What exactly is community solar?
Community Solar is defined as a solar-electric system that, through a voluntary program, provides power and/or financial benefit to, or is owned by, multiple community members. Community Solar advocates are driven by the recognition that the on-site solar market comprises only one part of the total market for solar energy. A 2008 study by the National Renewable Energy Laboratory found that only 22 to 27% of residential rooftop area is suitable for hosting an on-site photovoltaic (PV) system after adjusting for structural, shading, or ownership issues.i Clearly, community options are needed to expand access to solar power for renters, those with shaded roofs, and those who choose not to install a residential system on their home for financial or other reasons. Fairness also supports expanding programs in ways that increase options for participation. As a group, ratepayers and/or taxpayers fund solar incentive programs. Accordingly, as a matter of equity, solar energy programs should be designed in a manner that allows all contributors to participate.
This guide focuses on projects designed to increase access to solar energy and to reduce up-front costs for participants. The secondary goals met by many Community Solar projects include:
- Improved economies of scale
- Optimal project siting
- Increased public understanding of solar energy
- Generation of local jobs
- Opportunity to test new models of marketing, project financing and service delivery
Definitions of key-terms:
The following terms are defined in the context of community solar.
Renewable Energy Credits (RECs, carbon offsets, or green tags): A renewable energy facility produces two distinct products. The first is electricity. The second is the package of environmental benefits resulting from not generating the same electricity– and emissions –from a conventional gas or coal-fired power plant. These environmental benefits can be packaged into a REC and sold separately from the electrical power. A REC represents the collective environmental benefits, such as avoided mercury, CO2 and other environmentally harmful pollutants, as a result of generating one megawatt-hour (MWh) of renewable energy.
In most cases, RECs are sold on a per MWh basis. However, some project organizers choose to sell all future rights to RECs up front, on a per installed watt basis, effectively capturing an installation rebate and forgoing any future revenue from REC sales.
Net metering: Most on-site renewable energy systems use net metering to account for the value of the electricity produced when production is greater than demand. Net-metering allows customers to bank this excess electric generation on the grid, usually in the form of kilowatt-hour (kWh) credits that can be used as needed during a given period. Essentially, whenever the customer’s system is producing more energy than the customer is consuming, the excess energy flows to the grid and the customer’s meter runs backwards. Because this “netting of energy” results in the customer purchasing fewer kWh’s from the utility, the electricity produced from the renewable energy system can be valued at the retail price of power. Most utilities have a size limit for net metering. Community Solar project organizers should be sure to check before assuming participants in a community solar system can net-meter. It may be that some alternative arrangement, such as group billing or joint ownership, is used to account for the value of the electricity produced by a community solar project.
Tax appetite: Individuals and businesses can reduce the amount of taxes owed by using tax credits. For a tax credit to have any value, though, the individual or business must actually owe taxes. If they are tax-exempt or merely lacking sufficient income to need tax relief, the tax credits have no value. Individuals or businesses that can use tax credits to reduce the amount they owe in taxes are said to have a “tax appetite.”
For example, public and non-profit organizations are tax-exempt and therefore do not have a tax appetite. In addition, tax-paying entities might be eligible to use tax-based incentives, but have insufficient tax appetite to make full use of them.
Investment Tax Credit (ITC): Section 48 of the Internal Revenue Code defines the federal ITC. The ITC allows commercial, industrial, and utility owners of photovoltaic (PV) systems to take a one-time tax credit equivalent to 30% of qualified installed costs. There is also a federal residential renewable energy tax credit (Internal Revenue Code Section 25D) but the residential tax credit requires that the PV system be installed on a home the taxpayer owns and uses as a residence, thus it would rarely, if ever, be applicable to community solar projects.
Power purchase agreement (PPA): A PPA is an agreement between a wholesale energy producer and a utility under which the utility agrees to purchase power. The PPA includes details such as the rates paid for electricity and the time period during which it will be purchased. Sometimes, the term PPA or “3rd Party PPA” is used to describe the agreement between the system owner and the on-site system host, under which the host purchases power from the system. This arrangement is not explicitly allowed in all states; in some states it may subject the system owner to regulation as a utility. To avoid confusion, in this guide, a PPA refers only to an agreement by a utility to purchase power from the solar system owner.
Solar services agreement (SSA): A solar services agreement is an agreement between the system owner and the system site host, for the provision of solar power and associated services. The system owner designs, installs, and maintains the system (a set of solar services) and signs an agreement with the host to continue to provide maintenance and solar power. The agreement is sometimes referred to as a PPA, but in this guide, we use the term SSA to indicate that the agreement between the system owner and the system site host is more than a power purchase: it is an agreement that the system owner will provide specific services to ensure continued solar power.
