From an industry lifecycle perspective, we expected the evolution of community solar to be relatively fast. From introducing a new model of distributed generation designed to serve an expanding market vastly larger than rooftop solar could address, to attaining effective scale through ubiquitous utility and consumer participation, we projected a steep curve and an apex extending into the next few decades and beyond.
Community solar has indeed come a long way in a very short period, serving as a source of both excitement and challenge for the myriad participants that have taken a stake in its surging growth. Ten years ago, community solar was barely an idea, far from a robust business model. A few local community groups and rural utilities experimented with small-scale shared energy, but nothing worthy of exporting across markets, utility types and regulatory structures. Jump to today, and community solar is one of the fastest-growing segments of the U.S. solar industry, with more than 100 programs in 26 states and more than one-third of the country (18 states) with legislation enabling shared solar. It has gained a significant foothold in the U.S. solar market, and all signs indicate the momentum will continue accelerating.
Yet, community solar’s rise and maturation has also proven slower, or at least more gradual, than what Clean Energy Collective (CEC), at the time a solar start-up in western Colorado, envisioned in 2009 while designing what was considered one of the nation’s first community-owned solar models. The process has proven complex, the number of players limited, and enabling legislative and regulatory development slow and cautious.
But time and tenacity, as they do, have illuminated the path forward. We have reached a point where we know what works with regard to financial structures, project size, customer participation, legislative parameters, and finance. The focus has shifted to implementing each of them in a way that will allow the market to address the 100 million customers that can benefit from community solar.
Proving the concept
Innovation and bold action launched the U.S. community solar industry and have served as hallmarks throughout its expansion. Colorado initiated the movement by being first to enact legislation spawning utility and consumer participation in off-site renewable projects. The first community-owned solar facility was launched with Holy Cross Energy, a rural cooperative in western Colorado (interconnected June 2010). It was only 328 panels, purchased by 19 individuals and sold by word-of-mouth.
Since then, the term “community solar” has been applied to many variations on the concept. In general terms, community solar allows consumers to offset part or all of their electricity bills by securing bill credits, through panel ownership or subscription, corresponding to the electricity produced in a 500 kW to 10 MW solar project hosted in their utility territory. Economies of scale allow programs to be offered to customers at lower costs than individual systems and (in most cases) their retail electricity rate. This tangible consumer benefit, a predictable and meaningful financial payback for a broad base of utility ratepayers, distinguishes community solar from other “green” programs like group purchasing, green power programs, crowdfunding, or group investing schemes that have emerged.
As Colorado proved that the concept was viable, there was a buildup of pilot examples and unintended experiments with shared net energy metering (NEM). Other states like Minnesota, Massachusetts and California set out to demonstrate that the market could work at scale. Policymakers defined program participants, capacity and NEM policies, customer eligibility, off-take sizes, subscription terms and limits, and ownership. While some of these programs have been successful, some have not. Policymakers were discovering best practices and tailoring policies and programs to meet the specific needs of customers, utilities and developers.
A shift in perspective
From the beginning, we knew utility participation and cooperation were vital to growing community solar programs, whether this growth was driven and owned by the utilities themselves, the growth happened through a utility/third-party partnership, or it was completely third-party driven. Utility culture has generally been characterized as resistant to outside influences and slow to embrace innovation, and as such, the utilities were on high alert to the potential threats and challenges that community solar programs presented.
Developer pitches focused on the “bright idea” of community shared solar and how it could cost-effectively serve customer demand for renewables and support renewable energy mandates. Not surprisingly, early utility adopters were enthusiastic cooperatives eager to satiate enviro-minded members and public utilities supporting city-wide greening initiatives.
The rapid onset of distributed energy resources (DER) and broadening accessibility to affordable renewables provoked a shift in both perspective and strategy for many utilities, which approached the oncoming wave more as a source of opportunity rather than an obligation. Under greater pressure to evolve, get cleaner, and offer more options to customers, utilities were now motivated to understand how to best integrate distributed generation into the grid and create sustainable business models around their imminent growth. Community solar provided utilities with a solution-set that consumers actually desired.
Utilities now look at community solar programs as a strategic middle-ground solution, blending the broad appeal of behind-the-meter residential solar programs and the economies of utility-scale projects while minimizing complications, resources, and expense. More than 150 U.S. utilities are operating or developing a voluntary community solar program today. While rural electric co-ops and public power utilities will continue growing their community solar programs, many of the U.S.’ largest investor-owned utilities (Duke Energy, Con Edison, Xcel Energy and SCE&G) have integrated community solar as part of their renewables strategy, which in turn, is driving program scale to newer heights, leveraging greater cost efficiencies, and serving exponentially more customers.
Follow the money
Market development is fueled by capital. Like any industry, it is the oxygen most vital to a market’s health or demise. The expectation was that traditional solar financing – construction financing, debt for leveraged transactions, tax equity investments, and working lines of credit – would adapt to the community solar market. Yet, securing capital partners is complicated by the variables underlying community solar programing, such as multiple customer profiles, unique technology requirements and maintaining full subscribership. In community solar’s early days, CEC relied mostly on small, regional banks that had knowledge of, and comfort with, lending to members of the community.
