This blog was guest authored by Vito Greco, Elevate’s Director of Solar Programs.
Community solar is a fast-growing area in the clean energy economy and has quickly emerged as a big business. In 2020, despite the pandemic, solar photovoltaic (PV) installations reached record levels in the U.S. Community solar installations set new records with more than 700 MW installed nationally (U.S. Solar Market Insight 2020 Year in Review), continuing as the fastest growing segment of the solar industry with more than 2.5 GW installed at the end of 2020. Community solar is expected to continue to grow, tripling its current installed capacity over the next ten years (Wood Mackenzie Power & Renewables).
Community solar overcomes the obstacles of rooftop solar panel installation, such as high installation costs and shading, by offering all energy consumers a way to tap into collective solar projects in their communities.
Building a community solar project requires access to capital. The ability to access capital and where that capital comes from can significantly impact the business and subscriber model for the project, and how value is distributed.
How Capital Can Determine Your Business Model
Building a community solar project requires a significant amount of capital, which can come from a few places including tax benefits, renewable energy credits (RECs), incentives or subsidies, and financing. In some cases, the capital can come from grants, philanthropy, or even crowdfunding. As community solar continues to grow, the most common financing process is very similar to other parts of the solar industry – financing through investors.
A key to this financing is often the ability to capture tax equity, which allows investors to offset the cost of their investment with tax credits and depreciation of solar assets. This model works well because it can bring not only an additional 26% tax credit, but also 35% or more of the cost of installation as asset depreciation in the early years of the project. This represents a significant boost to the capital stack.
This investor-financing model requires the investor to own the project, which impacts the way the business model works. Most commonly, a solar developer puts together the land acquisition, the project design, and all the planning, then sells the project to an investor for a fee (usually around 20% of the project cost value). In some cases, a Limited Liability Corporation is created where the investor owns the majority and the developer or other stakeholders have an interest. This model, called a Special Purpose Entity, is common today – even with big solar developers and investors – to capture tax benefits and manage risk more easily.
For small businesses or nonprofits to own community solar they will often need to act as the developer, although they can also have a larger, long-term role as the project or subscriber manager to bring in additional revenue and some control over the subscriber model they offer their customers. For smaller businesses and nonprofits to take on full ownership, access to capital is key and tapping into tax equity often makes the difference of whether or not the project model will be viable.
The chart below shows the capital stack for a typical 1 MW community solar project.
If some components of the capital stack are not available, they need to be replaced or the business and subscriber model altered to compensate. For example, if the project developer does not have a tax appetite, they must bring in a tax equity investor. In some cases where the capital is not there, the lower value of the project will need to be shared differently. For example, if bill credits are lower in some states, the amount the subscriber pays for community solar and the savings they see will be significantly less.
How Value Can Determine Your Business Model
The value a community solar project creates is shared with many parties, including the subscribers, the solar developer, the vendors that provide services needed to build and operate the project, as well as with the project financiers who put up the money to build it. The chart below shows a typical value stack for the same 1 MW project. The lion’s share of the value goes to subscribers in the form of bill credits, but all stakeholders share the value of the project.
The level of customer savings is typically the lever used to adjust the value all stakeholders see. If less capital is available, subscribers will see less value, or the project will not get built. Developer and financier’s fees often have little leeway for movement in the solar industry, so in a stack with less capital grants or philanthropy would be needed to provide more significant savings to subscribers.
The way the subscriber model is structured can affect the available capital upfront and over time, as well as the value subscribers see. There are three common subscriber models: Panel Purchase, Panel Lease, and Power Purchase Agreement (PPA, or a per kilowatt hourly rate). Many community solar projects use a hybrid approach of both upfront payments and ongoing fees. The cashflow over time for project owners is an important consideration when determining a subscriber model. With the Panel Purchase model, for example, subscribers purchase panels upfront and receive bill credits for the life of the system (25 years or more). This provides good value for the subscriber but creates a significant hurdle with upfront costs. For the system owner, it can mean no revenue after assets depreciate and only project management expenses.
These obstacles are why a hybrid approaches like the PPA or Panel Lease models have become so common, since they ensure continued revenue over the life of the system. The charts below for the same 1MW community solar project show how the different subscriber models impact the cashflow for both project owners and subscribers. The Lease and PPA are almost identical for both.
*Models developed with Elevate pro forma tools available here:
How Consumer Access and Protection
Providing benefits to low-income households and providing additional consumer protections is an increasingly important part of the solar industry. These benefits ensure a significantly wider audience for community solar and provide needed assurances that make it more likely for subscribers to sign up. Providing these benefits does, however, create hurdles and can impact the business model and its value. For example, acquiring low-income customers requires overcoming issues of trust and typically means more time and effort building relationships and engaging community stakeholders. This takes time and increases acquisition costs. Subsidies exist for low-income adoption and can help compensate for these additional expenses.
Increasing competition in community solar means that project owners need to be more flexible with terms to offer things like shorter contract periods, the ability to easily cancel or transfer ownership, single billing, and more. These benefits can create additional administrative burdens, but may make it easier for subscribers to sign up. This means that while costs increase in the short term, customer turnover may improve and reduce costs in the long-term.
With community solar growing and capital easier to come by, understanding the development process and the pieces of the capital stack is increasingly important. Elevate’s new solar calculation tools can help you project costs and revenue to determine the right business model for your solar project