Nearly 50 percent of households and businesses are unable to host rooftop solar systems due to siting or property ownership issues,1 among other factors. Community solar has the potential to significantly expand solar capacity in the United States by making solar available to those individuals and businesses, although the growth of this market may be constrained by a lack of state legislation or access to financing.
Community solar generally starts with "net metering." In the residential solar market in many states, net metering allows a homeowner to sell excess production generated by a rooftop PV system to the utility and receive a billing credit on the homeowner's invoice. "Virtual net metering" (also called "remote net metering") means that a customer is entitled to this same type of credit when the project is not located on the customer's property. Community solar is an extension of virtual net metering, with multiple customers participating in a virtual net metering pool and receiving some of the benefits of an off-site solar project.
While community energy business models vary, the third-party owner model that is common in the residential solar market can be adapted to community solar, creating opportunities for tax equity investors to participate in community solar projects. Under this model, each customer may purchase the net metering credits associated with a percentage of a project's production for a fixed price, and a third-party owner of the project (or a tax equity partnership) may claim the tax benefits.
Some of the key issues that arise in community solar projects are:
- Financing. One key challenge for sponsors of community solar projects is aggregating enough projects to attract interest from the large financial institutions that typically provide tax equity financing for solar projects. At the same time, this market presents an opportunity for new tax equity investors to enter the market and make relatively small investments.
- State Law Issues. Community solar typically depends on state legislation that allows virtual net metering. To date, at least 14 states have implemented legislation that allows for some form of community solar. One issue that arises on the state level is the value of the net metering credit associated with a community solar project (i.e., whether the customer receives a credit equal to the full retail rate of electricity, or a lower credit that takes into account a utility's transmission costs). States may place caps on the aggregate capacity of projects that are eligible for virtual net metering.
- Customer Credit Issues. In a typical solar project, one of the primary issues for an investor or financing party is the credit of the customer or offtaker. For community solar, the credit risk can be mitigated if the project company has the ability to quickly and easily terminate and replace defaulting customers. Under community solar programs in certain states, if one customer in a virtual net metering pool defaults on its payment obligation to the project company, the project company has the ability to terminate that customer and then sell the applicable net metering credits to a different customer. This flexibility makes a project company less dependent on the credit of an individual customer, so long as there is sufficient demand for the net metering credits and a sufficient pool of customers that are eligible to participate in the applicable state program.
- Real Estate Issues. Given that community solar projects are typically ground-mount projects, diligence for a community solar project tends to be more expensive and time consuming than diligence for a rooftop PV project. For example, groundmount projects could raise issues with respect to environmental laws and local zoning/setback requirements that are less likely to apply to a rooftop PV project. On the other hand, because community solar projects do not need to be located on the customer's property, a developer has more flexibility in selecting land that is suitable for a solar project.
As sponsors look for new ways reach customers, and states seek to facilitate the growth of renewable energy, we expect business models to continue to develop in the community solar market, creating new opportunities for tax equity investors and lenders of all sizes.