there might be market frictions (e.g., purchase and selling decision making by market actors) which we are not accounting for perfectly, or not accounting for at all.
  • Related, the market might be concentrated or thin enough that one or more market actors is wielding market power by withholding supply to keep prices high. Our theoretical market fundamentals analysis assumes that the market is diluted enough that no market actor can wield market power.

Regardless, the market spot price did drop, just not much as we had forecasted, which was valued insights to our subscribers and would have been valued insights to market participants who did not subscribe to MA-SMS.

Sign up for MA-SMS 2022 and Let us Help You Maximize MA SREC Revenue / Minimize MA SREC Costs

You too can have access to our MA SREC market fundamentals analysis.

Either subscribe to our Massachusetts Solar Market Study (MA-SMS) subscription service on annual basis, or purchase a single analysis on an ad hoc basis.

From Dec-13-2021 through Jan-12-2022 we are offering our fourth and last MA-SMS market fundamentals analysis from 2021 published on Oct-13-2021 (MA-SMS 2021 MF#4) at an 50% discount. If you subsequently purchase a calendar year 2022 MA-SMS subscription by Jan-13-2022 we will credit the costs MA-SMS 2021 MF#4  to the calendar year 2022 MA-SMS subscription.  Hey, it may help you estimate 2022 revenue for your year-end planning.

Pricing: Contact us for pricing and more information, including discounts if you subscribe to other SEA subscription services.

Contact: Tom Michelman, tmichelman@seadvatange.com, (978) 580-6190, or Toby Armstrong, tarmstrong@seadvantage.com, (781) 219-7299.

Note: our next scheduled (and first scheduled) 2022 MA-SMS market fundamentals analysis will be released on January 13, 2022 two days prior to the SREC 2021-Q3 minting.

Finally, be assured that while we are very pleased with our perspicacious assessment of the SREC I market, as analysts, it bothers us that we didn’t nail the SREC II market prices. In 2022 we will be revisiting our supply-demand and price formation modeling assumptions and approach in our ongoing quest to provide even better analysis and forecasts.