2017 update: Community-scale solar continues to grow around the U.S. as more and more states realize the benefits of low-cost solar and low-cost distribution-level interconnections. There are always challenges, particularly in policy competition with larger transmission-level solar projects, but in general the market for community-scale solar is growing well.
Interconnection processes are becoming more streamlined (due in part to my policy efforts for various non-profit policy clients at the California Public Utilities Commission) but the challenge of obtaining a profitable PPA has in many cases become more pronounced. A welcome addition to the revenue options for solar projects is using power on-site to mine Bitcoin or other cryptocurrency, as I write about in this 2017 article.
Solar energy is booming here in the U.S. and around the world. Solar has clearly turned a corner in recent years, transforming from exotic, expensive and do-goodery, to cost-effective, viable and just plain sensible in many circumstances. Policymakers in California and elsewhere have recognized this sea change in the cost of solar and there are now a number of programs available for landowners to sell solar power to their utility.
This article is a brief primer on how landowners can take advantage of the boom in solar to make money from their property.
The large majority of California has enough solar resources to make solar viable, though some coastal areas are dicey. Assuming that you have a good enough solar resource, here are the key steps in developing solar on your property.
1. Figure out how big a project you can fit
A good rule of thumb is 6 to 8 acres per megawatt. A megawatt of solar provides enough power for about 200 homes and will cost about $3 million today as an “all-in” cost. For ground-mounted wholesale solar projects (which sell power to the utility), you want to focus on projects at least a megawatt or more in order to justify the development costs. Some key programs in California are now focused on projects that are 3 megawatts or less, so I’ll assume for the rest of this article that the project being developed is 3 megawatts, even though you may want to develop a larger project.
2. Interconnect your project
Interconnection is the first major hurdle for project development. Interconnection means you have permission from the utility to connect and operate your solar project in parallel with the utility grid. They can’t say no to you, by law, but many areas are just too expensive to interconnect viably, so it’s highly important to figure out early on whether your project can be interconnected affordably.
California offers a newly viable Fast Track process for interconnecting projects up to 5 megawatts far faster than under other options. In practice, however, Fast Track is generally only available for projects 3 megawatts and below.
A very good tool for scoping your project’s interconnection potential at no cost is to look to your utility’s online interconnection maps. PG&E, Southern California Edison and San Diego Gas & Electric all maintain their own interconnection maps. You can find what wires are on your property and what voltage they are from these maps. You can also find out how much capacity is available to interconnect on your property.
You won’t, however, find reliable information on whether your project will pass Fast Track. For that, you should submit a $300 Pre-Application Report to the utility. This new option provides an additional level of detail about your potential project site, above what is available in the interconnection maps. You often can, with some analysis, figure out if your site is likely to qualify for Fast Track.
The only way to be sure you can qualify for Fast Track, however, is to apply for Fast Track and go through the process. And that will cost some money. The application fees are quite low -- $800 for initial review and $2,400 for supplemental review -- but the real costs come from engineers and consultants who are required to create engineering diagrams and to shepherd the applications through the process. Total costs for obtaining permission to interconnect under Fast Track are usually about $25,000 to $35,000.
Even though it’s called Fast Track, it can still easily take six months for full interconnection approval and another six months for required upgrades to be constructed.
3. Obtain a power purchase agreement
Obtaining a power purchase agreement (PPA) is now the biggest hurdle to development in California and other states. There is a ton of competition for PPAs in limited programs, so it takes some real strategy to obtain a PPA. Each program is different so there aren’t too many generalities I can share about obtaining a PPA. Nevertheless, here are a few insights about current programs.
ReMAT is a new program that is starting this October. Pursuant to SB 32, a law passed a few years ago, California utilities are now accepting contracts under the ReMAT program for solar and other renewables at up to 3 megawatts in size (1.5 megawatts for SDG&E). The program size is very limited, however, with only about 100 megawatts for PG&E and SCE each and fewer for SDG&E. This means that competition will be fierce for PPAs. This program may be expanded in size at some point, but probably not for a couple of years.
The Renewable Auction Mechanism (RAM) is an auction program for all types of renewable energy projects 20 megawatts or smaller. Rather than an adjustable price, as in ReMAT, RAM pricing depends entirely on what developers bid into the program. And winning bid prices aren’t revealed for three years, so it requires some art to determine the best price to bid in each round of RAM. This is a much bigger program than ReMAT, with about 800 megawatts of capacity still remaining through 2015. Projects smaller than 3 megawatts are generally not eligible to bid into RAM.
Permitting is generally the easiest step in the development process, particularly for smaller projects like I’m focusing on here. At 3 megawatts, a solar project is about 20 acres and can in some counties be permitted with a mitigated negative declaration under CEQA. A full EIR may be required for larger projects, but by avoiding the EIR requirement, smaller projects can capture some negative economies of scale in terms of both lower costs and faster permitting times.
Once a developer/landowner fully entitles the planned project (interconnection, permitting and PPA), it can either be flipped for a profit or built out for long-term revenue. Financing of projects in today’s markets can be extremely complex and I’ll cover this in future columns.
Return on investment varies widely. The costs of development and the price of power to be sold under the PPA are the primary causes for variation. However, based on today’s market realities it is not unreasonable to expect returns of two or three times invested capital for a flipped project, and returns are in the 10 percent to 15 percent range for developers/financiers who build out the project and collect PPA revenue.
The biggest argument in favor of pursuing renewable energy development as a business model today is that we are clearly in the elbow of the exponential growth curve, particularly for solar power. Until recently, the future of renewables as a viable business model has always seemed in doubt. There is always some uncertainty in any business venture, but the scale that renewables have reached today, and the growth rates we’ve seen in recent years, combined with long-term climate change mitigation goals here in the U.S. and globally, weigh heavily in favor of renewables being a highly viable business venture.
Figure: Ernst & Young recently restored the U.S. to its top spot in terms of renewable energy attractiveness
Ernst & Young’s annual Renewable Energy Country Attractiveness Index, published annually, recently restored the U.S. to the top spot, after crowning China in that spot for the preceding three years. California is head-and-shoulders above other states in opportunities for renewables, so while it can be a crowded market at times, California is the best state for renewables in the best country for renewables in the world. That should produce some confidence in this business model for landowners looking to increase profits from their land.
Tam Hunt is owner of Community Renewable Solutions, a consultancy and law firm specializing in community-scale renewables. Community Renewable Solutions can help developers navigate this complicated field and provide other development advice relating to interconnection, procurement and land use.