As the market began to scale, state-level policies expanded; the federal investment tax credit (ITC) was extended; and technology emerged that delivered efficiencies in customer acquisition and fulfillment, billing integration, and project management. Non-residential entities with investment-grade credit were jumping in, and actionable data regarding program performance and risk became more available.
Consequently, there has been a slow-but-measured migration from boutique investors to the mainstream financial community. Bigger financial players have become more familiar and comfortable with community solar as its own asset class. They are willing and capable of a deeper, multidimensional dialogue addressing the specific mechanisms for market development and deployment. Particularly in the last year, we have seen large institutions positioning community solar as the next place to put low-risk capital, given that utility-scale development fueled by previous uncertainty over extension of the 30% federal ITC has now slowed and rooftop solar has stalled amid customer-acquisition challenges and a focus on profit over expansion. They are interested in long, optimized assets and predictable cashflows, and they want to know how to best get gigawatts into the ground.
More capital coming into the market as a whole will accelerate growth. Community banks are still good partners because they have good costs of capital, but legal lending limits prevent major participation. For example, a $30 million project fund equates to 10 MW to 15 MW of capacity, while CEC’s short-term development pipeline alone is several times that.
The balancing act
Paralleling development of the investment infrastructure has been a progression of product strategies and customer mix. In the first programs, participants purchased individual panels and owned the asset in perpetuity. Such models deliver the best financial benefit for customers and best chance of financing for developers, but requiring upfront payment narrows the target audience. Pay-as-you-go and subscription programs were introduced as alternatives to broaden the customer base. Myriad versions of these themes are in play today, varying by state, utility and program provider.
These offers illustrate the careful balancing act that community solar innovators grapple with daily: The desire to expand financing options is at odds with the desire to create more flexible offers for customers. Financiers generally need a program to offer more stability and less risk, thus resulting in less flexibility and increasing contract rigidity for customers, which is a harder product for developers to sell.
Achieving scale rests on finding the right balance.
In the last year or two, we’ve seen commercial and industrial companies and institutional organizations like schools and municipalities employ community solar as an efficient, cost-effective way for supporting renewable energy, lowering energy operating costs, engaging employees, differentiating their brand and demonstrating leadership in their communities. Leveraging these creditworthy customers as anchor tenants reduces transactional complexity and lowers risk for the overall customer base.
A growing voice
Market development is also fueled by data. The community solar industry and nearly every stakeholder has benefited from a rich body of research by the U.S. Department of Energy, the National Renewable Energy Laboratory, the Rocky Mountain Institute, GTM Research, Advanced Energy Economy, The Solar Foundation, and others. Trade groups like the Solar Energy Industries Association, Smart Electric Power Alliance, National Rural Electric Cooperative Association, and American Public Power Association have been instrumental in the industry’s development. Community solar is also now regularly addressed by the National Association of Regulatory Utilities Commissioners, as well as by numerous consulting and advisory companies.
One of the most significant milestones for the industry was the creation of its own trade association, the Coalition for Community Solar Access (CCSA). There was a need for a unique voice for the industry, and with a very modest investment, its members, representing project developers, PV manufacturers, energy generators, and service providers, gained a front-row seat in discussions on policy and regulatory efforts impacting the industry and their businesses. CCSA is the right vehicle to magnify our collective efforts, and the next step is getting more support, larger investments and a louder voice.
Business innovation, in its most classic sense, is responsible for community solar’s evolution, creating new opportunity and value in a rapidly changing climate. We approach the industry’s growth phase with a lot more knowledge of what works and what is needed, and we’re getting savvier at doing those things well.
We’re also gaining a greater understanding of strategically siting community solar projects to fill load pockets, leveraging a project’s ability to increase grid stability and bundling community solar with other offerings to increase customer participation and value. Enterprise-level software has opened the gates to greater efficiencies, lower costs and less risk. And steps toward more standardization in processes, policy, and technology will accelerate integration of multi-megawatt projects and gigawatt portfolios.
We no longer need pilot programs to understand the mechanics of successful programs. Achieving greater regulatory certainty will do much for a constantly changing energy landscape. Sooner than later, deliberation regarding NEM and value of solar will conclude in a simple compensation structure that is agreeable to enough people.
As project developers and community solar solution providers, we can no longer assume utilities’ motives, needs, processes and priorities, or that they are the same as the utility next door. We must determine their individual needs and provide the appropriate products and services to meet them. Conversely, utilities must pursue new business models – whether partnering with vendors or owning the resources outright – to fully integrate new DER innovations and satisfy customers.
In the short term, diverse market forces will continue to shape the industry, drive new renewable capacity and create real value in the form of consumer savings and greenhouse-gas reductions. In the medium term, community shared renewables will likely include more generation from sources other than solar PV. In the de-regulated markets, we may see community renewables blur the lines with retail power providers, becoming a true (direct) power source instead of a virtual one.
The future is about building upon the successes we worked so hard to achieve. The community solar industry is young, but it has a sturdy foundation and is just beginning to hit its stride.
Paul Spencer is founder and CEO of community solar developer Clean Energy Collective.