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Community Solar – A New Model for Local Ownership?

| Written by John Farrell | 8 Comments | Updated on Sep 9, 2010 The content that follows was originally published on the Institute for Local Self-Reliance website at http://www.ilsr.org/community-solar-new-model-local-ownership/
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A new report by the Institute for Local Self-Reliance (ILSR), Community Solar Power: Obstacles and Opportunities , examines nine community solar projects, the policies that made them possible, and the (substantial)barriers that remain.  Successful community solar power projects in Colorado, Maryland, and North Carolina are knocking down the price of residential-scale solar photovoltaics (PV) by 25% and giving opportunities to renters and people with shady roofs a chance to go solar.  While ILSR’s report found some successful community solar business models, there are others that lead to little or no ownership and others that defy easy duplication.

The importance of community solar and its potential future role in expanding solar power ownership is underscored by data on solar PV potential, showing that while nearly every state could get 20% of its power from rooftop solar alone, only a quarter of residential rooftops are suitable for solar PV.  Furthermore, one-third of Americans are renters, typically unable to put solar PV on their landlord’s roof. Community solar can provide a solution, allowing any person to invest in a rooftop solar PV system located on a neighborhood building and share the clean energy and financial benefits.

“Some community solar business models were nothing more than typicalutility green pricing programs, where do-gooders pay more for green power without any return on their investment,” said ILSR senior researcher and report author John Farrell .  “But we did find that some community solar projects can offer an affordable way to get your electricity from solar power while retaining a long-term ownership interest similar to having your own rooftop modules,” he added.

For example, joining the Clean Energy Collective in Colorado cuts the cost of solar ownership by 30 percent compared to a home solar installation and pays back in less than 15 years.  A University Park, Maryland, project built on a local church halved the cost of solar ownership and promises a 5 year payback on investment.  And a Mt. Pleasant neighborhood solar cooperative in Washington, DC, has negotiated residential solar prices down over 25 percent, offering individuals a 2-year payback on a home solar installation.  These paybacks and cost reductions are exciting but ILSR’s report highlights how these come about because of a suite of incentives, policy and other local factors.
The story behind some of these projects is “a tale of overcoming adversity rather than a litany of success that can be easily replicated,” remarked Farrell.Community solar projects organized by nonprofit organizations or municipal utilities have to forgo federal tax incentives that can reducethe cost of solar by over 30 percent.  Securities laws designed to protect people from bad investments put onerous restrictions on selling shares in community solar projects, even though community solar can offer a safer investment than an individual solar PV system.  And community solar leasing arrangements used to avoid these obstacles have often created a new version of a green pricing program (costing participants more, rather than saving them money or creating ownership).

Farrell concluded, “Community solar power has the potential to expand distributed solar projects, broaden ownership and participation in solar generation, and disperse the economic benefits of renewable energy generation, but not until we craft better policies to support it.”

Update: Our location grades sparked a good conversation about building-mounted v. ground-mounted PV systems.  Read more here. We also revised the report to reflect this conversation about the location of solar power generation.

Download the revised report, Community Solar Power: Obstacles and Opportunities v2

 

About John Farrell

John Farrell directs the Energy Self-Reliant States and Communities program at the Institute for Local Self-Reliance and he focuses on energy policy developments that best expand the benefits of local ownership and dispersed generation of renewable energy. More

Contact John   |   View all articles by John Farrell

8 Comments

Anonymous said...

It seems that IRR has a limitation that is not obvious (and wasn’t to utility developer I worked for years ago who used it exclusively)…

I haven’t run numbers to check it, but the limitation is reportedly that IRR assumes that interim cash flow is invested at the same return rate (i.e. the IRR that results from the calculation), with all returns then compounding and accumulating to the time horizon.

If this is true (I think it is…), then the could introduce some whooping inaccuracies that would inflate returns over actual — if your IRR comes out to 12%, but your interim cash flow is reinvested in 4% instruments or other projects with lower returns, you don’t get the calculated IRR at all.

According to the argument, NPV avoids this, because you are explicitly discounting the cash flow with a specific discount factor. There are other issues with the choice of discount factor, of course (is it risk free rate, return of another investment of comparable risk, or what?), but point taken that IRR has problems with assumptions on interim cash flows.

You could likely set up an IRR calc that could take this into account, by specifying the investment returns in interim cash flows and running more complicated calculations.

Jan 12, 2011

Leslie Moynihan said...

I’m confused by your blur of utility-managed community solar and green pricing (or pre-pay-green-pricing programs). Green pricing programs typically involve paying your conventional electricity price (for the electrons) plus a premium for RECs. No matter how the price of renewables goes in the future, this model will always cost a premium. The CS programs of Ellensburg, Ashland, etc are more like a pre-buy of electricity (albeit from a premium source, so yes, more expensive than pre-buying your conventional grid power). There is not an inherent premium until the end of time, because as you get credit for the energy, there is a return (even if long). Green pricing = no return (but good feeling for improving the type of energy on the grid). The pre-purchased energy also means the customer pays that much less for energy consumption (some form of virtual net metering). In this way, the utility CS program does mimic the model of investing in solar panels on your own house, more closely than it mimics green pricing…or maybe it falls somewhere in between.

