The Business and Economics of Community Solar Part II

Written By: Stratton Report
July 6, 2017

An Interview with Tom Hunt VP of Corporate Development for Clean Energy Collective

 

As part of our exploration of this rapidly growing business model, we spoke to the Clean Energy Collective; cited by Fortune Magazine as one of the nation’s largest community solar developers.  Based in Carbondale, Colorado, the seven-year old company delivers solar power through medium-scale facilities that are collectively owned by participating utility customers. We spoke with Tom Hunt who very graciously explained the firm’s model and many related issues of community solar.

 

Stratton Report: Could you tell us a bit about Clean Energy Collective’s history and business focus?  What attracted your company to community solar?

 

Tom Hunt: CEC was founded 2009 to develop community solar projects. We have been focused on community solar from the get go. And that remains the case today; we only do community solar. Our focus is delivering community solar solutions via a variety of different pathways. We wanted to allow people to participate in renewable energy without having to put solar panels on their roof. And we feel the promise of community solar, and the excitement of community solar, is that it allows anybody to participate in renewable energy whether or not they are able to put solar panels on their roof.

 

SR: What are the relative economics of community solar vs. individual residential solar projects? 

 

TH: In general, a subscription to a community solar project will be a little bit cheaper than the equivalent-size individual roof top solar project. Obviously the reason for that is the significant economies of scale. And as the community solar project gets bigger, that becomes even more the case. You can pull the number from a GTM or other research report but ballpark, let’s say that it cost $1.50 to $2 per panel to deliver a commercial scale solar project right now—that is, at the size of most community solar projects–while I’d say it’s about $3.50 to $4.50 to go out and buy panels for your roof. Obviously, those numbers vary a bit by state. You have some additional program costs that go with community solar, and I think it’s important to recognize that. You have to deal with security compliance, you have to deal with IT integration with the utility, you have to market the project, and you have to maintain it over the long run. These are important things and we put a lot of effort into them but, by no means should they outweigh the costs savings you get from the economies of this scale.

 

SR: How do “extras” like RECs get divided up?

 

TH: The treatment of renewable energy credits depends upon the state and the regulatory environment, which is a situation similar to one you see in roof top solar. I know that in some areas, the customers for rooftop solar don’t retain their renewable energy credits because they are essentially transferred or retired in exchange for incentive payment or rebate offered by the state or the utility. And that can be the case for some community solar programs. In some programs it’s a legal requirement that their Renewable Energy Credits get transferred as part of the program. In other programs, they can stay with the customer. Sometimes the utility, the customer and the developer to decide together who can most efficiently handle the RECs. I think it’s important to note, with community solar, the idea is to allow the customers to participate in the generation of renewable energy. And while that can include renewable energy credits it’s not necessary that it happens in every circumstance.

 

SR: Are there other practical or logistical advantages to community solar?

 

TH: As I said earlier, the biggest advantages of community solar are the economies of scale and the fact you can offer the service to 100% of the market. That’s really the most exciting thing about community solar. Depending on the numbers, roof top solar can reach anywhere from 25%-50% of the population in a technical sense, but probably significantly less than that in a business sense. Whereas community solar can benefit anyone. And it has a much lower cost barrier to participate. Often with rooftop solar it’s not going to be economically viable to have somebody come out and install it unless they do a good-sized installation. But with community solar, you can buy as little as one panel, and that opens up the market for many more people. It’s also more flexible as the market continues to evolve both in an economical sense and in a regulatory sense. As bigger solar projects become more and more economic and more and more efficient, you can take advantage of that with community solar; whereas with rooftop solar you’re kind of stuck based on what can fit on your roof, and what can be offset on a single customer’s bill. And in a regulatory sense, while sometimes community solar is run under a net metering structure, more often it’s not. Most of the programs we offer are not. And as net metering comes more and more under fire in coming years, community solar programs are more easily able to evolve and change.  Those are some of the main advantages we tend to focus on.

 

SR: What are the “infrastructure” requirements—relationships with utilities, cities and/or 

communities—necessary to make community solar work?

 

TH: The first one is the legal structure. The structure of a community solar project can be somewhat complicated. There are questions as to how you handle security, how you handle investment tax credits, how your contracts with customers work, and how you market and sell memberships in a project. CEC spent some time investing in a legal infrastructure that we feel works well. Another one is the billing system integration for community solar.  To work a community solar project really needs to be able to provide credits on the customer’s energy bill. So you have to either have it integrate it directly into the utility’s billing system, which our remote metering software does, or you have to be operating on a program the utility just opens up to third parties. Which of course leads to another key element: your relationship with the utility. And we do feel pretty strongly that a good relationship with the local utility is the most important element for successful community solar programs. You need to have a utility that is willing and ready to implement the program. About half of our projects are with utilities that directly contract with us to roll out a community solar program in their name. Even in projects that we develop independently, we need to work with the utility to site the facility, to do the integration and all that sorts of things. The cities and the communities are important as well. Obviously, if you are going to be siting a project in a city or in a county, you want to have a good relationship with them. Cities can encourage and expedite the facility if they want a community solar project in their area, for economic or environmental reasons. They can also be important customers. Many of our projects have the county, the local school district or the local parks and recreation district, as an anchor-tenant for power.  That allows us to go sell it to the residential customers in the area a little more easily. Those are some of the main “infrastructure” elements.

