The Law of Solar: A Guide to Business and Legal Issues

The Law of Solar: A Guide to Business and Legal Issues

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Key Contributors

Sara E. Bergan
Andrew P. Moratzka
David T. Quinby
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  • Bree Metherall Director of Business Development 503.294.9435

Community Solar

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Click here to download The Law of Solar - 5th Edition

I. Introduction. For all of the success of the rooftop solar industry, there is a fundamental limitation in its current business model: it depends on the customer having a suitable location for the installation of the solar system. Generally, this means a roof on a building the customer owns (so it has the right to install the system), that is oriented to get plenty of sunlight, and that has suitable structural support.

Unfortunately, about 50 percent of American households and businesses do not have a roof that meets these requirements. For instance, they may rent their home, lease their office space, or have a roof that is shaded by trees or buildings. In addition, even customers who do have a suitable roof sometimes want to avoid installing solar panels on-site for any number of reasons, including aesthetics, economics, and a desire to avoid maintenance. Finding a way to serve these customers would create a substantial benefit for consumers, the solar industry, and the environment.

Over the past few years, “community solar” or “shared solar” has emerged as a solution to this problem. In essence it is a form of virtual net-metering where multiple utility customers participate in a common larger solar project located somewhere off-site. Generally this 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 up-front or monthly 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 industry can access a significant new market that might not otherwise be available, and the utility maintains its traditional role and relationship with its customers.

According to U.S. Community Solar Outlook 2017 by GTM Research, nearly three gigawatts of new community solar capacity is currently under development across 29 states, and in the next few years, community solar is expected to hit 500 megawatts (“MW”) of new installed capacity annually. While these estimates bode well for the future of community solar, as with any new market, there are challenges that will need to be overcome before the full potential of community solar can be realized. 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 some of the earliest community solar programs began as voluntary innovations by local cooperatives or utilities, more recently lawmakers and utility regulators have created new programs to establish the rules under which community solar projects can be developed. 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. It is critical to pay very close attention to the particular details of a given state’s program, as early experience is showing that untested programs with complex rules tend to result in hidden costs and other uncertainties.

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 be developed in the state. In other states, the program places a cap on total program capacity. Where these caps exist, they generally range from under 10 MW in the smaller capped states to hundreds of megawatts in the larger capped states. 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 each project. These caps can range from about 1 MW to about 20 MW. 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. There, regulators later limited co location to 5 MW and more recently to 1 MW. Other states do not dictate a project capacity cap. However, projects in states like these likely face inherent limitations in the ability to interconnect to the distribution grid, which can preclude projects much over 20 MW.

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 “customer-developer 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.

Community solar programs tend to be creatures of state law and state regulators set the various rates for the programs. Not unlike net-metering, many of the rates paid to customers through bill credits 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, customers that subscribed to projects begun in the first couple years of the program were entitled to compensation at the retail rate for the applicable class of customer. Minnesota, however, more recently shifted to require a single value of solar rate be used to compensate all participating customers. Other states are following Minnesota’s lead in developing a resource value of solar for their community solar program. In theory, these tariffs 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). Developers should be aware that some states effectively penalize projects when the level of customer participation drops below the minimum level (e.g., through receipt of payments at avoided cost levels for any unsubscribed energy). 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 customers by requiring a certain portion of the project to be allocated to low- and moderate-income participants. 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 lease or 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).

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.

1. Term, Termination, and Termination Payments. Typically the owner of the system wants to grant very limited termination and assignment rights by 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 will seek some version of a make-whole termination payment. 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).

2. 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) approve 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 C&I 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 likely going to be 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 applicable 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.

3. 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’s billing cycle, while monthly, may not be on a calendar month basis (e.g., they may be billed on a month from the 15th of one month to the 15th of the following month). 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.

B. Interconnection. As discussed above, many community solar programs require the project to be located within a certain distance of the customer. This leads many community solar projects to be interconnected to the local distribution grid. However, developers sometimes have very little access to information on substation capacity and load conditions on the local distribution grid. In some of the early state programs, this led to a ballooning of interconnection applications as developers sought more information on distribution system capacity through the application process, knowing that applications would be dropped if interconnection costs were found to be too high or local substation capacity saturated. 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.

The general lack of information on distribution system interconnection can lead to problems when interconnection 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 behind certain 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.

As this suggests, developers should look for interconnection processes that are well designed and ultimately deliver relatively certain cost and timing estimates to interconnect the projects. Ultimately, the more coordination and transparency that exists around interconnection and project siting decisions, the more efficient the process is likely to be for all parties involved.

C. 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.

D. Securities Law Compliance. Because of the variability of many community solar programs and the potential for customers to participate in a variety of ways, an issue has arisen as to whether offering a subscription to a community solar project may constitute the offering of a “security” under applicable securities laws.

Both federal and state securities laws contain broad definitions of the term “security.” Those definitions typically list instruments that have historically been considered securities (stocks, bonds, debentures, etc.), but also includes “catch-all” phrases intended to cover a broader range of instruments in addition to those historically considered securities. Under applicable federal law, regardless of the label on the certificate or instrument representing the investment, a contractual arrangement can be considered a security if it is an “investment contract.” That term is included in the Securities Act of 1933, as amended, but was more clearly defined by the United States Supreme Court in the seminal case of SEC v. Howey Co., 328 U.S. 293 (1946). In that case, the Court indicated that a financial relationship could be considered an investment contract—and therefore a security—if it reflected (1) an investment of money, (2) in a common enterprise, (3) with an expectation of profit, and (4) from the efforts of others.

As a result, a community solar project owner will need to carefully examine the various contractual rights and obligations reflected in its form of subscription agreement to determine if it reflects the characteristics identified by the Supreme Court in Howey (and the analogous state cases in the state where the project is located). If it does, the project would be involved in the offer and sale of securities, which triggers various regulatory compliance obligations, including significant information disclosures. Conversely, if one or more of the key characteristics is not present, it is likely that the subscription agreement would not be considered a security. This determination can only be made after a detailed analysis of the particular terms of a subscription agreement. To cover the risk and potential liability arising out of securities law noncompliance, some states require developers to obtain a legal opinion from a law firm indicating whether or not the applicable community solar project involves the offer or sale of securities under applicable state and federal securities laws.

Even if shared or community solar subscriptions are determined to be securities, subscription sales could be in compliance with applicable securities laws if the entity is entitled to claim an exemption from registration under both federal and applicable state securities laws. The availability of any such exemption would be determined by the particular facts and circumstances and the offer and sale of securities by that issuer.

Two exemptions from registration are most commonly available to community solar developers. First, the federal securities laws contain an exemption from federal registration for an offering that is conducted entirely in one state by an issuer organized or formed in that state. However, this exemption only provides an exemption under federal law; it would be necessary for a community solar entity to identify and claim an appropriate state exemption as well. Second, 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).

E. 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 protections. 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. It could significantly expand 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 under development in dozens of states, and there are rosy projections for the market segment’s growth in the coming years. While the prospects for community solar look promising, the market is still in its infancy, 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. Download The Law of Solar - 5th Edition (PDF)

Key Contributors

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  • Bree Metherall Director of Business Development 503.294.9435
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