Utility’s active role in enabling community solar project allows business model innovations

Written By: Stratton Report
April 18, 2016

When Jim Kurtz, CEO of RER Energy Group, got a look at the RFP for a community solar garden issued by Cedar Falls Utilities (CFU), he was intrigued by several novel features the utility was proposing. So intrigued, in fact, that he made it a priority for RER to do what it took to win the solicitation—which the solar development company succeeded in accomplishing.

Roughly a year after the RFP came out, and the project has been financed, built and marketed (by CFU) to citizens of Cedar Falls Iowa, Kurtz is eager to share the approach envisioned in the RFP, which he hopes will spread as a particularly workable model for community solar.

“CFU was specific, they wanted community solar,” remarked Mr. Kurtz. “RER and our affiliated company, Sunvestment Group, have pursued and implemented a number of community projects before. But there’s many types of community solar. In this instance, all the credit has to go to CFU for coming up with the concept—we hadn’t seen it before.”

So what made this community solar garden project novel? According to Kurtz, It was the way in which CFU separated the project into two separate parts: one between the utility and the developer/investors, and another between the utility and the community solar garden members.

In the part containing the development, ownership and financing of the plant, CFU treated the solar garden as a typical utility-scale solar project, signing a PPA for 20 years of power with the investor group brought in by RER. Meanwhile, the utility sold 20-year membership units in the solar garden to its customers. The customer-members will get credit on their electric bills for their fraction of the garden’s solar power production, and the investors have gotten a contract with the utility as power offtaker, not with a group of consumers.

“The investor group could evaluate the credit worthiness of Cedar Falls Utilities, and it’s a pretty good credit risk because they’re a very reputable company. The investors didn’t have to worry about what was in the contract with the residential customers, or what the customers were doing with the membership units – it’s really separate. That allowed everybody to deal with the parts of the deal they were most comfortable with,” Kurtz remarked. He continued: “CFU called their campaign Simple Solar. They really delivered on that, and simplicity can lead to comfort. We see this as a model that could be followed by other utilities. We credit Cedar Falls with structuring something innovative and wise.”

It might be asked why the utility didn’t simply build the solar array itself? According to Kurtz, the utility was looking for a developer to add the value of its experience with solar design and construction, and an investor group to enable the project to utilize the ITC credit. As Kurtz explains, “The federal government requires that ownership does not transfer at any time within the first six years of the array being built. But after the six-year period Cedar Falls has the option, not the obligation, to buy the solar array from the investor group.” CFU also decided to retain the RECs from the community solar project, given its status as contracted offtaker of the project’s power.

RER pursued a very standard capital structure for the project. Kurtz explained: “Any big project like this will involve tax equity investors, sponsor investors, and debt investors –and this project basically followed the standard financing structure that large arrays go through today.”

Despite the solar farm being part of a community solar deal, finding investors wasn’t difficult for RER. “The investor group we worked with has been involved with over a 100 MW of solar projects throughout the world. It’s a very experienced group. Because of the structure of the project, it was relatively easy to get them on board,” remarked Kurtz.

In fact, Kurtz maintains that community solar projects seeking financing today are greatly benefitted by the high level of interest from the investment community in solar power—of whatever stripe. “Four years ago there were more solar projects than there were investors. Today there are significantly more investors than there are projects available. So many large players–the Goldman Sachs, the US Banks, and even Warren Buffet owned entities–are involved with solar investment,” Kurtz notes.

In the customer-facing part of the program, CFU took an equally active role. The utility handled marketing the community solar membership units to its customers.

Kurtz, whose company was not directly involved, though a team member did participate in the program, was impressed by the utility’s 90-day enrollment campaign. CFU got the word out via information mailings, emails, customer newsletter, digital, TV advertising, and even providing yard signs to customers who signed up. Kurtz notes: “Those yard signs were in such demand that they had to reorder signs multiple times, the residents took pride in displaying their Simple Solar signs in their yards. That word of mouth really helped promote more sign ups.”

