Community Solar
I. Introduction. Within the past decade, “community solar” or “shared solar” has continued to emerge as a viable path to open access to solar beyond those who have a well-suited roof as well as the means and desire to install solar on their own home or business. Community solar is a creature of state policy and is a form of virtual net-metering where multiple utility customers participate in a common larger solar project located somewhere off-site. Generally, community solar involves a three-party arrangement whereby the customers enter an agreement with the project developer (though it could also be the utility) that commits them to pay a certain amount in exchange for a portion of the electricity that is generated by the solar project. Because the solar project is located off-site, it cannot deliver the energy directly to the customer but instead interconnects to the utility distribution grid and delivers power to the local utility. The utility “pays” for the delivered electricity by crediting the participating customers on their utility bills. Through this arrangement, utility customers can benefit from the economies of scale of a larger project, the solar developers can serve customers who cannot host solar projects on their property, and the utility maintains its traditional role and relationship with its customers.
In early 2022, the Biden administration announced a target of 25 gigawatts of community solar by 2025, which would be a five-fold increase of the total installed capacity in the United States and in just three years. Additionally state legislators and regulators continue to develop new community solar markets across the country. While these developments bode well for the future of community solar, grid congestion prolongs the interconnection process in some states, low and moderate income residential customers remain underserved, and time and capacity-limited incentives creates an on-going boom and bust cycles for community solar in some markets. In this chapter, we analyze the key legal and regulatory challenges facing the community solar industry and provide guidance on how project developers can navigate these challenges in a way that maximizes the potential for developing successful community solar projects.
II. Key Features of Community Solar Programs. While there are some voluntary and cooperative models, community solar programs are generally created by state policy. These rules vary widely from state to state (and even utility to utility), and tend to evolve over time as various stakeholders, regulators, and utilities work through implementation issues.
In this section, we provide a list of key program features to consider when evaluating a given state’s community solar program. These are: (1) overall program capacity caps; (2) individual project capacity caps; (3) customer pricing; (4) subscriber requirements; and (5) geographic restrictions. By understanding these program features, developers can make informed decisions about where to direct their development efforts.
A. Program Capacity Caps. A key feature of any community solar program is the amount of capacity available under the program. In a few states, there is no overall limit on the amount of community solar project capacity that can participate. In other states, programs place a cap on total program capacity, ranging widely from under 10 MW to several hundred megawatts. The larger the cap, the more opportunity exists for new project development.
B. Individual Project Capacity Caps. In addition to overall program capacity caps, most states place a cap on the capacity of individual projects. These caps most commonly range from 1 MW to 5 MW, though a few states allow larger projects. Some of the early community solar states, such as Minnesota, initially allowed multiple community solar gardens to be co-located to share in distribution infrastructure and to make the projects more financeable. Subsequent programs have generally been careful to establish clear rules as to co-location, even if to allow permissible co-location under certain circumstances.
C. Customer Pricing. Another key feature of any community solar program is the value of the bill credit the customer is entitled to receive. The amount of the bill credit has a direct bearing on the pricing that a developer can expect to receive in the agreement with its customer (sometimes called a “credit purchase agreement” or “subscription agreement”). If the subscription agreement requires payment in an amount below the value of the bill credit, the customer will realize savings. In contrast, if the agreement requires payment in excess of the bill credit, the customer will be paying a premium.
State regulators tend to set the various rates for the programs. Not unlike net-metering, bill credit rates often are related to existing retail rates. Customers in some states receive a full retail rate credit for all subscribed energy used in a given year. In Minnesota, New York, Oregon and elsewhere, policy makers and regulators are setting the bill credit at a level consistent with the calculated value of the distributed solar resource, a “value of solar” rate. In theory, these rates add up all the costs and benefits of distributed solar such that the price paid has no positive or negative impact on nonparticipating customers of the utility.
In some states, the utility pays the developer directly for any electricity above the amount for which customers have subscribed. This so-called “unsubscribed” energy is often paid at a traditional avoided cost price. This lower rate tends to create an incentive for developers to maintain customer subscription levels as high as possible.
D. Subscriber Requirements. Most programs have established certain minimums and maximums associated with customer participation. For example, in many states, projects are required to have a certain minimum number of participants so that they further the policy vision of shared solar. However, customer participation levels can vary over time as customers re-locate their homes or businesses, thereby losing eligibility for participation in projects that are subject to geographic restrictions (discussed below). In addition, many states set a maximum participation level for a given customer. Currently, many states set the maximum level of customer participation at 120 percent of the customer’s load, but this can range as high as 200 percent.
States also frequently try to encourage participation by certain classes of customers. For instance, some states seek to encourage participation by residential customers by requiring some portion of the project’s subscriptions to be from residential customers or by capping the capacity available to any single customer (which has the effect of limiting the participation of commercial and industrial customers). Additionally, some states seek to encourage participation by low and moderate income (“LMI”) customers by requiring a certain portion of the project to be allocated to LMI participants, providing financial incentives to include LMI participation, trying LMI pilot projects, or weighting a project with LMI participants more heavily to increase the chances of a successful project bid. Similarly, some states seek to further the cause of environmental justice by providing incentives for projects that are built in economically or environmentally disadvantaged areas (e.g., through setting aside special procurement mandates or giving these projects preference in the interconnection queue).
