The first community solar programs were started nearly a decade ago, and, as the name suggests, the early efforts were led by communities — neighbors, small towns, places of worship — in each case, a group of people dedicated to building solar systems and sharing the benefits of the electrical output.
From these humble beginnings, community solar programs have grown and evolved to include many different design structures — in fact, some programs now use the moniker “shared renewables” to reflect the fact that the concept needn’t be limited to solar. In this three-part series of articles, we’ll focus on what has become the most typical program design: community solar programs launched by utilities in service of their customers.
Frequent readers of Greentech Media know that utility-led community solar programs are growing rapidly in popularity. According to the Solar Electric Power Association, there are now more than 50 community solar programs planned or operating. However, designing and launching a community solar program can be complex. Indeed, there are a number of questions that every utility faces as it works through the design of a program. Our three articles on the subject will walk through these questions, highlighting the many forks in the road toward the development of a successful program. Future articles will cover risk mitigation, impacts on utility bills, REC ownership, frequently debated terms and conditions, and best practices for customer messaging. Today, we’ll look at two key questions every utility considers when assessing a new community solar program: Who should own and operate the projects, and where should they be located?
Project ownership is perhaps the first question a utility should consider, because the answer will drive decisions about countless other program design points. There are three fundamental approaches.
Utility-owned: In this case, the utility designs and operates the community renewables program, and the energy is sourced from projects owned by the utility. This option is most likely to appeal to investor-owned utilities (IOUs) seeking a rate of return on the solar asset used for the program. It may also appeal to electric cooperatives and municipal utilities that have a strong history of owning assets and or those that want to gain experience managing the process of building utility-scale solar systems. It is still an open question whether state commissions will allow utilities to earn a return on assets deployed for one segment of their customer base, even if the utility guarantees remaining customers will be held harmless. We expect commissions across the country will soon begin providing guidance to utilities pursuing this option. Utility ownership also poses the risks of asset ownership to the utility, and can be an inefficient way to monetize certain advantageous tax treatments available to encourage the development of solar systems around the country, such as the federal solar Investment Tax Credit. What is clear is that this model directly aligns with utility interests, particularly for large programs with many participating customers.
Power-purchase agreement (PPA): Under this option, the utility designs and operates the community renewables program, but the energy is sourced from projects owned by others.Though the right to purchase the asset over time may be included in the PPA, this option is likely to be easier and faster to execute due to the lack of upfront capital constraints. In addition, this option can be appealing in that it exposes utilities to lower technology and operational risks and may be the most efficient way to monetize available tax credits. What’s more, utilities can ensure they are receiving the optimal level of energy, as developers’ returns are directly correlated to the productivity of the projects. While this option presents many benefits, the utility should consider any possible risks it is exposed to related to the developer and project under development, as it does with other PPAs it enters into.
Third-party turnkey provider: This model differs from the other two in that the third-party provider not only owns and operates the project but also designs the community solar program, acquires customers, bears program risk, etc. Legislation in Colorado and Minnesota has supported this turnkey program design as part of a larger policy prescription to drive development of distributed solar. This model has also proven very popular with electric cooperatives, but less so with IOUs.
So far, programs operating today have utilized a mix of these options, but as more IOUs seeking a return on investment begin to voluntarily launch programs, and as programs grow in size and importance to the utilities, we expect the market to tilt toward the utility-owned model.
For utilities with small service territories, it is clearly appealing — though not always the right decision — to have the system sited within the service territory and close to customers. For utilities with larger footprints (for example, many IOUs), this issue is complicated by the fact that supply can’t technically be “local” for everyone, though it can be relatively closer and more visible to a high percentage of customers.
Local supply: A project within an urban area is clearly most appealing from a marketing perspective. People tend to connect more powerfully to a project they can see. However, this option will typically be significantly more expensive (e.g., by 50 percent or more) than a more remotely located project that is optimally designed on cheaper real estate.
Regional supply: Projects located within a utility’s service territory or at least in the territory of the same balancing authority (but outside of urban centers) can benefit from lower capital and operational costs, as well as superior energy resources, and thus can make the community renewables program much more likely to provide meaningful financial and/or energy hedge benefits to end-use customers. However, they also make it much less “visible” to customers being asked to participate.
Ultimately, 3Degrees expects to see utilities pursue a combination of these supply options for community solar programs going forward. In our experience, customers often verbalize a desire for extremely local supply, but when forced to act, they assign higher priority to a lower-cost option. Therefore, it will not be surprising to see community solar programs designed around a larger, cost-effective, regional project with other small projects located within population centers to provide visibility to the effort.
In the next article, we will cover risk mitigation for program design, REC ownership issues, and best practices for customer messaging about community solar.
Originally published in GreenTechMedia.