Community solar markets are starting to snowball as developers pick apart different strategies to find the best approach.
New numbers show what policies make community solar markets thrive. According to the latest market report from GTM Research and the Solar Energy Industries Association, new community solar capacity was projected to hit 206 MW at the end of 2016, a 400% increase over the same period the year before that would bring the national cumulative capacity to 331 MW.
“With active markets in Massachusetts, Minnesota, and Colorado, and New York about to implement its policy, individual private sector providers have dozens of projects online, in development, and under construction,” said Jeff Cramer, the executive director for Coalition for Community Solar Access (CCSA). “Some may have hundreds of projects in their pipeline.”
Community solar goes by many names: community shared solar and solar gardens. But their essential function remains the same: they allow customers to purchase a share in a large central station solar array in exchange for a bill credit for any excess energy exported to the grid.
Community solar’s biggest appeal lies in opening access to solar energy for all customers regardless of income or their possession of a roof. A 2015 report said 49% of households and 48% of businesses are currently unable to host a rooftop solar system. By reaching those customers, the National Renewable Energy Laboratory estimates community solar could compose 32% to 49% of the distributed solar market by 2020, while attracting up to $16.3 billion in investment.
In some states, untouched markets could be as high as 85% of residential customers and more than 50% of commercial customers, Cramer said, but there are few publicly available numbers.
While Clean Energy Collective (CEC), NRG and Sunshare can claim the top three spots as ranking community solar developers, other solar industry giants are stepping into the community solar market.
Familiar names like SolarCity, Vivint and Sunrun, well-known in the rooftop solar space, have recently announced interest. But as community solar grows in popularity, leading developers are discovering new hurdles to clear as they debate the best approach to building out the arrays.
“We are now entering a growth phase where we will learn a lot more about what approaches work,” said Sara Baldwin Auck, program director at the Interstate Renewable Energy Council (IREC), which has documented community solar programs since 2009. “We cannot now say there are specific things that are fundamental to success but we can definitely say that absent certain features, it is unlikely customers will participate and benefit.”
With competition heating up, leading and new players are looking for best practices and introducing more ambitious approaches.
How approaches differ
State policies form the limiting bounds for many community solar approaches, according to IREC’s State Shared Renewable Energy Program Catalog.
Each state program defines participants, capacity and net metering policies, if any. Customer eligibility, off-take sizes, subscription terms and limits, and ownership also fall under state purview.
Tom Hunt, policy director at CEC, said all developers use those same fundamental building blocks.
“They secure site control, permits, regulatory approvals, and interconnection,” he said. “They then obtain construction financing, build the project, obtain long term financing, find subscribers, and put project management in place.”
For non-utility developers, the approach diverges a bit. One strategy — the most straightforward — focuses on subscription terms, while others center on how subscribers can own a panel or purchase a certain amount of kWh from its output.
Both of these approaches depend on the developer's’ business model, state policy and also market maturity, CCSA’s Cramer said.
To support new developers, an immature market may require 20-year terms that primarily attract large commercial customers, he said. More mature markets have elements that allow cost savings over the shorter terms that attract smaller customers.
Where some developers split is on whether or not to own panels or purchase a certain amount of energy. CEC offers both options, citing flexibility as a plus.
“Different products are important because community solar looks different in different markets,” Hunt said. “It is better to be flexible.”
NRG, by contrast, prefers to sell the power from its arrays rather than getting customers to buy panels, according to community solar vice president Drew Warshaw.
“NRG definitely favors selling by the kWh,” he said. “Selling panels does not really work for us or get us to scale.”
But both developers are targeting the low cost electricity that 65% of utility customers want from solar, Auck pointed out. Where they differ in approaches could help other developers find the best match for their company
As the developer with the largest market share, CEC’s Hunt says the developers’ approach differs from others in three ways.
First, it does ”the full spectrum” in community solar. Unlike developers who build projects to sell or independent power producers who buy developed projects to operate as long term assets, “we have the capability and in-house know-how to do everything.”
Second, CEC’s focus is local partnerships “and knowing the community and the market,” Hunt said. It has long been a leader in state policy development and “our local development team gets to know the locality where we develop because we know we are going to be serving that community for years.”
It is an approach that has reaped rewards because “local partners help us find good sites, obtain permits, and find subscribers,” he added.
CEC also has experienced in-house professionals that know solar project design, permitting and interconnection, billing and credits, and marketing and sales.
