Why Community Solar?
Despite the growing demand for distributed solar generation, only approximately 25% of the residential rooftops in the US can effectively accommodate solar PV installations. Potential customers may be renters, have roofs that are excessively shaded or in need of maintenance, may live in multifamily buildings or may not be economically qualified for a solar lease or purchase.
For potential customers with these issues, community solar may offer an alternative form of participation in the distributed solar market. Community solar installations may range from under 100 kilowatts (kW) to over 1 megawatt (MW) (compared to a typical single family residential installation of 4-5 kW). These installations are generally less expensive, in terms of installed cost per kilowatt, than single family rooftop units, although not as economical as utility scale facilities. As in the case of rooftop installations however, they are not directly competing with the production cost of utility scale solar generation, but with the delivered retail cost of electricity to residential and commercial customers. As a form of distributed generation, community solar programs require the same type of regulatory environment – e.g. renewable portfolio standards, strong interconnection policies, third party ownership, etc. – as do rooftop solar installations.
The three primary business models for community solar installations are described below. It should be noted, however, that even within these three categories, business models have not yet been standardized and commodified.
The Interstate Renewable Energy Council (IREC) has established a set of model program rules for community solar programs, incorporating principles such as net metering and the transferability of member’s accounts within a utility service territory. Fourteen states currently have community solar laws in place, although individual program structures differ, reflecting different sizes and financing sources, regional differences in solar resources, utility pricing, regulatory frameworks, state incentives, securities laws, etc.
Utility Sponsored Model
The utility or a third party owns the installation, and customers buy electricity from the utility, but will receive a credit on their bills corresponding to their share of the installation’s power production, which they may purchase either on a monthly basis, or up front in a lump sum.
Investor owned utilities will typically own the installation as they can utilize the associated investment tax credit (ITC) and MACRS depreciation benefits. In the case of municipal utility sponsorship, a taxable third party investor in may need to be brought to monetize available tax benefits. State incentives and available renewable energy certificates (RECs) may be allocated either to the operating utility or its customers, and this would be determined on a project by project basis, in accordance with local regulations.
Example: The Sacramento Municipal Utility District (SMUD) established its SolarShares program by entering into a 20-year power purchase agreement (PPA) with a 1 MW project built and owned by enXco, which retained the ITC and MACRS benefits. SMUD retained the RECs. This project supported annual subscriptions, from 0.5 to 4 kW each, from 700 SMUD customers, who paid fixed monthly fees for their shares of the system’s production. The customers receive monthly kW credits for their estimated shares of the system’s production, which are netted against their home electric bills at the full retail rate. In 2015, SMUD approved construction of a 10.88 MW solar array, under a 20 year PPA with First Solar, to support an expansion the SolarShares program, which could ultimately grow to 25 MW.
Special Purpose Entity (SPE) Model
The SPE model is a private ownership model which permits members to own or “subscribe” to their individual panels. The entity may be a general or limited partnership, limited liability company, “C” or “S” corporation, or cooperative, but each structural alternative is subject to different legal, tax, and financial constraints.
Customers may be residential, municipal, commercial or industrial. Under the purchase model the member buys and owns his/her panel(s) outright. Under the subscription model, the member agrees to pay monthly (or in a lump sum upfront) for the power output of the panel. In either case, credit for production from owned/subscribed panels is applied against the member’s utility bills.
The SPE is structured to pass along the economic benefit of federal tax and local incentives to the members. If individual members cannot claim applicable federal tax benefits, the SPE can be structured to monetize available benefits at the corporate level, and use the proceeds to buy down the panel purchase costs for individual members.
Example: Clean Energy Collective (CEC), in Colorado, started with a 78 kW array serving 18 owner/customers in the Holy Cross Energy service territory. Customers could buy a solar panel for $725, and receive credits on their Holy Cross energy bill for the power produced by that panel for 50 years. Holy Cross Energy purchased rights to the RECs upfront for $500/kW. The ITC for the project was monetized through the 1603 Treasury Program, and the proceeds were used to buy down the panel price for the owner/customers. CEC has since built or started development on over 90 projects with 28 utilities in 12 states, totaling over 160 MW of community solar capacity.
In this model, donors contribute to a shared renewables installation owned by a charitable non-profit organization, which can use the power or sell it to the local utility for bill credits. While the charitable contributions used to fund the installation are tax deductible, the nonprofit is not entitled to federal income tax benefits, although it may be eligible for RECs and local benefits. Grants and foundation funding may also be used.
Within this model, federal tax benefits could be monetized, reducing the capital outlay for the system, if the nonprofit enters into a prepaid PPA with a for-profit developer, rather than using the funds raised to purchase the system itself.
Depending on the output of the installation, power sold back to the utility may also be netted against the electric bills of the charitable donors, through group billing. Group billing, however, requires a single point of contact, acting as customer representative, who is then responsible for billing and dispute resolution within the group. Alternatively, some states have virtual net metering programs which allocate credits directly to participants’ electric bills.
Example: On Bainbridge Island, Washington Community Energy Solutions, a nonprofit, raised $30,000 from 26 donors and a $25,000 grant for Puget Sound Energy (PSE) to install a 5.1 kW rooftop PV system on the Sakai Intermediate School. The school owns the system, all its power output and environmental attributes, and net meters its electricity purchased from PSE.
Community solar is a promising model for expanding the growth of the solar sector to market segments which are currently underserved by traditional rooftop offerings. With the business models outlined here, there is considerable flexibility available for various consumer groups, but these models still rely on patchwork state and local policies, and would benefit from a more standardized approach to regulation.
As the entire solar industry grows, expect to see a greater interest in community solar applications and innovative business models.
Ken Kramer is a founding partner of Rushton Atlantic, LLC , a New York- and Chicago-based valuation consulting practice focusing on renewable and conventional energy, infrastructure, manufacturing and transportation, and a member of Global Asset Valuation Advisory Network, an international consortium of valuation consultancies. Rushton Atlantic’s services support financing, investment, financial reporting, tax and insurance. Ken serves on the Renewable Energy & Energy Efficiency Advisory Committee to the Secretary of Commerce, and served on the Steering Committee for the Department of Energy’s Future of the Grid Initiative.