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Community Solar 101

There’s been a lot of buzz about community solar lately. While the amount of investment in community solar projects is a fraction of the investment of the entire solar industry, there are a few leaders who recognize the incredible potential of community solar.

Over the next few months, we’ll be publishing a series about community solar. This is the first article in that series. If you’d like to learn more about the subject, sign up for our free Commercial Solar PPA 101 course.

In this article, I’ll address the following questions.

1. What is community solar?

2. Why is community solar important for the solar industry?

3. What are the regulations that make community solar possible?

4. Who are the key parties involved?

5. Are the different structures that can be used to develop community solar projects?

Background – Why are we writing this article?

To give you a sense for how small community solar is at the moment, SEIA reports that there “at least” 52 “shared renewables energy projects” in the US. While it’s likely the amount is higher, even if it’s 10 times more, that’s only 520 projects.

We decided to create this article series simply because of the volume of questions we’ve been receiving about this topic in three places.

  1. A section in our commercial solar PPA 101 free course dedicated to community solar has been getting a lot of questions.
  2. Professionals continue to join our LinkedIn group “Best Practices for Financing Mid-Marketing Solar Projects” and ask for help on community solar topics.
  3. Lastly, in our Solar Executive MBA, where students are focused on learning how to develop and finance commercial solar projects from start to finish, we’re getting more and more questions about community solar.

This article will outline some of the basic key points around community solar. The goal with this first article is to go much deeper than most of the trade press can go and provide practical advice on the subject. While some of the content will be original, a lot of what I’ll focus on will be curation and organization of the existing material on the Internet that will make it easier for you to do research on your own time.

We’ll start with the basics and get more and more detailed.

There are so many questions to be answered that it’s difficult to determine where to start, so I asked our “Best Practices for Financing Commercial Solar Projects” Linkedin group, focused on financing mid-market solar projects any questions about community solar, to tell me what they wanted to learn. Here’s what they asked:

  1. How much should a developer expect to pay to lease the land/rooftop space for the array?
  2. Are lease payments based on $ per acre (sq. ft.)? or $ per MW? or $ per MWh?
  3. Are there typical escalators? 1% a year?
  4. Who takes responsibility for paying the taxes? Landowner? Developer?
  5. Are typical lease terms 20 or 25 years? Do they typically have options for renewal?
  6. What sort of developer fee is reasonable given the significant additional overhead associated with managing a community array?
  7. Do the community solar customers really own a piece of the system? Or do they only own the rights to the energy and environmental attributes of the production from their piece of the system?
  8. Is the community solar LLC able to depreciate the value of the solar array?
  9. Who gets the federal tax credit? The community solar owners on a pro-rata basis? or the community solar LLC?
  10. What are the advantages / disadvantages of having a large anchor tenant / off-taker?
  11. Are there any rules of thumb on the cost of sales? How much should a developer budget in cost per watt for sales/marketing/admininstration/legal expenses to close a customer?
  12. Do you have any legal agreement templates to review for several agreements needed between the various parties?

These are all excellent questions. They’re just hard to answer without a significant amount of work. Also, given that such a small number of installations have been completed, it’s not clear that there are concrete answers for any of these questions.

By the way, if you’d like to connect with other professionals working on financing community solar projects, please join our Linkedin group on best practices for financing community solar projects.

For this article, I’m going to assume that most solar professionals have heard of community solar and know that it’s something about having one large array that credits a larger number of residential customers but have not done much more reading than that. If you have a much deeper understanding of community solar than this, this article will be dull to you. If this is exactly what your understanding is, it should be a better fit.

What is community solar?

In the most basic form, community solar means that there is a single solar asset that is producing power. The power that is produced can be owned or purchased by multiple parties that are not sited at the exact location of the array.

In many ways, community solar is similar to community wind, although community wind has been far more successful. The wind industry, unlike the solar industry, first developed as a utility-scale energy provider and has slowly been working towards smaller and smaller projects. Two of the largest community wind developers, National Wind and OwnEnergy, have developed a combined capacity of 5,000 MW.

How does community solar work?

  1. There is a single large solar array that is installed.
  2. Similar to financing any commercial solar project, it can be structured as a power purchase agreement, where the homeowner is simply purchasing a specific amount of power, or an ownership model, where the members technically own a certain number of modules of the array and receive the production of those modules.

Why is community solar important for the solar industry?

Community solar is important for a number of reasons.