E. Geographic Restrictions. Although one of the defining characteristics of community solar is the fact that the project and the customer can be in two different places, many states require some geographic proximity between the project and the customer. In many states, the program requires the project and the customer to be located in the same utility service territory. Sometimes, states include tighter restrictions, such as requiring the project and customer to be located in the same or a contiguous county. A variation of this requirement exists in some states, which require a showing of community interest from potential customers within a certain proximity to the project (e.g., the same city or county) through submission of nonbinding expressions of interest during the procurement process, while allowing actual subscribers to be located anywhere in the applicable utility service territory. Although geographic restrictions are common, they are not universal. Some states place no geographic restrictions on the location of the project, so long as the facility is in-state.
III. Considerations for Developing a Successful Community Solar Project.
A. The Subscription Agreement. In many typical solar projects, the developer enters a power purchase agreement (“PPA”) with the utility or a PPA with the owner of the home or building as the offtaker. In a community solar program, there typically is a three-way structure whereby the owner of the solar array enters into an agreement with the utility to provide the energy (and likely the associated renewable energy certificates or “RECs”) directly to the utility, and a separate agreement whereby a customer of the utility subscribes with the owner of the solar garden to acquire a right to receive bill credits from the utility. The utility then provides its customer with credits against the customer’s monthly bill based on the energy produced by the solar array. The agreements with utilities typically are form contracts established by the tariff governing the program, so are not subject to negotiation. The subscription agreement between the owner of the solar array and the utility customer, however, is typically open to negotiation (though practically speaking, residential subscription agreements are likely to be handled as form agreements as well). In some states there is some level of regulatory oversight of the subscription agreements, particularly where residential customers are involved, including required disclosures and/or required contract provisions.
Key issues for the parties to negotiate in subscription agreements include, among other matters, the term of the agreement, termination rights and termination payments, assignability, payment obligations (matching up production by the solar array owner and application of bill credits by the utility to the subscriber’s bill), and, potentially, production guarantees.
- Term, Termination, and Termination Payments. Typically, the owner of the system wants to grant very limited termination and assignment rights to the subscriber and for the term to run as long as, or nearly as long as, the owner’s agreement with the utility. The subscription agreements serve as the revenue stream for the project and such provisions will be reviewed closely by financing parties. In the event of termination, the owner may seek a termination payment to help cover the harm to owner of the lost revenue. The difficulty is agreeing on reasonable liquidated damages when the ability of owners to find replacement subscribers (particularly with significant subscriptions) is relatively untested given the newness of these programs. There may also be consumer or subscriber protections for the parties to navigate as they relate to the termination and termination payment provisions. For residential subscriptions, termination risk is typically at least partially addressed via having ready plans for replacing lost subscribers (e.g., through maintaining subscriber waiting lists).
- Assignability. As for assignment, the owner of the solar array (and its financing parties) are most concerned about the creditworthiness of the counterparty. Typically, the owner of the solar array (and its financing parties) approves a subscriber based on its creditworthiness, and usually would not want the subscriber to be able to assign the subscription agreement to a less creditworthy subscriber. Thus, the assignment rights are typically limited and require approval of the owner of the array. With respect to commercial and industrial subscribers, this issue is fairly straightforward and fairly customary provisions are negotiated. In the case of residential customers, limitations on assignability are more challenging. Residential customers are often reviewed and approved on the basis of their FICO scores. The issue that becomes more challenging in the context of residential customers is that they may move their place of residence during the term of their subscription agreement. In some states, subscribers are allowed to maintain their subscription to a project as long as they do not move outside of the eligible geographic area (e.g., the utility service territory). However, if a customer leaves the applicable territory, they may be forced to withdraw from participation. Providing flexibility for customers while maintaining the integrity of the overall portfolio creditworthiness is the meaningful challenge. To address these challenges, some project developers may choose to contract with a separate company to handle subscriber management.
- Payments. With respect to payment obligations of the subscriber, an issue can arise with matching up production by the solar array owner with the actual application of the bill credits to the subscriber’s electric bill. While the solar array owner’s production most likely is based on a calendar month basis, the application of the bill credit to a subscriber’s electric bill is likely to be delayed and many electric customer billing cycles, while monthly, may not be on a calendar month basis. Typically, the solar array owner seeks to have the subscription agreement provide for payment based on production, with an annual true up to review production with the ultimate application of bill credits to the subscriber’s electric bills. In some cases, however, subscribers may seek payment only of bill credits as received. In certain states like New York and possibly Illinois soon, there may be an option to elect on-bill crediting to help simplify the payment mechanics. On-bill crediting would consolidate the net benefit between the bill credit and the subscription payment due for an invoice on a single customer utility bill so that the customer only has to pay the regular utility bill (as opposed to managing both the utility bill and the separate bill from the project owner). Likewise, the utility would pay the project owner directly.
