By Katherine Searcy, Cation Consultants, PLLC
Over the past decade, a new solar market has gradually taken root across the country. Filling the gap between homegrown rooftop systems and large, utility-scale solar farms, community solar promises to expand solar access to everyone. Through community solar programs, electricity consumers voluntarily purchase or subscribe to part of a large solar array. In return, participants’ electric bills reflect a portion of the financial or electricity credits for the clean energy produced.
Community solar installations are typically smaller than 2 MW in capacity, though they occasionally range up to 5 MW. Often sited within the local distribution grid, these installations operate much closer to the customer than remote, utility-scale farms. Though these systems are commonly located offsite for both residential and commercial customers, multi-unit buildings such as shopping malls sometimes host onsite systems.
Community solar systems are also known as shared solar, roofless solar, or solar gardens, and they differ significantly from other types of systems in market size, benefits, and typical business model.
Market Size
Community solar is a relatively new approach that constitutes just one percent of the distributed solar market. Through the end of 2015, Greentech Media (GTM) Research reported 181 MW of shared solar capacity. Currently, over 100 installations supply clean electricity across 26 states.
Predictions for the rate of community solar growth vary widely based on assumptions and inclusion of the 2016 commercial Investment Tax Credit (ITC). Prior to the ITC extension, GTM forecasted shared solar would reach 1.8 GW (1,800 MW) by 2020, and the National Renewable Energy Laboratory (NREL) predicted that it would reach 5.5 to 11 GW in the same period. With the ITC extension and other cost reductions, Rocky Mountain Institute (RMI) forecasts markets approaching 15 GW by 2020.
Benefits
Currently, fewer than 25 percent of U.S. households have both the unshaded rooftop space and the financial means to install rooftop solar systems. NREL estimates that community solar will expand access to the 48 percent of residential customers who rent their homes or lack access to adequate roof space. Separately, community solar could serve the 49 percent of commercial customers who have insufficient roof space to support a PV system that would generate even 20 percent of their electricity needs.
Residential customers can capture the economies of scale by joining with others in larger PV projects. Many programs offer stable rates, which hedge against rising electricity costs. As the market matures, programs are tending toward little to no upfront investment, flexible contract terms, and no system maintenance costs. Finally, customers who relocate within a utility’s service area can usually retain their community solar contract.
Some large corporations such as Google and Apple have sufficient power requirements to negotiate Virtual Power Purchase Agreements (VPPAs) for renewable energy, while businesses with more modest power needs require other options like community solar. In addition to many of the residential customer benefits, participating companies profit by building their brand and demonstrating corporate stewardship. The projects themselves benefit from creditworthy corporate participation, some of which may also provide flexibility as variable off-takers of the projects’ output. This can lead to lower financing costs, cash-flow stabilization, and greater affordability for all participants.
For utilities, shared solar programs provide a flexible and democratic distributed energy option. Equity among ratepayers is a common utility concern, as only a small percentage of customers can accommodate rooftop systems. To a large degree, community solar expands participation to the entire customer base. What’s more, utilities can control the system’s design, construction, and operation. By locating projects close to customers, they avoid long-distance transmission costs. These facilities can reduce load defection and retain customers who might otherwise install behind-the-meter systems. Additionally, since customers can easily transfer subscriptions to others, the project remains fully utilized over time, reducing the utility’s demand risk; less risk means lower financing costs for the utility.
Business Models
Successful community solar programs must properly distribute the costs and benefits of the system, account for tax and other financial issues, and abide by securities and other relevant regulations for all stakeholders. The programs encounter a broad range of regional regulations and incentives, and they operate in both regulated and competitive markets. In response to these complex needs, utilities and other organizations have created innovative business models.
Though small groups of private investors and nonprofit organizations created many early community solar programs, utilities and utility partnerships now develop the majority of programs.
State policies and utility types (e.g., cooperative, municipal, or investor-owned) determine the business model and ownership structure of each program.
Key State Policies
Virtual net metering, which allows the allocation of energy or monetary credits to a customer from a generation facility, is a critical state policy that enables community solar. Regional production incentives or community solar mandates encourage growth. Problematic state policies, such as net metering caps and ownership limitations, inhibit growth. Additionally, existing legislation enabling distributed solar often requires revision to accommodate multiple-customer systems instead of single end users.
Nonprofit Utilities
Electric cooperatives and municipally owned utilities (MOUs) have led the deployment of community solar projects to date. Because these nonprofits are tax-exempt, they often prefer third-party project ownership (TPO) since the third party can utilize and pass through the ITC savings to the project.
Under the most common TPO arrangement, a developer collaborates with a utility to design and construct the array. The developer owns the facility, at least initially, and obtains the 30 percent ITC. The utility purchases electricity from the array under a long-term Power Purchase Agreement (PPA), and decides whether to maintain the array and manage the customer relationship or to delegate those responsibilities to the developer.
The developer can either sell the solar panels or sell rights to the electricity to customers. In cases where customers own the panels outright, the developer or another firm may act as an agent on behalf of all owners. In this capacity, this party negotiates the PPA with the utility and might also operate and maintain the facility.
In some cases, utilities can regain ownership of the project after the third party receives its tax and accounting benefits. In other cases, nonprofit utilities may use for-profit subsidiaries to access the ITC and retain ownership.
Despite lacking access to the ITC, nonprofit utilities may use other incentives and financing options to achieve affordability for their customers. Co-ops may access low-interest loans, federal financing from the Rural Utilities Service (RUS), and federal Clean Renewable Energy Bonds (CREBs). Cities may also use CREBs, or opt to supply public funds for rebates in MOU programs.
Investor-Owned Utilities (IOUs)
Though only a few IOUs currently offer community solar programs, they have tended to develop larger projects and will play a growing role in community solar deployment. IOUs tend to favor a utility ownership model because of the federal 30 percent commercial ITC. With this model, a utility may design and construct the array or collaborate with a third party for construction. However, the utility retains project ownership and community solar participants typically deal directly with the utility.
Pricing and Participation Limits
Customers usually participate in community solar programs via an ownership or a subscription approach. In ownership-based programs (Fig. 1), customers purchase panels or a portion of the project upfront and receive a proportional share of the facility’s electricity output each month. Loans and lease-to-own contracts improve access for low- and middle-income customers.
For subscription-based programs (Fig. 2), customers buy monthly “blocks” of energy, typically ranging from 100 to 200 kWh, or they pay a rate schedule specific to the program.
To avoid conflict with securities law, programs typically limit participation to 100 or 120 percent of the customer’s annual electricity usage. In this way, customers gain control of their electricity bill without creating a profit-generating investment.
Outlook
The community solar market is growing rapidly across the country and could expand solar access to almost all residential and commercial customers who are not candidates for individual, customer-sited systems. Operating under a broad array of local, state, and federal policies and incentives, utilities and project developers have created innovative business models to offer affordable options to customers. These models are experiments to determine what works, and successful business and customer participation models will emerge as the market matures. Looking forward, state policies will strongly influence the adoption rate of community solar. Programs that avoid shifting costs from solar participants to non-participants will garner support from state policymakers and offer the greatest chance to achieve the full promise of community solar.
Additional Resources
NREL Guide to Community Solar (2012 Revision)
Go Solar North Texas (created by the North Central Texas Council of Governments)
Katherine Searcy, P.E., is a Principal Engineer at Cation Consultants, PLLC. She has consulted for over 15 years to utilities and to other energy-intensive industries. She strives to implement and improve technologies that reduce our environmental impact.