Among all the electricity generation sources in the US, solar energy has had the fastest growth rate in the last decade with an average annual growth rate of 68%. After the Investment Tax Credit (ITC) was created in 2005, the annual installed capacity has grown to over 14 gigawatts. Of the total capacity, 70% is utility-grade high capacity solar “farms” with the most rapid growth occurring in the last four years.
The emerging trend today is in the smaller community solar “gardens”. The graph below shows the growth[i] of the community solar segment in the third party-led vs. utility-led markets:
The U.S. Department of Energy defines Community Shared Solar as “a solar electric system that provides power and financial benefit to multiple community members”[ii]. These solar gardens generate power, which can offset electricity usage in homes or businesses. This is then typically passed on as credits on utility (or supplier) electric bills. In the case of single-home rooftop solar installations, the credits are calculated using “net metering” which is effectively the customer’s electricity usage less the power put back into the grid. In the solar gardens, the equivalent is called virtual net metering, or allocating the generation pro-rata to all participants.
The two business constructs that have sprung up in the implementation of these projects include:
1. Ownership Model: In this model, the community “owns” the project in the sense that the participants hold shares in the project in return for the initial investment. The credits they get are in proportion to their shareholdings. There are several issues to be addressed in this model, including the need for the initial investment, and SEC definitions of qualifying investors – meaning it’s a rich people’s game.
2. Subscription Model: A third party – Community Solar Service Provider (CSSP) invests in and develops the solar garden and then sells subscriptions to participants. Typically, these are 20 to 30-year subscriptions and the pricing can take different flavors:
- Fixed monthly fee to be paid to the CSSP, which will pass on the credits received from the utility to the customers. The fixed fee goes towards servicing the financing that the CSSP had to obtain, with the hope that credits will be greater than the monthly fixed fee. In general, these plans have built in performance penalties which partially offset the participant’s losses in cases where the generation falls below the anticipated generation.
- Guaranteed Savings model – The CSSP takes a percentage of the credits from the utility and passes the rest on to the participant. Obviously, to a customer this is an attractive option since all the risk is borne by the CSSP.
- The subscription model addresses another common argument made against solar generation – the reverse Robin Hood syndrome. Those who can afford the investment take advantage of net metering using solar installations thus lowering their usage from the grid. But the cost of the distribution grid is largely fixed. Lowering the kWh flowing through them makes the distribution cost of each kWh higher – which disproportionately affects lower income people.
The primary requirement for a successful solar garden implementation is managing the risk associated with the investment. This can manifest in many ways:
- The programs cannot commence without a certain threshold of participant enrollments. So, in some cases it can take a year or two after someone has enrolled before the garden starts production.
- The “tax” calendar does not follow seasonality. To take advantage of tax credits, the CSSPs rush to complete projects in the last months of the calendar year (read: winter), five to six months ahead of peak generation season. Therefore, the savings that participants see in the first few months can be slim to none – leading to customer dissatisfaction, bad debt and other customer service headaches. So constant customer education and outreach is critical to help them cope with delayed satisfaction.
- The accounting and billing can be a nightmare. The older utility systems don’t have robust net metering and accounting functionalities, leading to a hodgepodge of desktop systems and spreadsheets.
In summary, bills are being sent to customers who have probably forgotten that they signed up for the program. Or the bills show scant savings (or worse), or are produced by system hacks that do not provide detail and transparency. These scenarios make it quite clear that operational excellence is an absolute necessity in this new world.
Solar is very much a growth business, and the recent experience of Xcel Energy[iii] promises a positive outlook with ever falling costs, despite uncertainty in tax policies, subsidies and import tariffs.
[i] Source: GTM Research: https://www.greentechmedia.com/research/report/us-community-solar-outlook-2017#gs.gLaKeW8
[ii] A Guide to Community Shared Solar: U.S. Department rel="noopener noreferrer" of Energy. https://digital.library.unt.edu/ark:/67531/metadc836027/m1/1/
[iii] Justin Gillis and Hal Harvey: Why a Big Utility is Embracing Wind and Solar, rel="noopener noreferrer" The New York Times, rel="noopener noreferrer" February 6, 2018. https://www.nytimes.com/2018/02/06/opinion/utility-embracing-wind-solar.html
Kumar Parameswaran is EVP Sales, North America at HansenCX