TODAY’S STUDY: All About The Community Solar Potential
Unlocking the value of community solar; Utilities find opportunity in the inevitable growth of distributed energy resources
March 2016 (Deloitte Center for Energy Solutions)
US electric utilities of all types, from investor-owned to municipal to cooperatives (co-ops), are defining their own paths forward to bring solar to their customers. Community, or “shared,” solar programs are an increasingly popular option. These programs allow customers who do not own their homes, possess strong credit scores, or have adequate roof space to buy solar power, or in some cases, to invest in solar assets. While community solar is often discussed in the context of program design and customer demand, this report will analyze the market from a different angle by unpacking the unique opportunities and challenges posed to each utility type: co-ops, municipal, and investor-owned utilities (IOU). For co-ops, their member-owners’ interest in community solar has enabled them to develop more programs than any other utility type. Municipal utilities have creatively leveraged state and local government incentives to bring shared solar projects to fruition. And IOUs, largely in response to state-level legislative directives, are partnering with experienced industry players to implement new types of program models.
Shared solar has gained a foothold in the US market during the past five years and its growth shows no signs of slowing. In 2010, only two shared solar projects existed. Today 77 utilities administer 111 projects across 26 states, accounting for a combined capacity of about 106 megawatts (MW).1 As innovation takes its course, shared solar business models are continuing to evolve, and the opportunity is becoming more evident. Utilities are finding that shared solar allows them to grow their solar generation portfolios, developers are seizing the opportunity to expand their business offerings, and more customers have the chance to buy solar power. By unlocking value in each segment of the supply chain, community solar is evolving into a growth engine for distributed solar resources.
What is community solar?
Community solar presents an opportunity for residential or commercial utility customers to invest in a solar array or receive credits on their electricity bill for solar power not located at their home or business. Program models are constantly evolving to fit the needs of both customers and utilities. Identifying an optimal program design is not without its challenges; models vary significantly based on market and utility type. However, electric power industry players are quickly innovating to overcome barriers and utilities are increasingly seizing the business opportunity that shared solar represents.
What’s in it for the customer?
Shared solar programs offer a convenient and cost-effective option to utility customers who want to buy electricity from a low-carbon, renewable resource.
The rapid growth of the rooftop solar PV industry has demonstrated that where there’s a will to “go solar,” there’s a way. Of the more than 1,500 household utility decision makers surveyed in the annual Deloitte Resources 2015 Study, 64 percent ranked “increasing the use of solar power” among the top three energy-related issues most important to them, up from 58 percent in 2014 and 50 percent in 2013.2
As interest in solar trends upward, utility customers seek cost effective options to buy electricity from solar resources. Installing rooftop solar is a popular way for consumers to reach this goal. However, owning or leasing a home PV system may only be realistic for people who own their home, have a creditworthy FICO score (typically over 680), and live in a state with net energy metering policies. According to Greentech Media’s US Community Solar Market Outlook 2015 – 2020 report, 77 percent of US residential households are likely ineligible for rooftop installations according to these parameters, and are thereby potential candidates for community solar program participation.3
For those customers who are deciding between installing rooftop solar and participating in a shared solar program, both the upfront cost of the system and the approximate payback period typically weigh into their decision. Since 2010, the upfront cost of community solar participation has declined 43 percent from an average of $5.13 per watt to $2.92 per watt in 2015.”4 GTM Research estimates that the average price of a residential rooftop solar installation in 2015 was $3.53 per watt.5 Based on upfront cost alone, community solar would seem to be the leading option. However, the time it takes for the customer to make back the total cost of the system by offsetting their electricity bill is a key consideration, especially for those customers who are eligible for “no money down” financing, which often has a payback period of 10 years or more. Because customers’ compensation for solar production is highly dependent upon retail electricity prices and net metering policies–which vary across the US–the payback period for rooftop vs. community solar is difficult to compare.
Another factor affecting the upfront cost of these investment options is the availability of the federal solar investment tax credit (ITC). The federal solar ITC for residential property has long been claimed by individual taxpayers with rooftop solar, but its availability for owners of shared solar programs is less clear. A private letter ruling released by the Internal Revenue Service in September 2015 held that an individual that purchased PV panels and a joint interest in related property (e.g., inverter, racking equipment) for installation in a ground-mounted off-site array with panels owned by other individuals qualified for the ITC with respect to the cost of the equipment and installation services.6 The power generated was delivered to the local public utility that served the taxpayer’s residence under the terms of a net metering arrangement.