B. Customer Acquisition or Subscription Management Services. Community solar comes with the administrative burden of finding and managing not one energy payment as in the case with the most basic PPA model, but payments for a multitude of subscribers. As a result, new companies have emerged to provide subscriber acquisition and management services to community solar project owners. Community solar project owners are increasingly turning to such service providers to acquire and manage residential and small commercial subscribers. Subscriber acquisition contracts typically establish milestones for subscriptions that tie to a project’s construction schedule and have a mix of financial incentives and penalties to ensure that the milestones are achieved. For on-going subscriber management services, project owners often seek minimum guaranteed subscription levels and provisions to limit the necessity for and/or manage the cost of replacing subscribers over time. In outsourcing subscriber management or acquisition, project owners should take care that service providers acting on their behalf comply with applicable community solar program rules, regulatory requirements and consumer protection requirements.
C. Interconnection. As discussed above, many community solar programs limit the size of individual projects to under 5 MW and require the project to be located within a certain distance of the customer. As a result, most community solar projects interconnect to the utility’s distribution system and certain locations that are both suitable for solar development and proximate to potential customers are highly sought after. The result in popular community solar markets has been long interconnection delays and high costs for interconnection in congested locations. Certain states have dealt with this challenge by seeking to encourage siting of projects within prioritized zones that are designed to provide the greatest locational distribution grid benefits.
Long lead times for interconnection can lead to problems when program rules impose deadlines by which a project must complete interconnection, reach commercial operation, or meet some other milestone. This is particularly true in states that have seen gigawatts of applications with significant lines or queues at optimally located substations. In many cases, projects lower in the queue do not have a clear picture of interconnection costs and timing until earlier projects in the queue have either been interconnected or have relinquished their position in the queue. The systems in place for each utility to review and study applications can also be a key bottleneck in interconnection processing. Minnesota, Maine and Massachusetts are active community solar states that have been facing significant interconnection delays in recent years. Many states across the country have been standardizing and/or updating a statewide interconnection process.
D. Site Control and Permitting. In general, community solar projects have the same type of site control requirements and challenges as similarly sized and sited projects. However, the nature of certain community solar programs has created some unique challenges. For example, as described above, many community solar programs include geographic restrictions that require the solar array to be located within a certain distance of the customer. These types of restrictions have resulted in sometimes intense competition for suitable land meeting all of the applicable program requirements and rapid development of multiple projects in close proximity in jurisdictions not accustomed to siting or hosting energy generation projects. The consequence in some cases has been permitting delays and even moratoria in some jurisdictions as local government officials grapple with how to establish appropriate rules for siting solar projects.
E. Securities Law Compliance. Because of the variability of many community solar programs and the potential for customers to participate in a variety of ways, parties need to carefully evaluate whether offering a subscription to a community solar project may constitute the offering of a “security” under applicable securities laws and/or whether exemptions from registration requirements apply. Both federal and state securities laws provide exemptions for certain offerings limited to a very small number of subscribers and for offerings of securities to “accredited investors.” Accredited investors are parties who meet certain financial criteria and are therefore presumed to have the sophistication (or access to advisors) necessary to analyze an investment opportunity. Individuals are typically accredited if they have a net worth in excess of $1 million, exclusive of the individual’s primary residence and any debt associated with that primary residence. Entities typically qualify as accredited investors if they have total assets in excess of $5 million. As a result, if shared solar subscriptions are deemed to be securities, parties could maintain securities compliance by offering subscriptions only to those individuals or entities that have accredited investor status (such subscription agreements may also contain subscriber representations and warranties to this effect). Subscription agreements often include accredited investor or securities law representations from the subscriber.
F. Consumer Protection. In addition to securities law compliance, community solar developers and marketers will need to ensure compliance with state and federal consumer protection laws. States vary widely in the scope of their consumer protection laws and the extent to which such laws have been expressly extended to the sale of renewable energy or solar energy systems. For developers engaging in sales of residential subscriptions, careful analysis of the applicable consumer protection laws is critical. To the extent the subscriptions are being marketed door to door, for example, it is likely there are state laws restricting home solicitations or that require a cooling-off period. To the extent developers are marketing the benefits of the subscription agreement, they need to be cautious to avoid any pitfalls with fraud, deceptive trade, or false statement laws. In addition, many state community solar programs include specific subscriber protection requirements. Compliance with consumer protection laws is a matter of both substantive observance of the rules and careful recordkeeping in order to demonstrate compliance to regulators and financing parties.
IV. Conclusion. The promise of community solar is an exciting one: opening up access to solar for all. Community solar expands the market for solar by giving energy customers (big and small) access to solar projects that are located off-site and benefit from economies of scale. As a result, community solar projects are installed or under development across the country, and there are ambitious federal targets for the market segment’s growth in the coming years. While the prospects for community solar look promising, the market is still young, the rules of the road in various states are continuing to be developed, and market participants are still working out their preferred approach. Critical to the success of any foray into the shared solar market is working with partners who have experience with community solar programs, and who know how to navigate the complexities of the community solar development process.