“By knowledgeably assessing the full spectrum of project issues, we select projects with more discipline,” Hunt said. “Other developers might identify a site without seeing obstacles.”
CEC’s projects in 12 states give the developer a national perspective on market conditions and regulatory regimes that it applies to new undertakings and partnerships, he said.
Take CEC’s recent deal with CPS Energy Texas. The project started as a bilateral deal and grew into a series of partnerships, Hunt said.
“The utility knew of interested landowners and they identified residential subscribers,” he said. “It also knew local governments and school districts that subscribed and authorities who streamlined interconnection and permitting. It all linked together.”
CEC’s projects in New York also grew out of utility partnerships.
“Our policy expert built relationships with the policymakers who represented the utilities as they worked on shaping the state’s just-completed community solar policy,” Hunt said.
The company uses both panel ownership through upfront purchase and no-upfront per-kWh subscriptions. “There is not a single product that is best in every market because there are so many variables.”
“A pay-as-you-go product is typically easier to sell because it is an easier decision for customers to make,” Hunt added. “But a purchase is the best in the long run for a customer who can afford it because there is no financing cost.”
For those who want to take on debt and get the advantages of ownership over time, CEC offers loan financing. But “we do not think we have found the best financing solution yet,” Hunt said. “That will only happen when the community solar market can attract stronger financial partners who offer better terms.”
CEC’s marketing methods are more conservative and lower cost than many solar retailers because of community solar’s very large addressable market, he said. “Developers can cast a broader marketing net and accept lower response rates that still bring big customer volumes.”
NRG, an emerging leader in community solar, takes a different tack.
The company can claim 15 community solar projects, with a presence in top markets such as Colorado, Massachusetts, Minnesota and New York. But that’s just the beginning, NRG’s Warshaw told Utility Dive. Eventually, NRG plans to scale its community solar division across the many growing markets.
For the NRG business model to work, third party financing is key, and policies in place to support that mechanism ensure success.
“The best markets have relatively simple policies,” Warshaw said. “NRG will not consider its community solar program successful if it does not get to scale and we can’t do that with complicated and layered policies.”
NRG also offers its customers only kWh subscription model, instead of both like CEC.
Marketing by the kWh, without upfront costs or financing complications, allows NRG to reach more customers, Warshaw said. It also avoids complexities about project ownership and about eligibility for the solar investment tax credit (ITC) and depreciation benefits essential to NRG’s business model.
“The tax attributes make the economics work for NRG,” Warshaw said. “Without them, we couldn’t give customers good enough rates. A developer may build a few projects offering panel ownership, but building hundreds of projects, which is the NRG goal, cannot be done without the tax incentives that our financing hinges on.”
Similarly, that subscription model is necessary to make project economics work for both NRG and its customers. “For financing, it needs to be very clear that NRG owns the project because when the customer owns the panels, the financing questions get more complicated,” he said.
To reach the “hundreds of projects and thousands of customers” necessary to meet its goals, NRG will use “all the sales channels available to NRG’s marketing force, including tele-sales, door-to-door sales, and digital sales,” Warshaw said.
Both Hunt and Warshaw said the per-subscriber cost of customer acquisition is lower in community solar than in rooftop solar. “It takes time to explain the complications of putting something on a customer’s roof and anything more complicated is more expensive,” Warshaw said.
NRG is committed to scaling because community solar “busts open the addressable solar market,” Warshaw said. “We think it will be a big part not just of solar’s future or renewable energy’s future but of the total energy future.”
But the push for net metering policy reform could curb NRG’s growth. The retail rate credit to solar owners for the unused generation their systems send to the grid is, like the tax attributes, “key” to NRG’s financial proposition, Warshaw acknowledged.
“It will remain essential until there is a better alternative and so far we have not seen a better alternative,” he added. “When we look for markets that will work, we look for strong net metering programs.”
Xcel Energy and community solar
In some markets, private developers build and operate the projects and interface with customers while utilities only facilitate billing, Cramer said. In others, utilities own and operate alongside third party providers.
Markets need to be open to both private sector providers and utilities, allowing consumers to choose between the full range of products, both Cramer and IREC’s Auck agreed.
Xcel Energy helped draft community solar policies for top-ranked markets in Colorado and Minnesota, and has recently engaged with stakeholders to work out final policy details. It continues to act as facilitator for private developer-led projects in both states, but expects to bring its first utility-led project online in Colorado in early 2018, according to Lee Gabler, director of Xcel’s Customer Strategy and Solutions.