 

SR: What is your geographical focus? Can you provide community solar everywhere?

 

TH: For a community solar project to work, a utility needs to post billing credits on a customer’s bill, to compensate for the energy that is produced. Now it’s not obligatory for every utility to do that, and that’s why you don’t see community solar as yet in every utility service territory in the country. You have a fair number of utilities that are choosing to do this, because they see the benefits of offering the program to their customers. And you know some states that have decided to pass legislation or regulation that requires all the utilities to offer these types of programs. And in terms of geographic spread, we focus right now on the US only, but it’s widespread across the US. We have existing programs in 11 different states, and we’re in conversations with utilities to roll out programs in virtually every state in the nation.

 

SR: What price do utilities pay for the power a community solar project generates? Do you receive something closer to a retail rate for power or something closer to a wholesale rate for power?

 

TH: Community solar can certainly work without being a retail net metering credit. We have many programs now where we have a negotiated a rate with the utility that is not the retail rate, but is sufficiently high to support the program and make it viable. We have some programs that are enabled by legislation–Colorado is an example–where the credited rate for power generated is less than the retail rate. There’s some deductions to account for transmission and distribution. So that’s one of the benefits of community solar; it can work with net metering, as in Massachusetts and New York, but it does not require net metering to be successful.

 

SR: How does Clean Energy Collective’s approach to community solar handle the disparity between the approximately 25-year functional life of solar facilities and the fact that Americans tend to move every 5 years? 

 

TH: I’m glad you asked this one: people certainly move. And the two important things when members move are transferability and portability. There are a fair amount of customers that expect to be in their current homes for the whole life of the project, and that’s great. But most of them would like to know that they have options. So the first one is portability; this is the idea that although people may move every 5 years, many of those people are going to be moving to the same general area. You know they might be upgrading from an apartment to a house, or vice versa, or from a bigger to a smaller house. As long as they stay within the utility service area and the general geographic area, because we run all these programs through our own software, it’s very easy for us to transfer the subscription from one home to the next, provided the member is still receiving their bill from that same utility. So a member will call us up, tell us their new account number and we transfer it just like that. So that is really important and something that all of our programs allow.

 

The other one is transferability; and this is the idea that once a customer buys into the program, buys panels in the program, they should be able to transfer it to somebody else, whether it’s to a neighbor or a friend, they can donate it to charity or give it to a family member. And again, as long as that person or entity is within the same utility service area, in the same region, we can just transfer it to the new account number, once they come to a deal, whether they’re selling it or whatnot. So the important thing for both of those is that community solar is not linked to the customer’s original home or place of business. It’s to the account that the utility is billing. So as long as you are still distributing solar credits within that same utility service territory, it’s not bound to one location.  As opposed to a rooftop solar installation, which can lead to a situation where: “Hey, I’ve put solar panels on my roof. Now I’m leaving, I lose all the benefits of that.” You can keep, give or sell it to somebody.

 

SR:  Is community solar competitive with, or compatible with, PACE financing?

 

TH: Community solar and PACE are somewhat interesting together because they’re both growing rapidly at the same time. To the extent that they both stay compatible, PACE will benefit people who are in community solar projects. We view the two as compatible. PACE financing makes it a lot of easier to pay for energy efficiency and renewable energy upgrades; community solar should fit in with that. I know that in Colorado, for example, as the state is rolling out its commercial PACE program, that they very intentionally looked at community solar as being one of the assets that could be included within that program. We are planning our new projects in order to be eligible for PACE financing. So we certainly hope that stays the same for other states and it’s just the early innings but we’re in conversation with groups to work on just that

 

SR: Several utilities (e.g., DTE) have programs that they describe as “community solar.”  Do you know if they utilize the same model your firm does, or would utility ownership change the structure of such a program?  

 

TH: I mentioned earlier our first project was in partnership with our local utility and that remains our model now and into the future. All of our projects are direct bilateral deal with utilities, where we offer a community solar program in their name. We certainly believe that utilities are very well positioned to offer community solar programs to their customers, and it benefits them to do so. We’re certainly very supportive of the idea of utilities participating in community solar programs. And whether they own the asset or they just sign a contract to offer the program, it doesn’t change our view. It changes the structure, the financing structure, the legal structure, but we have utility partners that only own a portion of the asset right now and we’re open to doing other types of structures in the future. What I will say is that there are some programs that are being rolled out now, and this is not specific to DTE, but just in general, that are being labeled community solar by utilities, but we wouldn’t really view it being community solar programs. They don’t offer any positive benefits to the customer, they don’t really offer any direct tangible connection to the solar asset, and we would certainly encourage utilities to avoid doing that. It doesn’t benefit them in the long run because it’s not going to be a program that’s successful in a large way and justifying the cost and effort to implement it. But as long as the program is viable and well structured, we certainly have no opposition to utilities being involved.

