Progress, But Community Solar Still Isn’t Shared
As roof-mounted residential photovoltaic (PV) systems proliferate in American suburbs and highly effective community outreach campaigns raise awareness about the technology, the concept of hosting solar is shifting from a matter of taste to a sound financial decision. Even so, many homeowners soon discover that their roof is not, and may never be, suitable for hosting solar. In fact, an April 2015 report from the National Renewable Energy Laboratory (NREL) estimates that at least 49 percent of houses are unsuitable to host a 1.5 kW PV system because of roof size, orientation, shading, or a combination of these factors. Community shared solar (CSS) provides an attractive alternative in these situations. Through direct ownership, subscription, or micro-lending, CSS can offer comparable economic benefits to that untapped market, effectively doubling the pool of residential solar customers. According to NREL, the CSS market could draw over $10 billion in cumulative investment by 2020.
So, what’s not to like?
Much of the rhetoric surrounding CSS focuses on the idea of equality. A main criticism of the solar industry, specifically incentive programs, stems from the perception that the public is subsidizing the technology only for high electricity users who can afford the initial costs. CSS seeks to change that—but can it?
The answer is, for the most part, no. The most successful CSS business model to date is the power purchase agreement (PPA), or subscription model. In this model, a customer signs up for a portion of the CSS system’s capacity based on their consumption pattern. They are then allocated net metering credits according to the share of the system to which they subscribe. Customers purchase power from the solar project at a reduced rate compared to their normal cost of electricity and the project applies retail (or nearly retail) rate credits to the customer’s account. These net metering credits offset the customer’s monthly electricity consumption and the customer saves money. The simplicity of the model is its best attribute, but favorable incentives such as solar renewable energy certificates (SRECs) and virtual net metering, only available in the country’s more solar-friendly states, substantially impact the savings customers can expect.
However elegant the model, it is not without its detractors. Long heralded as the inclusive solar model, CSS has often proven restrictive to those consumers it should logically be serving. The groups with the least access to solar tend to be low- to moderate-income (LMI) customers and renters. In most cases, these groups consume less, but spend more in proportion to their income on, electricity. Allowing them access to CSS would drive down their electricity costs and help the solar industry shed the perception of incentive inequality. Unfortunately, a few factors continue to exclude these groups from the benefits of CSS.
Credit Minimums and Underwriter Risk
In the majority of CSS PPAs, there is a minimum credit score. Although not always the case, an applicant of a CSS project could be required to have a 700+ FICO credit score. Lenders have proven unwilling to underwrite projects that fail to meet this provision. This threshold excludes a sizable portion of the population, making it even less likely for some owners and renters to access solar benefits. According to FICO, nearly 50 percent of Americans have FICO scores of 700 or below, as of October 2012.
Limited Incentives
It is conceivable that in 10 to 20 years CSS financiers will be much more open to expanding access and eliminating FICO minimum requirement, but in the solar industry timing is everything. Net metering, the critical incentive for CSS, is subject to caps in most U.S. markets. For example, Cadmus tracks the net metering caps in Massachusetts, which will soon face another legislative battle over incentive availability. As solar development accelerates, net metering availability is shrinking and incentives are becoming less attractive. This means that the projects that are financed and constructed most quickly will swallow up the remaining incentives, leaving a less certain future for more innovative projects. This trend reinforces the perception that the solar industry subsidizes solar for privileged groups. In CSS, it takes a lot longer to finance and construct a project that serves LMI homeowners and renters than it does to serve a group of 700+ FICO score participants. Add in the scarcity of land suitable for development in built-up areas and the lack of access to underserved groups may last a while.
The short-term limitations of CSS are discouraging, especially since its most common application diminishes its most promising attribute. Nevertheless, it remains one of the most promising trends in the renewable energy space because many in the industry are taking the long view and working to offer incentives for projects that provide access to LMI customers. Most notably, the U.S. Department of Energy, through its Sunshot Initiative, is spurring shared solar development nationwide. Though a few developers have actually eliminated the FICO minimum, the availability of those projects is still limited. The large and growing interest in solar among institutional investors has also led to more innovative financing mechanisms and more willingness among financiers to accept risk. As more solar projects in general, and CSS specifically, come online through these financing methods we can expect some of these initial growing pains to subside.
The industry has already accepted CSS, and elected officials are quickly embracing the political value of the model. In current economic times, expanding solar access to under served communities could be an important part of our collective recovery. It is time for stakeholders to work together and allow CSS to live up to its promise.
