The community solar program in California is off to a slow start. The program has significant potential to expand the state's solar market, but virtually no developers have shown up to participate.
The reasons for this slow start were discussed at a solar developer’s forum held by the state’s major utilities and policymakers on April 5, 2017. In this article, we take a look at the issues raised and the need for program reform.
California community solar 101
California’s community solar program is formally known as the Enhanced Community Renewables program. The ECR program is part of the larger Green Tariff Shared Renewables program, which was signed into law in 2013; final program rules were adopted in May 2016. Together, these programs require the California investor-owned utilities (IOUs) to procure 600 megawatts of new renewable energy.
Under the ECR component of the program, customers can enter into agreements directly with third-party project developers to purchase new clean energy generated by a project located in their community. ECR projects are limited to sizes between 500 kilowatts and 20 megawatts.
As we recently reported, the IOUs held their first request for offer (RFO) last fall, which sought to award power-purchase agreements for 170 megawatts of new renewable energy from ECR projects. However, very few bids were submitted in the solicitation, and ultimately no PPAs were awarded. The developer forum was intended to discuss some of the reasons for this lackluster performance.
Reasons for low participation in the RFO
Utility representatives gave a report on the RFO results. In summary, there were few bids overall, and those bids that were submitted failed to meet the eligibility criteria.
Here is a summary of the results of the bidding provided by the utilities:
The bids that were submitted but not shortlisted failed to meet one or more of the screening requirements intended to ensure that the projects are viable. These screening criteria include the submission of a Phase 2 interconnection study and documentation demonstrating site control over project real estate. Of the 15 bids, 11 failed to meet these eligibility requirements.
The four bids that were shortlisted failed to meet the next two criteria. This is where the ECR-specific issues arise. These two criteria are: 1) a demonstration of “community interest” in the project; and 2) submission of a legal opinion from an “AmLaw 100” law firm stating that the community solar offering does constitute a “securities” offering under applicable securities laws.
Demonstration of community interest
The demonstration of community interest requires that the bidder submit documentation within 60 days of being notified of a contract award that: 1) either customers have “committed to enroll” in 30 percent of the project’s capacity, or customers have submitted “expressions of interest” sufficient to cover 51 percent of the project’s capacity; and 2) at least three separate customers have subscribed to the project.
This “community interest” requirement was a hotly discussed topic at the forum. In particular, developers are unhappy with the 60-day timeline that is required here. Developers are required to conduct their own outreach and marketing to potential customers in order to obtain the commitments or expressions of interest. However, under program rules, developers cannot begin marketing to customers until they have submitted their proposed marketing materials to the IOU for approval. This step can take a few weeks to a month or more. Once approved, it can take months for a developer to obtain enough customer commitments and expressions of interest to meet the thresholds required. As such, a developer needs to do this before the 60-day clock begins to run. In this first RFO, some developers came up a little short in meeting the thresholds before the 60 days expired.
It appears the IOUs and the California Public Utilities Commission will consider extending this deadline. However, representatives from Southern California Edison mentioned that doing so might require pushing out future RFOs. Under program rules, the IOUs are required to hold two RFOs per year until the full 600 megawatts of capacity is contracted. If you extend the time for meeting community interest thresholds, the IOUs could be in a situation where they do not know how much energy they have finally procured during one solicitation by the time the next solicitation needs to go live.
AmLaw 100 securities opinion
Additionally, all shortlisted bids failed to submit a legal opinion from an AmLaw 100 law firm. "AmLaw 100" refers to the law firm rankings published by American Lawyer magazine. The AmLaw 100 law firms are the top 100 firms in the U.S. in terms of total revenue.
Developers at the forum expressed concern over the costs associated with this process. Obtaining a legal opinion like this would require a law firm to analyze the community solar subscription agreements and other materials surrounding the community solar program in light of legal principles governing securities. This can be costly, depending on the time involved and the law firm’s rates. We wrote a legal memorandum for the National Renewable Energy Laboratory a number of years ago addressing the issues involved here.
At the forum, CPUC representatives mentioned that they are aware of the costs involved with this securities opinion and are working on a solution. The CPUC recently conducted a workshop to try to identify a more cost-effective way to address securities concerns. As a starting point, we expect that new program rules will allow smaller law firms, with lower billing rates, to provide these opinions.
Economics of community solar in California
More fundamentally, developers at the forum expressed concern over the economics of the community solar program in California. A combination of low credits to customers and high costs for developers has led to a situation where community solar customers would need to pay a price premium over their existing energy in order to subscribe to a community solar project. Estimates of the amount of the premium vary, but can reach upward of 3 cents per kilowatt-hour, which is considered outside the range many consumers will tolerate.
We do not expect a solution to this problem in the immediate future. The IOU representatives at the forum seemed to suggest that low RFO participation was more due to the “newness” of the program than to its poor economic fundamentals. Staff members from the state legislature indicated they were not concerned with this problem because the state’s program was intended for community groups, not professional solar developers. This view reflects one of the political realities that will need to be addressed in any program reform. This is significant because increasing the credits provided under the program will require amendments to the statute underlying this program by the state legislature, not merely action by the CPUC.
Changes are coming to community solar in California
The IOUs have opened up the second RFO for community solar in California. SDG&E launched its solicitation on March 22, 2017, with a deadline of May 5, 2017 for developers to submit bids. SCE launched its new solicitation on April 7, 2017. PG&E has submitted its request to the CPUC for approval of its next solicitation, which is expected soon.
Significantly, there will be approximately 340 megawatts available in this second round of RFOs, since the IOUs are required to include the 170 megawatts that went uncontracted during the last solicitation with the additional 170 megawatts now available.
Many people will be watching this solicitation to see how it performs. We expect that some PPAs will be awarded in this new solicitation, particularly from developers that only just missed the community interest requirement in the last RFO. However, absent changes in the program, we expect continued lackluster developer participation in the current RFO.
If that occurs, we expect that some changes to the community solar program will be implemented. These changes are likely to simplify and streamline some of the program requirements. Any such changes would require CPUC approval. That is not possible in time for the second RFO that is open now. At best, changes would be implemented in time for the third solicitation, which will be held in the fall of 2017.
Furthermore, we do not expect fundamental changes to be put in place in 2017. Major changes to the underlying program economics will likely not take place until 2018, if they occur at all. It remains to be seen whether and how the results of the second RFO will impact the political appetite for these reforms.
Brian Orion, of counsel at Stoel Rives, provides project development and transactional and regulatory counseling to clients in the solar, electric vehicle, energy efficiency, energy storage and climate change arenas. He also serves as strategic adviser to the Smart Energy Enterprise Development Zone (SEEDZ) Initiative, a project of Joint Venture Silicon Valley.