So the Last Chance Auction has come and gone and only 3 SRECs sold, out of over 30,000 available. But then the Mass DOER stepped in and said that they would pay $285 for each unsold SREC anyway. So the big question now is “should you sell?”
Let’s consider your possible options. First off, you could sell now and put an immediate $285 (minus any transaction fees) in your pocket. I have 6 eligible SRECs so, after fees, they would be worth about $274 each and about $1,640 in total.
Or you could keep them in your account. Since the Clearinghouse Auction went through all 3 phases without selling out, an additional 3 years of life has been added to each SREC. So while they are no longer eligible to be included in any future auctions, they can be sold at the market price until June 2016.
So where do I see pricing headed over those next 3 years? According to the program documentation, once the 400 MW cap is hit, the number of SRECs required to be purchased by the utilities will be set equal to the number generated. While many thought that we would most likely hit that cap in 2015, we all now know that that cap has essentially already been hit with the DOER expanding it to include all installations completed by the end of the year.
Since all SRECs generated during this time frame are guaranteed to be purchased for $300 by the utilities yielding a $285 payment to the sellers in the Last Chance Auction, the only circumstance I can see them selling for less than that is when a generator doesn’t feel like waiting until the auction and would prefer to earn that money sooner.
However, since even these SRECs can be resold in the auction for a fixed $285 I do not see them selling for much less than $250 as any bids less than that will be outbid by those willing to pay more for less guaranteed profit.
Similarly, I do not foresee them trading near the Alternative Compliance Payment (ACP) price as the utilities can just wait until the Last Chance Auction and pay a flat $300 for each SREC. So while we can wait them out, they can wait us out too. Essentially while $285 is the “floor” on what a generator can expect to receive, similarly $300 is the “cap” on what a utility can expect to pay.
Interestingly, an “equilibrium” price of $292.50 would make the most sense for both parties. That way generators would received $7.50 more than they would if the SREC went to auction and buyers would save $7.50 off what they would need to pay if they had to buy them at auction. If both sides were cooperating, this would be the optimum price.
It makes sense therefore for the utilities to purchase all SRECs that they can below the $300 auction price. However, they may not want to tip their hand by doing so since there will always be those who will sell for less in order to avoid any risk whatsoever.
While I had originally thought in my post back in December entitled A Comprehensive Strategy for Selling Your Massachusetts SRECs that the market would get a chance to be undersupplied before reaching the 400 MW cap, it no longer looks like there is a chance of that happening.
As far as what action to take, I would suggest selling them now for $285 apiece. While I see little risk of them dropping in price below $250, I also see little chance that they’re going to sell for more than $300 either.
And I think this is exactly the way the DOER designed this mechanism to work: it encouraged early adopters when the system was undersupplied, discouraged new installations when the system was oversupplied, and now that it is closing to new installations is headed towards a predictable equilibrium. Nicely done, guys!
One last bit of news that also serves to corroborate my above analysis. I have actually already sold my first SREC! But it was not one that I was expecting to sell. While my 2012 SRECs were waiting for the auction, my first 2013 SREC was sold at a market price of $245. While I don’t know who bought it, it is either a utility trying to save themselves from having to pay $300 in next year’s auction or a speculator looking to receive $285 for it in that same auction. In either case, I feel this validates my prediction.