The top 10 questions utilities have about community solar

By Dan Chwastyk

In April, the Smart Electric Power Alliance brought together 75 community solar professionals at a workshop sponsored by Tendril. Attendees included representatives from utilities that have implemented programs or are planning to launch programs, as well as solar developers and other community solar solution providers. Much of the discussion focused on the critical issues and decision points in the surprisingly complex and still evolving world of community solar.

Here are the most frequent questions that emerged at the workshop, followed by SEPA’s insights and suggestions.

1.) What is the optimal subscriber value proposition in a community solar program?

This question gets right to the essence of what customers are getting, and how they are paying for it. Though it is an oversimplification, it’s helpful to consider only two possibilities for each piece of the transaction:

— Participants can either get a credit on their bill at their prevailing retail rate (i.e. virtual Net Energy Metering), or a credit on their bill at a rate unique to the community shared solar program.
— Participants can either make a single upfront payment for a share of the solar asset or make an ongoing rate payment applied to the kWh produced by their share of the project.

Though there are other possibilities, a vast majority of utilities and programs employ some combination of the above.

Be sure to do the early customer research to determine the value proposition your target audience is most receptive to. Also, involve your information technology and billing departments early to assess the impacts of your favored approach on the billing system.

2.) What is the best community solar business model?

First, let’s free ourselves of the thought that there is one or two off-the-shelf community solar models that will be applicable to all. There are different utility structures, with different existing generation resources, with different regulatory climates, with different types of customers. And though there may not be a single best model, there likely is a best model for you. A great “getting started” guide is our Program Design Models report.

To truly find out what that your best model is you need to involve stakeholders in the design process and conduct customer research. Paul Clements from Rocky Mountain Power (RMP) talked at the Workshop about the stakeholder process his utility used when designing its Subscriber Solar program. Paul credited the pre-launch workshops that RMP held as a factor in streamlining commission approval of the program. The workshops attracted the consumer advocate, environmental organizations, and city representatives. We have great experience in facilitating customer stakeholder groups to aid in the development of community solar and can provide additional support to its members in this area.

3.) What is the most effective way to market the program?

Here are three ideas to keep in mind.

1. You have to know your target audience in order to develop effective marketing. Conduct the research. Does your audience want to save the world or save some bucks? At the SEPA workshop, Suzanne Shelton from the Shelton Group discussed its national survey aimed at identifying what a customer of community shared solar wants. Shelton’s team has identified some common characteristics among customers (cheaper is always better!) but also recognize that what is appealing will vary significantly in different markets and customer segments.

2. Leverage earned media. It is free, it is typically positive, and it is effective. Orlando Utilities Commission sold out its 400 kilowatt (kW) community solar program in under a week with just a billboard, press release and the resulting media coverage in local news outlets.

3. Be upfront if your program is not providing the renewable energy certificates (RECs) to customers or retiring the RECs on the customers’ behalf. If neither is the case, you aren’t technically selling renewable energy. For more background on the RECs issue see SEPA’s February Member Brief on the topic.

4.) How do you determine the optimal project size?

Survey your market first to gauge the level of interest in subscribing to a community solar program. If your utility has a green pricing program, the number of participants in that program can serve as a passable proxy for quantifying likely customer interest in community solar. In either case, multiply the number of likely participants by the average community solar subscription size (1.5kW for residential participants) to estimate the size of the system you’ll be building.

Additionally, give some serious thought about your organization’s motivations for starting a community solar program. If you just want to build experience in owning and operating a solar generation asset, then perhaps a smaller pilot program may make most sense. But if you envision community solar as a long term strategy in your customer program portfolio, you should consider a larger project, more than 1 MW, or at least a project that can be easily scalable. The new Utility-Scale Solar: the Path to High-Value, Cost-Competitive Projects report details that economies of scale in solar generation are real.

5.) How do you lessen the cost of updating your billing system?

The cost of updating an existing utility billing system to accommodate community solar participation can be quite onerous. SEPA has heard stories from utilities that spent upwards of $1 million and required the work of dozens of employees to make the change.

Mitigating these costs takes forethought. IT personnel often have the biggest lift with system updates. Involving these staff members in the community solar program planning process early can help to ensure that the program design is most harmonious with the current billing system. Where possible you will want to work within the existing architecture of your billing system. For example, if you already have the ability to easily add line items for miscellaneous credits to customers’ bills – maybe as a result of a previous or existing energy efficiency rebate program – it may make sense to utilize this ability for community solar credits.

Finally, set up talks with third party solution providers specific to the billing issue. Many third parties specialize in custom billing integration and they may be able to provide efficiency to the program.

