- Industry: Energy & Utilities
In early August 2015, the Obama Administration finalized its Clean Power Plan rules, which will lead to a dramatic shift in the U.S. electricity system over the next 15 years, reducing carbon dioxide emissions by nearly one-third. The combination of impending greenhouse gas regulations, increasing customer demand for clean energy, and a steep decline in the cost of solar can be seen as a threat or an opportunity for U.S. electric utilities. In many states, third-party residential rooftop solar developers actively implement campaigns to secure customers by presenting utilities as dirty, high-priced, slow-moving monopolies. But there is a way for utilities to use these trends (as well as solar developer education efforts) to their advantage, specifically by establishing utility-sponsored community shared solar programs.
Community shared solar has a variety of flavors, but, for purposes here, it is defined as a solar photovoltaic project that delivers energy and/or economic benefit to multiple customers. These customers subscribe to the solar project by purchasing a share of its energy output. A community solar project, then, allows subscribers to benefit from a central commercial-scale solar plant through virtual net energy metering. Virtual net energy metering refers to an arrangement through which multiple customers are credited for a share of energy generated by a renewable energy facility that is not physically connected to their property. If the costs of transmission and distribution, reliability, and ancillary services provided by the utility are properly accounted for, crediting subscribers for their share of solar output should not lead to a cross-subsidization by non-subscribers. This is an important area that requires dedicated analysis as utilities consider rate restructuring to better account for the full value of the services they provide to those with distributed energy resources.
Community solar may be a more appealing concept for many customers than traditional rooftop solar, since it allows greater access to solar energy (i.e., for renters, those with shaded roofs, and households that cannot afford the upfront costs of a solar system). While community solar is rapidly gaining traction throughout the country, there are a number of barriers that need to be evaluated and addressed before developing a new community solar program.
- Project economics—The biggest barrier to community solar is poor project economics. In regions with low electricity rates a community solar project may not be viable without additional incentives. Before starting a program, utilities should assess the business case for the project from the perspectives of both the project sponsor and the subscriber. If a project sponsor is willing to subsidize subscribers or if subscribers are willing to pay a premium for solar energy, it may be possible to overcome poor project economics. A robust internal and external stakeholder engagement process is, therefore, critical.
- Customer acquisition—When starting a new community solar program, the project sponsor should ensure that there is robust stakeholder outreach. To the extent that there is low penetration of solar energy resources currently in the area, the sponsor must focus more on education of potential subscribers. Along with education and outreach efforts, marketing of the program will be crucial to secure adequate participation.
- Financing challenges—An important component of solar economics is taking advantage of tax incentives (specifically, the renewable energy Investment Tax Credit and accelerated depreciation). Because municipalities and regulated utilities tend not to have tax liability, a sponsoring utility will often have to contract with a third-party developer with access to tax equity in order to leverage the available tax benefits. The scale of projects, then, must justify the diligence and legal costs required to develop the tax arrangements to finance such a project. Often, tax equity investors are looking for projects that are 10-100 times larger than a typical community solar project.
- IT/OT system barriers—Prior to initiating a community solar program, a utility should assess the system changes that would be required in order to implement such a program. New software solutions and adjustments to existing systems will be necessary to enable on-bill crediting for subscribers, real-time tracking of system generation, and management systems for subscriber contracts. The cost of the build-out and implementation of these changes should be assessed prior to program deployment.
- Policy barriers—In many states enabling policy for community solar is in flux. Primarily, there is ongoing debate on rate design as it relates to residential solar and capturing the true cost/value of solar. Public power entities—municipal utilities and electric cooperatives—have greater flexibility to create community solar programs. However, key policy parameters should be assessed prior to developing a multi-decade community solar program.
Community shared solar represents a unique opportunity for utilities to engage customers while simultaneously reducing their greenhouse gas exposure. Potential barriers should be properly assessed, but the benefits of community solar could be great in accomplishing multiple goals of the utility of the future. With the Investment Tax Credits set to decrease at the end of 2016 and extensive stakeholder outreach required to secure and adequate subscription rate for a new community solar program, utilities should begin their consideration and analysis of the business case for community solar as soon as possible.