  1. Increase the addressable market size by 2X to 3X overnight.
  2. Instantly lower the customer acquisition costs for a residential solar installer that is already generating and selling roof mounted solar projects.
  3. Lower investor risk, in theory.

Let’s dig deeper into each of those.

First, community solar drastically increases the number of people that can buy solar. Increasing the number of potential customers means that the solar industry simply has more room to grow, more equipment can be installed, more people employed.

Faze1 screened all of the 1.2 million single family homes in Massachusetts and found that only 26% of them have suitable roofs for solar. It is true that some of them could install a small ground mounted system in their yard. However, it’s reasonable to assume that this would be a small percentage. Community solar provides solar access to the rest of the homeowners who don’t have proper roofs.

It also provides solar access to renters who cannot buy solar because they don’t own their home. In the existing solar model, solar makes the most sense when you own the building where the solar is being installed. Because community solar can change ownership quickly, renters will have access to solar.

The benefit of having more potential solar customers is clear. By increasing the potential market size of solar, it allows there to be a larger target market, more customers, more companies, more solar workers, and more cash flowing.

Second, community solar instantly lowers the customer acquisition costs for a residential solar contractor that is already selling roof mounted solar projects.

Reducing soft costs, and specifically customer acquisition costs, has been a focus of the solar industry for the past 18 to 24 months. Allowing community solar development would solve this problem. In fact, a recent solar bill in Massachusetts would have eliminated community solar potential because it removed virtual net metering. 

I’d argue that the most important reason for more community solar development is the ability to decrease customer acquisition costs for existing roof-mounted solar providers by at least 50% to 70% overnight. Let me explain why.

Let’s look at the sales funnel of a typical solar customer. This data was provided by Faze1. They have done extensive research on optimizing solar marketing profitability using better consumer data.

Let’s assume this is what a typical sales funnel looks like. Yes, these are averages and over-simplified, but they will illustrate my point. You could simply plug in your business’s number to get a better idea.

  • Marketing spend: $10,000
  • Leads Generated: 300
  • 30 – Qualified lead. Those that are willing and able to go solar.
  • 120 – Willing and not able lead. Willing means that they are interested in solar, have good credit, etc. They could purchase cash, use a solar loan, or buy cash. Not able means that the existing site is not suitable for solar.

This is anecdotal evidence from most of the contractors I’ve spoken with. But it’s clear that in order to find customers who can go solar and have acceptable roof space requires attracting and talking with 3 to 5 times more potential customers who want solar but don’t have the roof space. By being able to sell that customer a 20-year PPA for their home’s power or a 5kW share of a 1MW community solar facility, you can generate more revenue for the same marketing spend and number of salespeople.

If selling a community solar share was possible alongside roof-mounted solar, then the same $10,000 investment in marketing would yield 150 qualified leads instead of just 30.

Here are the numbers from my simple example.

  • Cost per qualified lead without community solar; $333 ($10,000 divided by 30)
  • Cost per qualified lead with community solar: $66 ($10,000 divided by 150)

Third, community solar has lower investor risk, in theory.

With community solar, the risk of default is lower than a PPA with a traditional roof mounted system. The reason for this is simple: In the case of non-payment, the community solar provider can instantly find another customer and change who is being credited for the power. In the case of non-payment for a roof-mounted project, power can be shut off from the solar provider, but there is no easy way to recoup the value of the solar array.

However, I’d suggest that, while this theoretical reduction in risk is true in the long term, community solar is perhaps a little more risky in the short term from an investor’s perspective simply because it is new. Potential risk will be affected by regulations, policy, and execution.

Key Parties

Here are the key parties in a community solar project.

  • Community Solar Service Provider. The community solar provider is responsible for setting up the SPE, gathering members, changing members, and handling billing.
  • Special Purpose Entity (SPE). The SPE is the specific legal framework that is set up to finance the project. It’s typically a LLC and it’s set up to own and operate the project.
  • Subscribers or Members. The subscribers or members are the “off-takers” for the project. They are buying the power. If they are “members” and invest in the project, they contribute their own money to buy a part of the project.
  • Host. The host is simply the location where the physical array exists.
  • Utility. The utility is responsible for distributing the power and billing credit. In the case of a utility-sponsored model, they are also buying the power and then distributing it to their members.
  • Developer. The developer does the engineering, procurement, and construction work and sets up the PPA.
  • Installer. The installer is responsible for building the project.
  • Investor. The investor is the individual or entity that is financing the project and monetizing the tax credits if the community solar project is financed with a PPA.