This also impacts the description of the Washington State program. A utility-owned community solar project does not have to be a green-pricing program. Participation is voluntary and customers will get credited for the energy produced (as well as the incentive). Again, the credit for the energy produced is unlike green pricing. Also, the incentive rates for systems using WA made equipment are even higher than you state. The “compound multipliers” are counter to anything we were ever taught in math class, but they result in $.54 (individual)/$1.08(CS) incentive for systems with WA made modules and inverters.

Sep 16, 2010

jfarrell said...

Tom,

Thanks very much for your comment.  I think you are right that IRR is a better investment metric, and I think I stuck with payback on the idea of "keep it simple stupid."  I do have the data set up in such a way that an IRR calculation would be fairly simple, so perhaps I’ll put up a post soon offering up that information.

 -John

Sep 17, 2010

Tom Konrad said...

This study seems useful comparing the various types of Community Solar Projects from the perspective of the solar share owner, but it could have been more useful if it did not focus on the commonly used but not particularly useful payback metric.

If you are going to discuss these as an investment, it makes sense to use investment metrics. Probably the most useful would be Internal Rate of Return (IRR), which allows the investment to be compared on an apples-to-apples basis with a bank CD or government bond.

I won’t go into detail here, but any discussion of Capital Budgeting will go into detail as to why payback is a very poor measure and how to calculate the more useful alternatives such as IRR.

Sep 10, 2010

jfarrell said...

Leslie,

You highlight a really complicated part of the utility-hosted community solar programs. A traditional green pricing program – as you noted – means paying a per kWh premium (for the renewable energy credit). Community solar usually means paying upfront for a share of the output from a utility-owned, community solar PV system.

The description all depends on how the cash flows. Let’s say you have a typical utility customer that uses 1000 kWh per month and the retail price for electricity is 10 cents per kWh.

Their annual utility bill is $1200.

The utility offers both a green pricing program (that costs 0.1 cent per kWh) and a community solar program (with an upfront investment of $1680 for 100 kWh per month of electricity, over 20 years).

If the person joins the green pricing program, their annual utility bill goes up from $1200 to $1212. So they pay more; $240 more than they would have over 20 years.

If the person joins the community solar program, their annual utility bill falls to $1080. (900 kWh per month * 10 cents * 12 months = $1080
+ 100 kWh per month from solar share). So they save $120 per year for 20 years, or $1440. But since they paid in $1680 for their share, they are actually paying $240 more over 20 years, just like green pricing.

The community solar participant never recovers their initial cost, but even worse, they paid that $240 up front, rather than over 20 years. Thus, I describe this as “pre-paid green pricing.” The mechanism is totally different, but the result makes the name apropos.

In the report, I detail three different utility-run programs where the community solar participant does not recover their initial cost. If people are happy with participating in a pre-paid green pricing program, great. But I think that if we have a goal of massively expanding distributed solar PV, it will take more people than are willing to go solar as a solely a charitable or an environmental venture.

And ultimately, people should be aware that these community solar programs are no more “investments” than is participating in a green pricing program.

Sep 17, 2010

Chelsea Hodge said...

Though the “keep it simple stupid” approach makes your report more accessible to the masses, the IRR values would make your report more useful for those of us that could use hard financial metrics. I would love to see IRR values for each project included as an appendix to your report!

Best,
Chelsea Hodge

Oct 18, 2010

Thom Johnson said...

I can definitely understand needing to compare IRR. But is the goal of these projects to create another method of investing? As I see it, the goal is to reduce or slow down the rising cost of electricity for the individuals in that community. I, like any other investor, do not want to throw away good money, but would it be more prudent to look at these projects as a tax deduction (as long as the Feds allow it to be one). By looking at these projects in that light, we would be able to concentrate on the amount of money we are saving on our electric bills; the amount of fossil fuels used; the amount of carbon put into the air; the amount of US dependency on for supplies of fossil fuels.

Nov 11, 2010

Energy democracy | "Global Possibilities" said...

[...] also this report from the Institute for Local Self-Reliance (ILSR), which “examines nine community solar projects, [...]

Sep 13, 2012

  • Pingback: Energy democracy | "Global Possibilities"

  • Anonymous

    It seems that IRR has a limitation that is not obvious (and wasn’t to utility developer I worked for years ago who used it exclusively)…

    I haven’t run numbers to check it, but the limitation is reportedly that IRR assumes that interim cash flow is invested at the same return rate (i.e. the IRR that results from the calculation), with all returns then compounding and accumulating to the time horizon.

    If this is true (I think it is…), then the could introduce some whooping inaccuracies that would inflate returns over actual — if your IRR comes out to 12%, but your interim cash flow is reinvested in 4% instruments or other projects with lower returns, you don’t get the calculated IRR at all.