The utility’s installed community solar capacity, now at 44 MW, is expected to reach over 100 MW by the end of this quarter and 400 MW by the end of the year, Gabler said.
Last summer’s sweeping settlement between Xcel and the Colorado solar industry allows the utility to develop its 50 MW Renewables*Connect (R*C) project. The company is also issuing a call for competitive bids from private sector developers who want to contract as builder, but the utility will handle the customer-facing elements, according to Alice Jackson, the vice president of Xcel’s Strategic Revenue Initiatives.
Under the Colorado policy, Xcel has facilitated 18 MW of community solar, while issuing a request for competitive bids from private developers to meet its obligations from 2017 to 2019. The company is also moving to fulfill commitments to stakeholders in the settlement, including building protections for private developers into its marketing for the R*C project, Jackson said.
Both Colorado and Minnesota policies allow for utility-led development, she added. But despite whether or not development is led by the utility or a private developer, the utility is the facilitator who must qualify interconnection applications, manage the distribution system, and handle bill credits.
“There is definitely room for both private developer-led and utility-led community solar,” Jackson said. “We are seeing constant iterations across the country in how customers who choose to own solar can best be satisfied without imposing costs on other customers. Xcel will watch that evolve and work to meet customer needs in a reasonable way.”
The competitive bidding built into both the Minnesota and Colorado policies has successfully allowed private developers to offer prices that sustain their business models, she added.
One way to measure that success, Gabler said, is Xcel’s recently announced 2 MW Wisconsin program. It will be built by the private sector, but Xcel will again handle the customer interfacing. Subscriptions will be through upfront payment for panel ownership, Gabler said.
Scheduled to go online in late 2017, it originated in an Xcel proposal and was not mandated by a state policy, he added.
Utilities vs. the private sector
There is no single utility response to community solar, Cramer said. It largely depends on the market’s maturity. With well-designed state policies in maturing markets, utilities often have an in-house community solar lead who addresses concerns as they arise. “But it takes time for a utility in an emerging market to figure things out.”
Where utilities understand community solar and a policy allows them to participate, they are participating successfully. But if a utility does not understand community solar, “it can appear to be a threat,” Cramer acknowledged. “In reality, well-designed policy makes it a huge opportunity for the grid, for third party providers, and for utilities.”
IREC’s Auck said a “robust regulatory dialogue” is emerging on the question of whether utilities or third party providers should deliver the opportunity to consumers.
But that is not the real question, she said. “The important thing is to maintain flexibility in the marketplace and allow different business models, competition, and innovation so that consumers get the best possible community solar options.”
Hunt said CEC’s core business is working with utilities. A dedicated business development team focuses entirely on utility-led projects. “The team is constantly talking to utilities about their goals, their needs, and how we can serve them.”
With its full spectrum approach, “we can do any part or all of a community solar program in any way the utility wants.”
CEC is committed to a market that includes both private developer-led and utility-led community solar, Hunt said. “If a project is utility-led, we will partner with the utility. Where third party developers offer projects, we can do the developing. We want both models to be successful.”
NRG is less utility-focused.
“We fundamentally believe in customer choice and that competition works,” Warshaw said. “Our hope is that regulators allow the third party ownership that allows private developers to compete.”
Working with utilities is, however, essential because community solar will only work and the market will only grow if developers and utilities build constructive partnerships, Warshaw said.
“This is one of the fastest growing markets in renewables and very new for utilities,” he said. “It is unrealistic to expect it to be easy. There have been kinks in things like interconnections, managing queues, and handling bill credits. But we have been able to work through them.”
As community solar moves into more markets, some will be more friendly to third party ownership than others, Warshaw said. “Competitive markets are where NRG will be most active and will invest more capital.”
Which approach will keep growth going?
When you get to the scale that NRG is striving for, “there will be hundreds of projects somewhere in the development cycle at the same time and they will require thousands of customers,” Warshaw said. “Synchronizing the availability of projects and the availability of customers will be critical to our economic success and where the magic of community solar at scale will happen.”
Community solar has proven “adaptable” because projects are working with different business models,” Hunt said. “Our goal is to find what appeals to customers so everybody can choose to go solar.”
CCSA’s Cramer sees most developers still working from project to project “but the idea of building at very large scales is emerging,” he said. “In a fully mature market, community solar could ideally be like a satellite TV subscription where you sign up month-to-month but you can get a lower price or other benefits with a longer commitment.”