6.) How do we make sure our community solar program complies with securities laws?

Community solar may trigger an issue with securities laws – some have suggested that the financial streams bear a strong semblance to that of traditional debt investments. If you have a concern, consult a legal expert. A legal expert could petition the U.S. Securities and Exchange Commission (SEC), as well as state securities commissions, to review your program and, if appropriate, issue a no-action letter or guidance on your program to forestall any future securities issue.

To date, there are a few who braved this path. In 2011, CommunitySun, a developer in TX, requested and received a no-action letter from the SEC for its SolarCondo program. In 2014, Vermont’s state securities division issued a state no-action letter covering several specific program designs. And most recently, in 2015, Hawaiian Electric Company noted in its filings before the State of Hawaii Public Utilities Commission that it plans to seek no-action letters from the SEC for its pilot program and from the SEC and State Securities Commissioner for its full scale program. These efforts all required legal fees, and any no-action letters issued would only be applicable to specific customer contracts, not to the general community solar concept.

If you don’t want to go down the legal path, you need to recognize the possibility of not being in compliance. However, there are steps you can take to avoid obvious complications. Some tactics that utilities have used include having subscribers pay through an ongoing rate as compared to an upfront fee; limiting participants purchase to panel increments (disallowing panels to be split into fractional shares); and/or, avoiding investment language such as “return,” “profit,” “investor,” in all contract and marketing documents. It is important to note, however, that none of these tactics have been reviewed, vetted or approved by any securities agency and, as noted above, any such review and/or approval would be limited to the characteristics of the particular program being reviewed.

What should give everyone peace of mind is that of the over 100 active programs SEPA tracks, none have ever been sued for securities noncompliance or investigated by the SEC.

7.) Can participants take advantage of the federal investment tax credit (ITC)

Currently one participant in one solar farm – Boardman Hill – has IRS approval to take the tax equity. But this program is largely unique – it was developed by an LLC formed of investors who are also participants. This is simply not relevant to a majority of community shared solar programs. There are multiple working groups, one notable group led by American Public Power Association, exploring how the tax incentive can be broadly applied to participants.  And many existing programs suggest that participants may be able to take the tax credit, but they recommend confirming this with a tax professional.  But keep in mind, if a participant can claim the ITC, that seems to suggest that the subscription is an “investment”, it may trigger SEC issues discussed above. Partnering with organizations that can take the ITC, and getting assurance that the value will be passed on to participants, still seems to be the most surefire way to realize the ITC.

8.) At what scale can you bring in a tax equity investor?

There is no minimum limit to the investment required to take advantage of the ITC. The trick is finding a party willing to invest in a smaller scale project like community solar. John Kinch of Michigan Energy Options (MEO), which is developing 600kW of community solar noted that one of MEO’s biggest hurdles delaying their program’s launch was the difficulty in finding a tax equity investor. Most banks and financiers expect projects to be larger scale (20 MW or more). With its smaller scale, community shared solar may have little appeal to traditional tax equity investors.

9.) Can utility customers who are not participating subsidize the cost of a program?

In many cases, this is up to the discretion of the utility – particularly electric co-op and public power utilities – but there may be legislative or regulatory restrictions. Several co-ops have taken pains to detail how their community solar programs are wholly paid for by participants. Other utilities do not hide the fact that there is a cross subsidy.

Stephen Frantz from Sacramento Municipal Utility District (SMUD) explained that its SolarShares was heavily subsidized by non-participants when it was launched in 2008 (though SMUD’s planned future offers will not be subsidized). At the time, SMUD enjoyed substantial political and customer support for broadening solar generation. On the other side of the coin, regulated utilities in California and Colorado are legislatively required to ensure that no cross subsidy occurs. It’s all about the market the program is in and what stakeholders value more – building a larger solar program or avoiding impacts on nonparticipants.

10.) How can we get to “nonparticipant indifference”?

Nonparticipant indifference simply means that a community solar program has absolutely no financial impact on those not voluntarily subscribed to it. For the most part, there are two financial levers that can be utilized: the participant charge and the participant credit.  In order to get nonparticipant indifference you need to account for all the costs of the program and either add these costs to the participant charge or deduct them from the credit (or both).

The trickiest thing is accurately accounting for all the program costs – including administrative, marketing, the costs associated with customers switching from standard generation, and the cost of the program going unsubscribed. SEPA’s most recent report has some data on the real costs of community solar programs, however more research is needed. In lieu of perfect data, it may be necessary to have an annual adjustment to the credit to account for the uncertainty.

Do you have a question that we have not covered here? Send Dan an email at [email protected].

NOTE: Answers 6 and 7 edited for accuracy Thursday, July 7, 2016.