Securities: A security is an investment instrument issued by a corporation, government, or other organization that offers evidence of debt or equity. Any transaction that involves an investment of money in an enterprise, with an expectation of profits to be earned through the efforts of someone other than the investor, is a transaction involving a security. Community solar organizers must take care to comply with both state and federal securities regulations, and preferably, to steer clear of inadvertently offering a security. (Further information on securities is provided in Section 4, Tax Policies and Incentives.)
Community Solar Project Models
People have many reasons for organizing or participating in a community solar project. Just as their motives vary, so do the possible project models, each with a unique set of costs, benefits, responsibilities, and rewards. This section reviews several project models:
- Utility-Sponsored Model, in which a utility owns or operates a project that is open to voluntary ratepayer participation.
- Special Purpose Entity (SPE) Model, in which individual investors join in a business enterprise to develop a community solar project.
- Non-Profit “Buy a Brick” Model, in which donors contribute to a community installation owned by a charitable non-profit corporation.
For communities desiring to organize a community solar project, the local electric utility is a good place to start. First of all, utilities are likely to have the legal, financial and program management infrastructure to handle organizing and implementing a community solar project.
Second, many utilities are actually governed by their member-customers and can be directed to pursue projects on their members’ behalf. Fully one-fourth of Americans own their own electric power company, through co-ops, or city- or county-owned utilities.ii And, in general, publicly owned utilities have taken the lead in deploying community solar projects. But even when the utility is investor-owned or privately held, it may wish to expand customer choice with an option for community solar power.
In most utility-sponsored projects, utility customers participate by contributing either an up-front or ongoing payment to support a solar project. In exchange, customers receive a payment or credit on their electric bills that is proportional to:
- Their contribution and…
- How much electricity the solar project produces. Usually, the utility or some identified third party owns the solar system itself. The participating customer has no ownership stake in the solar system. Rather, the customer buys rights to the benefits of the energy produced by the system.Note that utility-sponsored community solar programs are distinct from traditional utility “green power” programs in that “green power” programs sell RECs from a variety of renewable energy resources; utility community solar programs sell energy or rights to energy from a specific solar installation, with or without the RECs. Utility-sponsored programs can help make solar power more accessible by decreasing the amount of the purchase required, and by enabling customers to purchase solar electricity in monthly increments.
Special Purpose Entity (SPE) Models
To take advantage of the tax incentives available to commercial solar projects, organizers may choose to structure a project as a business. In most states, there is a range of business entities that could be suitable for a participant-owned community solar project.
The main challenges in adapting these commercial solar structures for community projects include:
- Fully utilizing available tax benefits when community investors have limited tax appetite, including a lack of passive income.
- Maintaining the community project identity when engaging non-community-based tax-motivated investors.
- Working within limits on the number of unaccredited investors if the project is to be exempt under securities laws.
When a group chooses to develop a community solar project as a special purpose entity, they are taking on the significant complexity of forming and running a business. The group must navigate the legal and financial hurdles of setting up a business and raising capital, while possibly having to comply with securities regulation. In addition, they must negotiate contracts between the participant/owners, the site host and the utility; set up the legal and financial processes for sharing benefits; and manage the operation of the business.
Given the complexity of forming a business, it is not surprising that many special purpose entities pursuing community solar are organized by another existing business entity with legal and financial savvy. Solar installation companies such as My Generation Energy in Massachusetts have successfully created LLCs to purchase solar installations funded by a group of investors.
Although this expands the market for solar, we have not included this as an example of community solar because the benefits are limited to a small group of tax-motivated investors. In an alternative model, the Clean Energy Collective in Colorado is an LLC that has created a complex business structure that allows for individuals to buy solar panels in a common installation. While the CEC incurred significant legal costs to set up the company structure, they are now able to offer participation to an unlimited number of utility customers.
While this is not strictly “community solar” in that the donors do not share directly in the benefits of the solar installation, the donors do share indirectly, by lowering energy costs for their favored non-profit and demonstrating environmental leadership. In addition, with emerging state policies such as virtual net metering and group billing, there may be possibilities for a non-profit project sponsor to share benefits with their donor/members. In a variation on non-profit ownership, a non-profit may partner with a third party for-profit entity, which can own and install the system and take the tax benefits. This model has been deployed successfully in the California Multifamily Affordable Housing program and at other non-profit locations throughout the country.
Non-profit organizations such as schools and churches are partnering with local citizens to develop community solar projects. Under this model, supporters of the non-profit organization help finance the system through tax-deductible donations. While the non-profit is not eligible for the federal commercial ITC, it may be eligible for grants or other sources of foundation funding that would not otherwise be available to a business. An example of this model is the “Solar for Sakai” project on Bainbridge Island, Washington, in which a community non-profit raised donations for a solar installation, and in turn donated the installation to a local school.
Information in this blog-post has been provided by NREL.gov