The repeated buys of yard signs for CFU customers who signed up for membership units presaged an interesting aspect of the program. Support turned out to be so great among the community that the project was enlarged to accommodate demand.

“When CFU issued their RFP they asked all of us who participated to provide quotes on three sizes of a potential project—a smaller, a medium and a larger size. The utility ultimately opted for the largest sized project, approximately 2 MW of direct current),” Kurtz explained.

Each household buying a membership unit benefitted from that enthusiasm as well, because of project economies of scale. “Originally it was projected that the cost might be $399 per unit for somebody to participate, because that would have been the cost for the smaller system,” Kurtz remarked. “But because there was so much interest, leading to demand for the largest sized array, that per-unit cost ended up dropping to $270 per unit. One of the community solar model’s advantages is that it can allow a project’s fixed costs to be spread over a larger base of members. “

Some customers were of course either more interested or sufficiently affluent to purchase multiple units. “We understand some people purchased three or more units,” said Kurtz. “There was a range, of course, but enrollment was not restricted to one per customer.”

Each membership unit entitles the owners to receive a monthly credit on their bills for the next twenty years. The credit is calculated as the member’s share of the energy produced by the array for that month times the energy rate per kWh.

According to Kurtz, the energy rate is adjusted annually and it is tied to the Cedar Falls wholesale cost of power. The rate is also adjusted upward to account for the utility’s avoided capacity investments as a result of the volume of power generated by the community solar garden and the reduced transmission costs that the locally produced power helps the utility to avoid. The payback time for the members is not guaranteed by CFU, as it depends on the wholesale power cost of the utility. Kurtz observes: “If the power goes up fairly quickly the rates that CFU is paying for energy will go up and the customer will get their money back sooner and realize a higher rate of return.”

Overall, Kurtz emphasized, CFU’s priority in designing the program was to both make it economically worthwhile to the members and at the same time to ensure that the electric rates of their non- participating customers were not impacted by the project at all.

The 20-year term for the memberships was set by CFU to represent a conservative term for the solar garden to continue to produce power without problematic degradation. “These systems are extremely reliable,” Kurtz emphasizes. “The modules involved have a warranty that they’ll maintain 80 percent of their capability for 25 years, so for sure the expectation is that the array will last longer. I think CFU just set the membership terms for a period of time during which they know they could deliver with the highest level of confidence.”

In an interesting approach to offer customers “insurance” on their investment, CFU offered to repurchase units from members who moved out of the utility’s service territory during the first 17 years, on a predetermined declining price schedule.

“They were trying to make sure people didn’t feel locked in,” Kurtz said.

“The members were free to transfer their credit to another CFU customer if they chose to engage in private transactions. CFU was really trying very hard to make the experience as positive as possible for everybody.”

CFU also made the choice not to finance memberships over time. “It is more common for us to see community solar memberships being financed, rather than sold with cash upfront,” Kurtz reports. “But obviously the financing costs make the level of reward to the members correspondingly less. At RER, we like what Cedar Falls did, it’s what we advocate for community solar gardens.” However, CFU allowed customers to spread out their membership unit payments over 12 utility bills with no interest.

Kurtz and RER find the future of community solar to be as bright as a sunny summer day.

“Community solar is going to be huge,” Kurtz declares. “I was at a community solar event for Central New York two Fridays ago, which was packed. Community solar activity is spreading nationally. Maryland is about to release details of their program, and the District of Columbia, Massachusetts, Vermont, are other places that are seeing activity. Community solar is absolutely growing very fast, because it addresses the needs of the up-to-75 percent of individuals who live in a place that can’t participate in rooftop solar. Community solar can also put utilities and their billing departments in a crucial supporting role for solar power, where rooftop solar can sometimes set up tensions between utilities and ratepayers. Utilities are trying to evaluate how best to engage with renewable generation, and community solar has a lot of advantages for them. We think this is going to be a very, very large market and we’re just glad that the word’s getting out. “