Regulations

There are three types of regulations that allow for community solar development:

  1. Group Billing Standards. Group bill is often compared with how master metering arrangements can be set up in real estate transactions. A landlord receives a single bill for the entire building. The landlord then determines how to split that bill up between all of the tenants. Using group bill in the content of solar works the exact same way, except all of the “tenants” don’t need to live in the same building. What happens is that the utility creates a group of members who want to be billed together. The utility produces a bill that describes all of the members’ electric usage and charges. Second, the output from the solar array is netted against the group bill. In this way, a number of residential homes can receive credit from a single facility. In this structure, there must be a single utility representative that deals with disputes and billing. This is the structure most commonly used in Vermont. Read about community solar lessons learned in Vermont.
  2. Virtual Net Metering. Virtual net metering allows net metering credits generated by a facility to offset loads at multiple retail electric accounts within a utility’s service territory. Under virtual net metering, credits appear on a customer’s bill as they would under a traditional net metered project.
  3. Joint Ownership. Laws and regulations that allow joint ownership allow many individuals to invest and own a certain percentage of a larger solar array. They are then are entitled to the power produced by that array.

Available States

Technically, there is some form of virtual net metering in 11 states according to DSIRE:

virtual-net-metering-policies-feb-2014.001

However, only 4 states have effective policies that are actually spurring investment. Those are Massachusetts, Vermont, Colorado, and Minnesota.

This is a development map from Clean Energy Collective. You can see they only develop community solar projects in 4 states.

Screen shot 2014-10-09 at 8.54.07 AM

Why is there a difference between laws on the books and development?

Laws on the books and effective regulations are separate animals. I ran into this when trying to help a friend develop a small community solar facility in Maine, a state that does allow joint ownership and virtual net metering, technically. What I ended up having to do is work through a loophole to make the project the work. However, this loophole is only something that’s possible with close friends or family situations and made it obvious why community solar on a commercial basis in Maine is impossible. Read more about a step-by-step guide to a 14.25kW community solar project in Maine. 

 Ways to Structure Community Solar Programs

In my research, I have found that there are three main ways to structure a community solar facility. All of these images are courtesy of a NREL report on community solar. 

1. Utility-sponsored model

Under the utility-sponsored model the utility itself owns or operates the solar array. Ratepayers of this utility are then allowed to voluntarily chose to receive power produced by solar.

Here is how flows of capital work in the utility-sponsored model.

Screen shot 2014-10-09 at 8.44.56 AM

2. SPE. In special purpose entity formation, a group individual investors join a business enterprise to develop a community solar array.

Here is how this model is structured.

Screen shot 2014-10-09 at 8.45.05 AM

3. Non Project Buyback structure. Through a non-profit entity, donors contribute to purchase a community installation that is eventually owned by a charitable organization.

Screen shot 2014-10-09 at 8.45.16 AM

This is the first article in a series of articles and interviews that we’ll do on community solar. If you have a question about any of the content, please leave it in the comment section.

Additional Recommended Reading

If you’d like to learn more about the topics in this article, I highly recommend these resources.

 

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Community Solar Lessons Learned in Vermont – Jeff Forward @ Renewable Energy Vermont 2012

At the beginning of October, Renewable Energy Vermont held their annual conference. There were a number of amazing presentations and some struck me more then others. For the ones I really enjoyed, I decided to follow up with the presenters to get more color on the topics they presented about. I learned a lot at the conference and there was a lot of activity around what needed to be done to push the industry to the next level. If you’re working in the renewable energy industry in Vermont, you should join REV.

Community Solar

Community solar, which is also called group net metering, or virtual net metering is a rather simple concept. It means that power generated from a single renewable energy project can be applied against the utility bill of many meters, as long as all of the meters (the production and end use meters) are in the same utility service territory.

It’s a great concept and it has received support from the industry because many peoples’ roofs won’t work with solar, but they want to buy solar power. Community solar solves this problem. It also solves some issues around monetizing tax credits. Massachusetts also has community solar, but it’s referred to as virtual net metering. This allows (insert huge bank name here) that is based in downtown Boston to buy 10 acres of land outside of Boston and put a huge solar array on this land. They can then apply the power production to reduce their bills in the Boston location, and also monetize all the tax credits directly.

Back to Jeff 

Jeff Forward was looking for an investment that provided a reasonable return and helped the environment. He decided to build a community solar project on his farm.  He then recruited 3 of his neighbors to join his group and they now pay him for the solar credits they receive from their utility.  He figures his $30,000 net investment returns him about $3,000 in revenue for a 10% return on his investment.  Not bad considering bank CD’s are returning less than 1% and his retirement investments seemed to always lose money.

