Community Solar: A Tale of Two Structures
Community Solar:  A Tale of Two Structures

            Community or “shared solar” is gaining attention by both utilities and environmental advocates for its potential to extend the benefits of solar energy development to all households, not just those homeowners with suitable rooftops. 

            In those states that permit remote net metering in general and community solar in particular, solar developers can build “solar farms”:  Large deployments of solar panels that sell their electric output to the local utility which then credits consumers with the amount of solar production.

            Like many new technologies – think VHS and Betamax – different approaches have evolved for community solar developments.  In this article we discuss the two different ways in which consumers can participate in a community solar project.  In a subsequent article we discuss the two types of credits – monetary and volumetric -- that consumers can receive from utilities.
 

1.  Panel Ownership with Upfront Cost.

To date almost 70% of Community Solar Projects (or CSPs) have required participants to purchase the solar panels used to produce the electricity for which the utility gives them a credit.  

In some cases consumers must buy their solar panels outright.  In other cases, CSP developers have provided financing or have made it available to help participants purchase their panels or ownership interests.    In those cases participants pay the debt service on the financing separately.  Debt service is not tied to solar production which consumers must still pay for (although a developer could bundle the two costs and bill them together in a single bill).

Depending on the CSP developer, buyers of individual panels may or may not receive tax incentives and other benefits (such as the value of RECs).

Whether or not they own the panels the CSP developer will need to advise customers that they are not purchasing “solar energy” or “clean energy” but rather “solar credits” that are produced at a remote CSP.  The Federal Trade Commission, as well as the Attorney General for the State of Vermont, have opined that it is misleading to market community solar as “solar power” because the solar energy is going to the utility, not to the consumer.  Only the “benefits of solar” or “solar credits” can be sold by CPSs.

The panel ownership model has been adopted by many non-profit sponsors of CSP.  Its principal exponent is Clean Energy Collective (“CEC”) which initiated its first projects beginning in 2011.  Today CEC is arguably the largest community solar developer.

The purchase of panels poses a securities law issue for CSP Developers that choose this model.  Courts have interpreted the U.S. Securities laws to mean that an investment in property with a view toward profit from the efforts of others may be considered a security.[1]   Some lawyers have considered that the purchase of a solar panel as part of a CSP might be considered a security. In 2011 Vinson & Elkins, a Washington, D.C. law firm, asked the SEC for a “no action” letter, arguing that solar panels in a CSP were analogous to certain condominium purchases which the agency had previously held would not be treated as securities.  The SEC granted the request.[2]    


2.  Subscription with Minimal or No Upfront Cost.

An alternate model is a PPA subscription model.  Although now represented by a minority of CSPs the model is growing in popularity and is expected to account for at least half of new installations in coming years.   

Participants do not purchase panels or an ownership interest in a CSP.  Instead they enter into contracts to purchase “solar credits” generated by the CSP and allocated to their bills by the local utility which buys the CSP production. Payments are billed monthly by the CSP developer based on actual kW production. 

The subscription model does not raise the securities law issues that arose in the case of purchases of panels.  However, because subscription participants do not own the panels they are unable to take advantage of tax and other incentives (such as RECs) available to other owners of solar PV projects.  CSP developers of subscription model projects keep those incentives for themselves. 

As with panel purchasers, subscribers to community solar must be advised that they are not buying “solar energy” or “clean energy” but rather “solar credits” that are produced at a remote CSP.  

C. Obstacles

A number of obstacles pose challenges to CSP expansion. 

·       VNM limitations.  The mechanics of utility programs for virtual net metering to customers may pose obstacles to new developments.

·       Marketing. CSP benefits are a new product and pose unforeseen challenges.  Unpredictable attrition will make continuous marketing essential to the long term viability of a project that depends on many residential or small business consumers with short term contracts. 

·       Contracts.  Contracts must be designed that will attract subscribers and meet customer expectations.

·       Zoning laws.  Municipal zoning, permitting and inspection regulations can hold up new project development.

·       Tax equity.  CSP Developers must have access to sufficient tax equity partners to take advantage of ITC and MACRs benefits. 

·       Property taxes.  Most CSPs will require an exemption from property taxes or an agreement such as a PILOT (payment in lieu of taxes) to properly budget future costs.

·       Production taxes.  Even if the CSP is exempt from tax the solar electricity generated may not be.

·       SREC risk.  If the value of environmental attributes (such as RECs) are material to the economics of a CSP Developer, the Developer’s ability to hedge the forward value of those RECs through a long term contract with the utility or to a third party purchaser will be critical.

·       Securities laws.  Where customers own panels the arrangement may be treated as a regulated security under federal and state law.

·       Infrastructure.  CSPs pose substantial fulfillment challenges including site preparation, interconnection, etc.

 
[1] See SEC vs. Howey, a 1946 Supreme Court case.

[2] Letter dated August 29, 2011 from Vinson & Elkins to SEC on behalf of CommunitySun LLC.  https://www.sec.gov/divisions/corpfin/cf-noaction/2011/communitysun082911-2a1-incoming.pdf .