What’s in it for the utility?
The opportunity that shared solar represents to investorowned, municipal, and co-op utilities is less straightforward, but increasingly significant. While primarily developed to address customers’ interest in “going solar,” these programs can also be leveraged to bundle other products and services. Grid optimization and Renewable Portfolio Standard (RPS) compliance are two other ways that utilities can benefit.
Community solar programs not only allow utilities to offer their customers a venue for buying solar directly, they can also provide a sales channel for other services. For example, the Minnesota-based co-op, Steele-Waseca Cooperative Electric (SWCE), is pioneering an innovative bundled service offering that benefits both the utility and its customers. As part of the SWCE community solar program, customers can opt to buy their portion of the shared solar facility at a discounted rate if they also install a new electric water heater in their home.7 The customer uses the excess power generated by their solar array during the day to heat their hot water heater, allowing them to avoid pulling that electricity from the grid during “peak load” in the early evening. This allows the customer to effectively “store” the excess solar power generated from their array. It also helps the utility to reduce peak demand, which is highly beneficial for the reasons described below. Other products and services utilities might consider wrapping into their programs include appliance upgrades, efficiency retrofits, and compensation for participating in demand response programs.
Utility-administered community solar programs allow the utility to make key decisions regarding the placement and design of the solar array, enabling them to optimize valuable grid resources. For example, a utility might build the array with the panels facing west to boost output late in the day during periods of peak demand. This practice, commonly referred to as solar “peak shaving,” can reduce costs by avoiding deploying expensive “peaker” plants designed to meet high demand. All consumers benefit from this approach, not only those who have invested in the array. Utilities may also choose to install tracking systems so that they can move the panels to align generation output with supply and demand. Additionally, strategically placed shared solar arrays might help utilities defer or avoid the cost of upgrading transmission and distribution assets by reducing their use and prolonging their useful life.
Finally, utilities can use community solar programs to comply with state-level RPS requirements. Utilities that are subject to an RPS may directly generate renewable energy credits (RECs) or indirectly purchase RECs from third party developers. When utilities own the solar array, they should consider structuring their program so that they, not the subscriber, claim the environmental benefits of the credits in order to apply them toward their RPS requirement.
What’s in it for the developer?
As community solar adoption gains momentum amongst utilities and customers alike, several US developers have begun to build projects. Large developers see an opportunity to unlock previously unreachable solar demand while small developers are beginning to offer niche, à la carte services that align with utilities’ needs.
SunEdison, Inc. launched its first program in National Grid’s Massachusetts territory in September of 201510 and NRG Energy, Inc. partnered in the same year with other solar firms to develop projects in both Massachusetts and Colorado.11 Residential solar developer, SolarCity, Inc., also announced a shared solar program in 2015.
Despite the entry of these big hitters, smaller, more specialized developers continue to dominate the market. Companies such as Clean Energy Collective (CEC) were among the first to offer project development services with billing technologies that work with utility infrastructure. This allowed utilities without previous experience to offer shared solar.
According to Tom Hunt, Vice President of Corporate Development at CEC, “It’s a big leap to go from single to multiple offtakers. It adds a lot of complexity.” These added layers might include remote meter program tracking as well as customer acquisition and billing software. Services such as these are growing into a significant business opportunity for CEC. With its proprietary Community Solar Platform, CEC has developed a software-as-a-service (SaaS) model that provides developers and utilities with the necessary tools for on-time market deployment. “We’re not going to be the most cost effective developer in every market. It’s too much of a local game. So CEC is now partnering with solar developers that specialize in their respective markets to offer a SaaS product that enables community solar programs,” said Mr. Hunt. This offering has begun to soften one of the most significant barriers for developers looking to enter the community solar market. As more firms innovate to offer these types of services, previously unreachable solar demand could create an opportunity for more large-scale developers to grow their shared solar businesses…
The evolution of community solar is a classic case of business model innovation turning a challenge into an opportunity. Foreseeing the inevitable growth of distributed energy resources, utilities are deploying these programs to get ahead of the game and to capture the benefits that distributed resources provide to the grid. Often utilities also aim to further engage their customers and, when applicable, comply with state-level regulations. Though the design of these programs varies greatly by market and utility type, this growing trend of shared solar adoption represents how a highly regulated industry can leverage technology and policy to adapt to a changing business climate. Strong consumer demand for solar and innovative program design will likely propel US shared solar growth for years to come.