 

SR: To clarify, if utility built a solar asset and included it in the rate base, is that what you’re describing what is being mis-identified as community solar?

 

TH: No, I was more thinking of programs that are aimed at customers, where the benefit or the involvement being offered to the customer is not very tangible and not positive, not in line with wanting to really drive large amounts of customers to participate in renewable energy. So that’s more the concern. I don’t think the ownership structure is really the issue; you can have a solar asset that’s included in the rate base but in a way is involved in a community solar service program. So, there’s too many shades of gray there to really offer a definitive opinion on that one.

 

SR: I believe some utilities are building solar power assets as part of their fleet of generation assets. I was wondering if you were talking about that.

 

TH: If a utility is just purchasing or building solar power as part of their standard power generation mix, we would not define that as community solar.

 

SR: How does your firm obtain financing?  Does it provide financing to the members of a community solar project?

 

TH: We can, yes. In terms of financing the project, it’s very similar to anybody else that’s financing the project. We’ll work with large institutional investors and big national banks, certain regional banks as well. That’s going to look similar to anybody else. And certainly community solar is of a size now, or at least it has been for us, where we don’t have issues finding a source of financial partners. In terms of financing to the customer, that is something that is something we can do. There’s a couple different ways you can do it. One is, you can just roll it in with the financing of the project and have a model where customers pay as they go; something they pay for over 20 years or 25 years for the time they are involved in the program. You can view that being something akin to a third party lease for rooftop solar, although the exact structure are a little bit different. And then the other way you can look at it is, we do have programs where customers can go out and buy the panels and they can purchase up front to make that purchase directly out of pocket right now, we will partner with local credit unions and other regional banks to set up a financing program where they can obtain a pretty low cost loan for that purchase up front. So, in general, all of our programs have some sort of financing option. Either the programs are pay as you go, or partnership from financing from a credit union or bank.

 

SR: Is your company for profit?

 

TH: We are. CEC is a for-profit company.

 

SR:  To take advantage of the ITC an investor needs to pay taxes. I understand non-profit organizations can have difficulties getting tax benefits for solar.

 

TH: And that’s one of the benefits that we provide. We can set up the financing in a way that allows us to monetize the tax credits and then pass them through to the customer in the form of reduced costs. For a non-profit that wants to have solar generation, this may be a better option than doing rooftop solar, in the form of reduced costs and in the form of tax credits.

 

SR: You say community solar is rapidly growing; can you give me some numbers?

 

TH: I’ll say from our standpoint, we’ve gone from doing a couple mega-watts a year to doing tens of MW’s a year, and hopefully in the near future doing hundreds of MW’s of community solar a year.

 

SR: From what I read, it seems community solar is more common in the eastern part of the country. Is this correct?

 

TH: I think there’s a couple factors that cause that. Community solar as a business model just came about in the past 5-7 years. It only really started to take hold in 2010, 2012. By that time the California solar market was already doing pretty well with just utility scale solar and roof top solar. So, people had already focused on that and weren’t really looking for new ideas as much. Some of the east coast states and the states in the middle of the country were just starting to look at solar in the past few years. They saw community solar programs and saw the benefits of those. Those states were able to include community solar in their initial state solar programs. The other part of it is specific to California. California has a community solar program on the books that was passed a couple years ago. The program is pretty convoluted, and it has taken a few years to implement it at the CPUC, which has slowed things down. And to be pretty frank, the program structure that’s come out of it is pretty constrained and I think there’s a lot of doubt in the industry, whether it will result in very many projects being built.

 

SR: There is a lot of interest in combining solar with storage as battery prices are dropping. Is that something you are considering in community solar projects?

 

TH:  It is. We did one power project with storage a few years back. I would say that was a little bit early on the learning curve on the storage front. But energy storage is accelerating pretty rapidly now and there’s a lot of interest in it. Especially because community solar is often done with more coordination in partnership with the utility, providing the utility with additional energy grid benefits from storage can make a lot of sense. So, it’s something that’s being discussed quite a bit. I think, there’s still work to be done on pruning up the business model involved in combining storage with community solar, because you have an additional party that’s now involved, the customer. So we’re still trying to figure out all those things, but that’s certainly workable and as community solar is starting to infiltrate the grid more and more, we’ll have an increasing need to combine storage with it.

 

SR: As “utility 2.0” and the New York REV model change how distribution utilities are structured and controlled, how will that impact community solar?

 

TH: We are active in New York, and it’s certainly something we are looking at. It’s at the early stages so I don’t think there is anything conclusive as of yet on how community solar will work with that sort of evolution. We’re certainly excited about it and once we figure it out we’re confident we will be able to work with it.