Jeff’s presentation materials provide a very complete story and I encourage everyone to read through it.

 

I decided to follow up with Jeff to get some color on a few of the points he discussed.

What were your huge lessons learned around group net metering? It sounds like billing was an issue. 

▪   Setting up a simple and transparent billing process has been frustrating.  The whole model is based on a revenue stream from the group members and for it to work, group members need to be able to see on their bill how much they are being credited. It seems like such a simple thing, but it’s unbelievably difficult. So far I have spent an entire year working with my utility to get a summary of the solar credits that were attributed to each members bill and we have still not completely resolved it. To be fair, this requires the utility to make changes to their billing software and that apparently is more difficult than it would seem. And utilities have been reluctant to go too far down the path of changing their billing system until the state has signed off on all the standards and procedures for net meter billing.  It will be easier once  the state said “this is how you do it” and then require all the utilities do it the same way.

What would be the ideal billing situation?

▪   On every bill it should say: 1) how much power a member  consumed; 2) what was the output of the array; 3) what was their share of the solar production; 4) how much they were credited for the solar production; 5) and then how much they now owe for power.  Each members bill would then be the net of what they used minus what they were credited.  The solar credit should be a line item on the front of the bill so that each member knows exactly how much is being credited each month.  It needs to be transparent.

▪   Where we ran into problems is that initially the only thing the utility was reporting was the net usage, but they would not show the methodology. So, nobody could figure out how much of their bill was supposed to go to me (as the owner of the community solar project). The group members also could not figure out how much power they used.  It has been terribly confusing and frustrating.

You mentioned large groups might be a problem. Why?

▪   For my scale system, the output is still quite small.  The total cost of the project was $85,000, but with tax credits, incentives and depreciation deductions the net cost was about $30,000.  However, the revenue is only worth about $3,000 per year.  With that small a revenue stream, there is not a lot of room for administrative costs.  You couldn’t for example hire someone to do the billing or it would eat up a good portion of the revenue. Perhaps the easiest way to set up a group would be to get one or two large members.  Then perhaps the billing would be easier.

▪   The margins are pretty low.  While I like the rate of return I am getting, it is still pretty small in absolute terms.   Small things like a customer service charge can have a measurable impact on the return.  For example, I am required to have  an additional meter at the site to record the solar output. The meter charge is $16.75 per month. This is nearly 7% of the revenue of the system over a year.  Clearly I am not going to get rich off this investment.

After doing it, do you think community solar could be a business model by itself? i.e. could a business just do community solar in Vermont or will installers start offering as part of their service?

▪   Absolutely there is a business model and potential for it. I like the idea a lot. There are a lot of folks that just don’t have a good solar resource at their home and would like to be in the game. There are other folks who don’t have the resources to invest, but would much rather their power came from a clean renewable source. Consider the Vermont Cow Power program. It was introduced about 10 years ago. In this program you can pay more for your electricity, up to $.04/kWh more.   The utility then uses that money to pay farmers $.04/kWh over the wholesale power rate for electricity they produce from an on-farm anaerobic digester. It is very, very successful. Before launching the program, they did a survey of their customer base and found that between 2% and 5% of their customer base would be interested in such a program.  That estimate has proven to be true.  My community solar project is similar except that my group members don’t pay anything more for their electricity at all.  Sure, I get all of the financial benefit, but I took all of the risk too.  I am sure other models could be developed whereby members could share in the risk and the financial benefit.

▪   Finally, there are a lot of people that would like to invest in something that they believe in, rather than handing their savings over to Wall Street.  Community solar, or community wind for that matter, offers a vehicle for folks to make a moral investment and make a reasonable return on that investment.  In Europe, there are places where average folks can invest in shares of a local renewable energy project and then receive a  return based on the project’s production.  Folks sink their retirement savings into these projects and then receive a predictable dividend for life.  What better place to put your retirement investments?  Renewable energy projects can generate a highly reliable and predictable income over a long period of time.  I would much rather invest in a specific project than I would in a company producing a product.  Companies come and go.  But the sun always shines and the wind always blows.  Where else can you get such a great dividend?

Are you thinking about doing it again?

Absolutely! In fact, we are breaking ground in the next phase of this project next week.  It will be completed before Christmas.  We are essentially doubling the size of our array.  When I installed the first phase, I buried an extra conduit so that I could expand without a lot more trenching.  By the first of the year our system will be 25 kW and we will be completely powering five households.

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