    According to the argument, NPV avoids this, because you are explicitly discounting the cash flow with a specific discount factor. There are other issues with the choice of discount factor, of course (is it risk free rate, return of another investment of comparable risk, or what?), but point taken that IRR has problems with assumptions on interim cash flows.

    You could likely set up an IRR calc that could take this into account, by specifying the investment returns in interim cash flows and running more complicated calculations.

  • jfarrell

    Tom,

    Thanks very much for your comment.  I think you are right that IRR is a better investment metric, and I think I stuck with payback on the idea of "keep it simple stupid."  I do have the data set up in such a way that an IRR calculation would be fairly simple, so perhaps I’ll put up a post soon offering up that information.

     -John

  • http://www.tomkonrad.com Tom Konrad

    This study seems useful comparing the various types of Community Solar Projects from the perspective of the solar share owner, but it could have been more useful if it did not focus on the commonly used but not particularly useful payback metric.

    If you are going to discuss these as an investment, it makes sense to use investment metrics. Probably the most useful would be Internal Rate of Return (IRR), which allows the investment to be compared on an apples-to-apples basis with a bank CD or government bond.

    I won’t go into detail here, but any discussion of Capital Budgeting will go into detail as to why payback is a very poor measure and how to calculate the more useful alternatives such as IRR.

  • http://diysolarhomepanel.com Thom Johnson

    I can definitely understand needing to compare IRR. But is the goal of these projects to create another method of investing? As I see it, the goal is to reduce or slow down the rising cost of electricity for the individuals in that community. I, like any other investor, do not want to throw away good money, but would it be more prudent to look at these projects as a tax deduction (as long as the Feds allow it to be one). By looking at these projects in that light, we would be able to concentrate on the amount of money we are saving on our electric bills; the amount of fossil fuels used; the amount of carbon put into the air; the amount of US dependency on for supplies of fossil fuels.

  • Leslie Moynihan

    I’m confused by your blur of utility-managed community solar and green pricing (or pre-pay-green-pricing programs). Green pricing programs typically involve paying your conventional electricity price (for the electrons) plus a premium for RECs. No matter how the price of renewables goes in the future, this model will always cost a premium. The CS programs of Ellensburg, Ashland, etc are more like a pre-buy of electricity (albeit from a premium source, so yes, more expensive than pre-buying your conventional grid power). There is not an inherent premium until the end of time, because as you get credit for the energy, there is a return (even if long). Green pricing = no return (but good feeling for improving the type of energy on the grid). The pre-purchased energy also means the customer pays that much less for energy consumption (some form of virtual net metering). In this way, the utility CS program does mimic the model of investing in solar panels on your own house, more closely than it mimics green pricing…or maybe it falls somewhere in between.

    This also impacts the description of the Washington State program. A utility-owned community solar project does not have to be a green-pricing program. Participation is voluntary and customers will get credited for the energy produced (as well as the incentive). Again, the credit for the energy produced is unlike green pricing. Also, the incentive rates for systems using WA made equipment are even higher than you state. The “compound multipliers” are counter to anything we were ever taught in math class, but they result in $.54 (individual)/$1.08(CS) incentive for systems with WA made modules and inverters.

  • jfarrell

    Leslie,

    You highlight a really complicated part of the utility-hosted community solar programs. A traditional green pricing program – as you noted – means paying a per kWh premium (for the renewable energy credit). Community solar usually means paying upfront for a share of the output from a utility-owned, community solar PV system.

    The description all depends on how the cash flows. Let’s say you have a typical utility customer that uses 1000 kWh per month and the retail price for electricity is 10 cents per kWh.

    Their annual utility bill is $1200.

    The utility offers both a green pricing program (that costs 0.1 cent per kWh) and a community solar program (with an upfront investment of $1680 for 100 kWh per month of electricity, over 20 years).

    If the person joins the green pricing program, their annual utility bill goes up from $1200 to $1212. So they pay more; $240 more than they would have over 20 years.

    If the person joins the community solar program, their annual utility bill falls to $1080. (900 kWh per month * 10 cents * 12 months = $1080
    + 100 kWh per month from solar share). So they save $120 per year for 20 years, or $1440. But since they paid in $1680 for their share, they are actually paying $240 more over 20 years, just like green pricing.

    The community solar participant never recovers their initial cost, but even worse, they paid that $240 up front, rather than over 20 years. Thus, I describe this as “pre-paid green pricing.” The mechanism is totally different, but the result makes the name apropos.

    In the report, I detail three different utility-run programs where the community solar participant does not recover their initial cost. If people are happy with participating in a pre-paid green pricing program, great. But I think that if we have a goal of massively expanding distributed solar PV, it will take more people than are willing to go solar as a solely a charitable or an environmental venture.

    And ultimately, people should be aware that these community solar programs are no more “investments” than is participating in a green pricing program.

  • http://www.esource.com Chelsea Hodge

    Though the “keep it simple stupid” approach makes your report more accessible to the masses, the IRR values would make your report more useful for those of us that could use hard financial metrics. I would love to see IRR values for each project included as an appendix to your report!

    Best,
    Chelsea Hodge