Community solar, hype or hope?

In many cases community solar business models offer consumers, developers and utilities more flexibility and value creation than more traditional residential and utility-scale solar installs – a triple win for three distinct groups of solar stakeholders whose interests don’t always align.

For consumers, community solar can mean better access. According to a recent Greentech Media (GTM) analysis, community solar offers a way for 77% of US residential households to invest in solar that are unable to do so today. And because community solar bypasses the link between available roof space and system size, consumers can make smaller-scale solar investments that may better match their budgets and often without long-term financial commitments.

For developers, community solar can mean higher profits. Installations are usually larger scale and the resulting generation can be sold at prices closer to retail electricity rates rather than the wholesale rates that typically govern bigger projects. Customer acquisition costs can also be a fraction of what it takes to land a residential buyer, although community solar contracts are usually for much shorter periods.  

For utilities, community solar can mean maintaining and satisfying their ratepayers. Pilot projects abound as utilities are beginning to realise that community solar may offer them a comfortable platform to compete for market share with residential solar installers while still maintaining control of centrally owned and operated arrays. In fact, utilities may have unique market advantages if they choose to aggressively leverage their existing customer relationships, utilise tools like on-bill financing, and succeed in rate-basing project development costs. Utilities also know best where to site larger distributed solar projects so they boost grid reliability and can provide ancillary services like voltage support and additional peak capacity. With almost every shared solar project to date affirming considerable consumer demand for more tangible clean energy alternatives, utilities should embrace this opportunity to build out their solar portfolio and better service their customers. 

While there is a range of promising community solar business models beginning to blossom, a much clearer and more certain legal and regulatory regime is needed in order for community solar to reach its full potential. 

Currently only 13 American states and the District of Columbia have enacted proactive legislation and policies guiding the development of community solar. However, even in those states, questions regarding financial incentives, debates over value-of-solar proposals and uncertainty over virtual net metering rules continue to slow project development. Some states also cap the size of community solar projects or dictate the number of users per site, which at times has resulted in artificial and distorted project structures.

For example, even after Washington DC lawmakers unanimously passed what was once considered one of the most enabling community solar statutes in the nation in October 2013, it took regulators a year and a half to issue the necessary rules. And even though the law was intended to help the 80% of District residents that cannot own their own rooftop solar, regulators chose to greatly handicap future uptake rates by not crediting distribution charges to community solar subscribers, effectively cutting the value of community solar to almost half as compared to what DC homeowners get for their rooftop solar generation. 

There is also a detrimental lack of certainty regarding how community solar meshes with federal laws and regulations. It is still unclear whether community solar projects qualify for the 30% investment tax credit, the bedrock incentive programme supporting conventional solar installations. While the Internal Revenue Service ruled last month that an individual subscriber in Vermont could apply the residential solar ITC to his investment in a community-owned array, the IRS needs to provide guidance on ITC applicability for all community solar projects.

Community solar developers are also often frustrated to learn that that their projects may qualify as a “security” and thereby fall under the jurisdiction and prevailing regulations of the Securities Exchange Commission and state securities laws. While it is possible to structure a project to be exempt from SEC regulation, the issue continues to distort project configurations and be a drag on community solar deployment.

As the community solar market continues to expand at a blistering pace these uncertainties and distortions will likely become more pronounced. But the hype is still justified. GTM predicts that community will grow at 59% between 2014 and 2020 and result in around 1.8GW of new solar capacity by the end of this decade. NREL forecasts even greater growth, estimating in a recent analysis that community solar will lead to 5.5 to 11GW of new distributed solar systems by capturing 32% to 49% of the market and US$8.2 to US$16.3 billion in cumulative investment. So it’s not just hype, but also the hope that community solar will fuel new business models that will empower many more Americans to access solar who are effectively shut out of the market today.