Community Solar
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Designing Community Solar Programs to Manage Risk

In the second of three articles, Adam Capage of 3Degrees looks at how utilities can address the larger risks of a community solar program.

With interest in community solar continuing to grow, more utilities are grappling with how to design a successful program that meets their organizational goals.

In part one of this series on best practices in community solar, we reported on project ownership and siting options. This article focuses on risk mitigation — a critical subject for every utility, but especially for investor-owned utilities (IOUs) that operate within regulatory mandates to hold non-participating customers harmless. When designing a community solar program, there are multiple risks utilities must assess. Here, we’ve focused on two that are particularly important and relevant.

Risk No. 1: Oversupply

Every utility designing a community solar program worries, “What if our solar supply doesn’t sell out?” Even if the unsold portion is small, the downside regulatory risks are high. Selling any over-supply to third-parties is an option, but this can bring complications and administrative expenses out of proportion to the solar volumes involved. Fortunately, there are other options to mitigating this risk.

Use excess supply to meet other requirements: In California, utilities operating mandated shared renewable programs will be able to shift any unsold supply to meet their renewable portfolio standard requirements. This reduces risk and increases efficiency; we recommend every utility operating in a state with an RPS seek similar flexibility.

Similarly, utilities that currently offer voluntary REC (renewable energy credit)-based green power programs have the same built-in flexibility. When shifting supply to a REC-based green power program, the utility could pay avoided cost for excess energy produced and value the RECs at the difference between the avoided cost and the all-in price of the solar energy. If participation in the REC-based green power program is adequate, these relatively higher-priced RECs can likely be integrated into the green power program supply without increasing the cost of the program to participants because volumes will be low.

Actively manage program demand: Small community solar programs sell out easily, but for those that want to pursue a larger program with thousands of customers, and for those offering programs where the financial benefits of participating take longer to realize, it’s important to create a marketing plan designed to meet specific participation goals. For example, in some cases it will be necessary to flexibly ramp marketing up or down depending on program performance; in other cases it will be necessary to use marketing to help you build and maintain a wait list that can address turnover as customers move out of the service territory.

Carefully define terms and conditions: Some utilities are also looking at program rules such as requiring signup fees (even when the solar will be paid for in monthly installments) and/or cancellation fees, or setting minimum time requirements for program participation. There is not enough market data to know for sure how these rules may impact customer behavior.

Ultimately, however, we caution that fees and mandatory commitment periods represent barriers to customers’ decision to participate. Not only is this counter to the spirit of a program to engage customers with solar, but it’s likely to lead to higher sales costs and a longer sales cycles. The benefit these strategies ostensibly offer — reduced risk of unsold program supply — can be more easily attained using the other strategies discussed above.

Risk No. 2: REC treatment

Depending on how the utilities plan to use the RECs associated with the community solar project, another potential risk is running afoul of the Federal Trade Commission (FTC) Act. If the utility program conveys the REC to the customer or retires it on their behalf, there is no issue: the utility can say the customer is purchasing and consuming solar energy.

Things get more complicated when the utility decides to use the REC for other purposes. In these instances, it’s important that customers not be led to believe they are buying or consuming solar energy, because without the REC, which represents the environmental benefits of solar energy, they categorically are not. Here’s the key point to remember: it doesn’t matter whether the customer understands what a REC is (most don’t) or whether ownership of the REC is retained by the utility in contractual fine print. What is relevant is what a reasonable consumer believes he or she is getting based on all the program marketing.

The question is whether a reasonable customer believes he or she is buying solar power. No utility wants to risk misleading consumers, being accused of misleading customers, or being the subject of a complaint filed with the FTC.

Our recommendation is that utilities retire the RECs on the participant’s behalf — it lowers risk, delivers value to participants and makes marketing easier. That said, if the utility needs to use the REC for other purposes, it’s still possible to say the customer is investing in, or helping to build, emissions-free solar generation. This is likely to be appealing to many customers, especially if they are able to receive fixed-price energy through the program. In these instances, the utility should also inform the customer that he or she is not using solar energy, but that someone else is buying it. This 2-page report from the Center for Resource Solutions explains best practices.

Although the risks associated with community solar may initially seem daunting to utilities, the approaches to dealing with them can be relatively straightforward.

In the next installment, we’ll talk about the range of value propositions that utility-led community solar programs can offer to participants.

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Originally published in GreenTechMedia April 16, 2015