Community solar emerged as one of the brightest spots in the U.S. solar market last year. But its prospects for the future look dim without some careful thought being put into program design.
A report released earlier this month by the Smart Electric Power Alliance (SEPA) tracked approximately 387 megawatts of community solar last year, for a total installed capacity of 734 megawatts at the end of 2017. That corresponds to 112 percent year-over-year growth. For comparison, the broader U.S. solar market has grown at an annual average of 68 percent over the last decade.
Based on recent growth rates, it’s likely the U.S. community solar market has now surpassed the 1-gigawatt milestone.
SEPA expects to see continued growth in the short term. Further out, the future of community solar is unclear. “Whether this growth continues in the long term after state renewable portfolio standards are met and the standard utility supply has a greater share of renewable generation, or after the most environmentally conscientious customers have already subscribed, is undetermined,” the report states.
Community solar programs are proliferating across the country. SEPA’s 2015 community solar report found that 68 utilities in 23 states had programs in their service territories. According to the latest report, 228 utilities in 36 states have active programs, and many others have announced plans to develop them — Alaska’s Chugach Electric Association even approved a community solar project in October 2017.
Shared solar programs can be developed without a specific policy in place, although most active states have adopted some kind of policy guidance. Currently, 17 states plus the District of Columbia have enacted community solar policies. According to the Coalition for Community Solar Access (CCSA), legislation seeking to open or expand community solar programs has been introduced in at least nine states across the country over the past year.
A lab of program design
“There are really two ways to create a community solar program,” said Jeff Cramer, CCSA’s executive director. “One, a utility can do it on its own and get approval from the utility commission, or a municipal or co-op can do it as it wants. Two, it has to be driven by policy.”
“Right now I think we’re in a lab of program design,” he said. “We’re learning lessons, figuring out what works and what doesn’t work.”
Minnesota’s Xcel Energy currently has one of the strongest community solar programs in the country. According to the U.S. Solar Market Insight 2017 Year in Review, Minnesota deployed 241 megawatts of shared solar last year, after a couple of false starts. Massachusetts also had a strong showing with 93 megawatts installed in 2017.
New York is coming on the scene too. Deployments to date have been limited, but the state has 728 megawatts of community solar projects currently in the pipeline, according to New York State Energy Research and Development Authority (NYSERDA). That’s a more reasonable number than the 1.8 gigawatts New York had in the pipeline in 2016, the vast majority of which ultimately turned out to be infeasible and was never built. The Empire State’s experience underscores the significance of policy design in this market segment.
New Jersey recently passed legislation (S 877) to create a permanent community solar program and now has an opportunity to adopt lessons learned from other states. One of the big lessons is that there needs to be a two-part approach, according to Cramer. Part one is about building projects, expanding access to solar and encouraging innovation. Part two is about determining how the community solar program fits with overall distribution and resource planning design. These two pieces of the equation need to be developed concurrently.
Some states have focused on the first part without thinking about where the program will end up, Cramer said. “I think we’re at a turning point in the market where we know how to build out good community solar programs in the short term, and have to think about how it works in the long term.”
Third-party and utility administrators
Community solar programs are designed to allow multiple customers to buy electricity from a single solar project. Community solar policies are fundamentally intended to enable bill crediting for participating customers, but policy design can still vary dramatically from state to state, particularly concerning scale, bill credit rate, and whether third-party ownership is allowed.
According to the SEPA report, third-party providers are currently administering a majority of the total installed community solar capacity. These organizations are responsible for 495 megawatts, or approximately 67 percent of the total installed capacity. Utilities administer the remaining 239 megawatts of installed capacity. These roles have flipped from 2015, when approximately 60 percent of capacity was administered by a utility.
Among utilities, cooperatives have been the trailblazers. At present, 160 cooperative utilities have a program in their territory. This far exceeds the 31 programs administered by investor-owned utilities and the 37 programs administered by public power utilities.
Most of these programs are small, however. Only 30 percent of them have a total generating capacity greater than 1 megawatt. But the average program size is steadily growing. In 2015, only 20 percent of programs had an operating capacity of 1 megawatt or greater, according to SEPA. The median program size has also increased from 120 kilowatts in 2015 to 200 kilowatts today.
State policy plays a big role in metrics. As noted above, 17 states plus Washington, D.C. have launched community solar policies to date. Most of those states have seen large third-party developments as a result. SEPA notes there are several that have drawn limited to no third-party interest, either because the policy is new (Illinois and North Carolina) or the policy specifics are a deterrent (California and New Hampshire).
Third-party-administered programs are found in a total of 14 states, including five states that do not have enabling policy. But a vast majority of third-party-administered program capacity is located in just three states: Colorado, Minnesota and Massachusetts. “The reasoning for this concentration is fairly straightforward: There are significant financial incentives available to subscribers in these states,” the report notes.
Utility-administered programs are found in 33 states, including states with and without enabling policy. These programs are significantly smaller by comparison.
Some other differences between the two models were underscored in the results of a survey conducted by SEPA and CCSA. For one thing, third-party administrators said they’ve subscribed a majority of capacity (68 percent) to commercial customers, while utility administrators said they’ve subscribed a majority of capacity (52 percent) to residential customers.
Another distinction is around program subscription rates, or how much of a solar project is spoken for. The average program, across both administrator types, had 83 percent of its capacity subscribed. Break that down and the survey data shows 97 percent of third-party community solar projects are subscribed, while 77 percent of utility projects are subscribed, said Cramer.
Customer interest is high across the board. So the difference appears to come down to the financial benefits for subscribers. “It is not surprising that programs promising immediate bill savings almost universally garner a full subscription,” the report states. “Programs that provide either a hedge against potential rate hikes or payback of the upfront payment after a set period experienced lower subscription rates.”
The report doesn’t explicitly spell out this distinction, but third-party programs tend to fall into the former category and utility programs tend to fall into the latter.
In both administrator situations, difficulties lie ahead.
For utilities, the survey found the biggest challenge is signing up the initial customers. When asked to list their biggest challenge, more than half of utilities suggested it was related to customer acquisition. Meanwhile, third-party administrators overwhelmingly indicated that working to meet complex and diverse policy requirements is their top challenge. They also cited difficulties adjusting to uncertainty in program regulations and caps, acquiring financing, educating customers, marketing, and ongoing administration of the programs once live.
Looking to the future, these challenges stand to hamper the ongoing community solar expansion. Existing programs are already running into roadblocks.
In Minnesota, community solar subscriptions have become much less attractive under the state’s Value-of-Solar Tariff scheme and even less so under the new Value-of-Solar Vintage Bill Credit Rates. Third-party providers in the state are also running out of commercial customers to sign up, and will have to start recruiting more residential subscribers.
Because of these changes, GTM Research forecasts development falling off significantly in the country’s leading community solar state starting in 2019. Other states, like Maryland, have been experienced setbacks related to program design, interconnection and legal issues. Several programs also have sunset dates or caps on how much solar can be deployed.
All community solar stakeholders in the space will have to find new market approaches and help craft new policies to ensure strong growth for the long run.