With many utilities addressing the challenge of rooftop solar, community shared solar is fast emerging as an appetizing solar business model. A top solar research firm now says 2015 is the year that the community solar market breaks through.
A new market report forecasts community shared solar developers will grow 2014’s 65.9 MW of cumulative installed capacity to 465 MW by the end of 2016. A 59% annual growth rate for the sector over the next five years will take the 21 MW installed during 2014 to 534 MW installed during 2020, it predicts.
“There may have been more articles about community solar than projects brought online to date,” joked GTM Research Sr. Analyst Cory Honeyman, co-author of U.S. Community Solar Market Outlook 2015-2020. “But 2015 is the tipping point year when community solar becomes a relevant sector in the broader U.S. solar opportunity.”
Two key factors will drive the transition, Honeyman said.
First, the key states of Colorado, Minnesota, California, Massachusetts, and New York now have the kind of governing laws in place that give developers, utilities, and customers the confidence to buy in.
Some 90% of installations in 2015 and 2016 will come from states with community solar legislation in place, the report forecasts, and 82% of that will come from the top four markets of Colorado, Minnesota, California, and Massachusetts.
Second, community shared solar developers Clean Energy Collective (CEC) and SunShare have proven there are workable answers to questions about the business model. That is now bringing big, deeper-pocketed national players to the marketplace.
The growth of the market will come from a huge potential customer base. There are at present 116.8 million U.S. households but only 77.8 million own their homes and only 70.1 million of those are in states with net energy metering (NEM), the policy key to solar’s value proposition, according to the report.
Only 52.6 million of those homes are occupied by owners with FICO scores over 680 but only 15.8 million of those have solar-suitable roofs. That leaves approximately 77% of U.S. residential households available to the community shared solar market. “That doesn’t include businesses that can’t go solar for many of the same reasons,” Honeyman added.
Using a different analysis, DOE’s Shared Solar: Current Landscape, Market Potential, and the Impact of Federal Securities Regulation estimates 49% of households and 48% of businesses are unable to host solar. “By opening the market to these customers,” it reports, “shared solar could represent 32% to 49% of the distributed PV market in 2020, thereby leading to cumulative PV deployment growth in 2015 to 2020 of 5.5 GW to 11.0 GW, and representing $8.2–$16.3 billion of cumulative investment.”
“People want to save money on their bill,” Honeyman said. If they can go with rooftop solar, they will. If they can’t, they will seize the opportunity to buy a portion of a centrally located array. “They will not want to stay with the standard cost of electricity when their neighbor has rooftop solar and is saving 20%.”
“What gives CEC and SunShare a competitive advantage in the near term is they have demonstrated in the pipeline they have built that they understand the market and its many complicated issues like security laws and how to monetize the federal investment tax credit,”Honeyman explained.
Going forward, developers in the community shared solar space will require a very different set of capabilities than those needed by even the most successful of today’s solar companies, Honeyman said. “In community solar, companies need utility-facing and subscriber-facing competitive advantages that cover the spectrum from traditional large-scale project origination to customer acquisition.”
Emerging players include:
- Leading international utility-scale solar developer First Solar, from its purchase of a dominant interest in CEC
- SolarCity, from its partnership in Minnesota with large-scale developer Sunrise Energy Ventures
- Utility-scale developer SunEdison, from its acquisition of leading residential installer Vivint Solar
- NRG Energy, based on its announcement it would become the first vertically-integrated U.S. community shared solar company by using the resources of subsidiaries NRG Home, NRG Solar, and NRG Yield
The rest of the residential market is likely also trying to figure out how to tap into this emerging market as well, Honeyman added. “Vertical integration in residential solar is customer acquisition, installation, and financing.”
But a vertically integrated community solar company would need core competencies in traditional project development, from siting and building to financing, he said. And it would also need a vision for how a community solar project can be a grid resource for a utility and an understanding of how it allows a utility to strengthen its relationship with its customers.
It would need a software platform to manage the complexities of getting the output of the array it builds accurately and cost-effectively credited to the utility bills of the array’s subscribers.
And it would need to know how to acquire those subscribers. Typically, there is an anchor commercial subscriber that takes the biggest single part of the project’s output but the majority of the output must be subscribed to by households, Honeyman said.
“The community solar company has to be able to explain community solar to utility leaders and to executives in the board rooms of the businesses that subscribe and to subscribing families at their kitchen tables.”
CEC reports its cost of customer acquisition, at below $0.10 per watt, is a fraction of the residential cost, Honeyman said. “But it is not about the cost. The volume of subscribers needed for a community solar project is what a residential installer would aim for over five years. Acquiring that volume requires a well-built out sales force.”
Why utilities should pay attention
By 2020, according to the report, the growing number of utilities now running pilots to demonstrate and test the value proposition of community solar will take over as much as half the market, largely in states where legislation does not create certainty for private developers.
Utilities that have run pilots see it meets their customers demand for solar, Honeyman explained. “Other utilities are looking for that solar offering that can be competitive with rooftop solar solutions without taking customers off the grid,” he said. “That is the starting point of the conversation.”
Soon, though, utilities will see community shared solar in two new ways: (1) as an economically attractive addition to their generation fleet and (2) as an opportunity to engage customers that can eventually lead to the marketing of solar and non-solar products and services like energy efficiency and storage.
“It is a high level way to strengthen that relationship. As utilities wake up to the value proposition, it will increasingly shape the market,” Honeyman said.
Because utilities don’t have a lot of experience in traditional project development or in customer acquisition, some solar companies have begun engaging them, he noted.
CEC has marketing software that distinguishes it in the space. It leads utilities through the spectrum of development challenges and especially addresses the complexity of administering bill credits, Honeyman said. SunShare recently told Utility Dive it is preparing a similar product. Tendril offers software aimed at streamlining customer acquisition and management.
“For a long time, utilities did 75 kW symbolic gestures,” Honeyman said. But those pilots have been fully rolled out and online for a year or two years and the utilities see their value.
“More and more key movers, especially municipals and cooperatives, are partnering with CEC and SunShare and thinking about projects of 500 kW and above that show they want to make a substantial investment in a scaled up program.”
“My biggest surprise was that community shared solar subscribers may get anywhere from a locked-in zero savings rate to up to about 15% savings while residential solar owners save 20% to 30% or more,” Honeyman said.
That significant difference in the value proposition is in part due to the reduced risk to the subscriber when the solar is offsite and not on the roof, he explained.
Another part is how “unsaturated the community solar landscape is,” he said. Over time, as the national installers move into community solar, "there will be a lot more pressure for community solar deals to mirror those of rooftop solar.”
The rooftop solar bill savings may not stay at its current level, because of changes to NEM and rate design, he said. But if community solar does not suffer from similar issues, “there will be a convergence between the savings potentials over time.”
The sunset of the 30% federal investment tax credit (ITC) for solar could also be as much a challenge for community shared solar as for other segments of the market. But the more favorable project economics of larger installations could help community solar compete without the ITC, he acknowledged.
“What could make the community solar opportunity more talk than walk would be unforeseen roadblocks utilities might put up with the intent to slow development in the leading state markets,” he said.
The roadblocks would be challenges to bill credit mechanisms or community solar net metering policies, he said. But, he acknowledged, it is also possible that where utilities are heavily invested in community shared solar, they would be disinclined to use roadblocks.
“Down the road, when community solar is a 500-plus MW per year market, there will be a debate about how it is credited to customers,” Honeyman said. “Just like the debate now about rooftop solar, different benefits and charges will be accounted for in different ways, as the sector matures. But it is hard to see that being brought to the table for the next couple of years.”