By: Colin Murchie, Director of Project Finance, Sol Systems. Research support provided by Eric Lustgarten.
The New York State Energy Research and Development Authority (NYSERDA) is getting closer to solidifying the next iteration of its solar incentive program with the creation of the Megawatt Block. Perhaps befitting what may be one of the last major new cash incentive programs for solar, it could be one of the best; as proposed, the Megawatt Block incorporates a number of “best practices” for incentive design that should poise the Empire State for strong, steady solar growth.
Solar panels in Palo Alto. Image credit: Richard Masoner.
The current version of the Megawatt Block program awards incentives for solar projects on a per watt basis. It divides market sectors into residential PV (up to 25kW), small PV (non-residential up to 200kW), and large non-residential PV (over 200kW). The final framework for projects over 200kW should be in place by mid-November, and the program is expected to open in late Q1 in 2015 on a first-come, first-served basis.
Proposed Program Design: Geographic Preference
As anyone who’s spent time Upstate can tell you, upstate vs. downstate resource allocation is a perennial issue in all of New York politics. No surprise then that it is also a mainstay of the Megawatt Block program. In addition to allocating incentive blocks for specific market sectors based on project size, blocks are allocated to specific regional geographies within the state.
There’s both supply and demand reasoning in play here. On the supply side, all things in New York get more expensive to install as you get closer to New York City (higher electrical labor costs, shipping and logistics, land costs, pictures with Elmo, cocktails, etc.). On the demand side, New York City and its environs are more transmission constrained, and an increase in distributed generation capacity is not only good for the grid – it’s good for the state. Megawatt Block plans for this by allowing for different rates of solar development – stepping incentives down separately on Long Island and in areas closer to New York City to promote development in these higher-cost, more transmission-constrained environments.
As these MW capacity blocks are filled, the prices will step down — a well-proven incentive design which should allow the market to grow at a consistent, healthy rate, avoiding either “boom and bust” euphoria or a languishing, under-incentivized market.
For now, the plan will tentatively exclude the Long Island region and focus on the incentive levels for the Consolidated Edison region and rest of state (ROS) region.
Taking into Account Regulatory Best Practices: Chasing the Goldilocks Price
The biggest difficulty faced by incentive administrators in solar is always finding the Goldilocks price at which the maximum solar projects go forward with the minimum public funds. At one extreme, this process can be too accurate – requiring thousands of individual systems to each bid for the specific price they individually need, at the expense of massive program costs, and added soft costs in the form of half-developed or unsold projects. At the other, more common case it can be too inaccurate – with state or utility administrators setting a single price. Generally, operating on inadequate or old information, this will be too high, creating a “rush” of rich projects, followed by a crash when funds are depleted faster than they can be replaced.
Reflecting another emerging incentive program “best practice”, NYSERDA’s proposal strikes a balance between market information on real pricing with administrative simplicity, allowing for streamlined deployment of funds. On the simplicity side, allocations will be awarded to developers on a first-come, first-serve basis, with the declines-as-filled nature of the steps providing a rough correction as solar prices decline. However, the initial price for the program is not set by an administrative process, but rather apparently based largely on historical auction results from the previous NYSERDA PON 2112 program.
After the first round, a proposed $.05/watt reduction per incentive “step” also contributes to providing a good balance between incentivizing early development and preserving public capital. This relatively small difference between steps will also reduce the “surge for the door” problem. In programs with fewer, larger steps, developers rush to get in applications before incentives bump down – leaving program administrators are faced with the dilemma of how to prioritize and qualify all of the last-minute applications coming in. Having more gradual drops will minimize this rush.
How Much “P” In The PBI?
The other major dilemma experienced by solar program administrators is whether to pay all funds up front (which reduces the cost to finance solar projects,) or to pay them only over the life of the project (ensuring maximum performance at the expense of major administrative and tracking headache – and effectively raising the amount of the necessary incentive.)
In line with current NY “short term PBI practice,” the first proposal for an incentive schedule splits the difference; payments would be 25% (of the total contract amount) awarded at project completion; with performance-based payments thereafter based on four years of actual, metered performance. This is also probably close to an optimal balance; it minimizes the time value of money penalties associated with a longer PBI horizon. Further, it captures the critical “shakedown” period of an installation during which most design or performance issues will tend to arise – without tasking some poor SUNY–Albany Class of 2034 intern with gathering a few hundred meter readings each year.
How Will Megawatt Block Impact the New York Solar Market?
The NYSERDA programs have been long in coming, propose to offer relatively modest returns, and perhaps as a result have created comparatively little “buzz” in the space. Nevertheless, they’ve been built to last with features that we feel that they will create one of the strongest, and most sustainable, rooftop solar markets in the U.S. over the next several years.
Colin Murchie is a Director of Project Finance at Sol Systems, a solar energy finance and investment firm located in Washington, D.C. To date, Sol Systems has facilitated financing for 165MW and over $600 million of distributed generation solar projects on behalf of Fortune 100 corporations, insurance companies, utilities, banks, family offices, and individuals. Mr. Murchie’s solar industry experience dates to 2002.
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