This spring, SEIA and GTM Research issued their US Solar Market Insight, the 2015 Year in Review, which also highlights the major trends anticipated for 2016. Though only about 100MW has been installed so far, the report predicts that 2016 will be community solar’s big breakout year. Other sources, such as NREL agree, predicting that more than 4GW of community solar could be installed by 2020. This substantial growth could have a major impact on several groups of stakeholders in the industry. Let’s check the list.
Many utilities are intrigued by community solar, and for good reason. Some utilities see this segment as an entry point to the solar industry because it will allow them to maintain their relationship with their customers. It will also enable them to diversify their generation resources and assist in meeting their RPS requirements. As a result, I see a number of utilities, instead of fighting community solar, choosing to adopt this model, though in some cases that process may be in its earliest stages.
Like many in the industry, however, utilities also have unanswered questions when it comes to community solar growth and adoption. They want to understand optimal price points that will motivate consumers to sign up, the best marketing strategies (e.g., radio, door hangers, or door-to-door marketing), which demographic groups to target, and what to budget for customer acquisition costs and turnover--questions they have previously not had to answer. They also wonder if they can rate-base these programs, how to process bill credits through their billing systems, and whether they need to increase their investment in IT to support these new arrangements.
Some utilities are moving forward, others may be intimidated by the breadth and scope of what is ahead...
At the same time that some utilities are moving forward in this area, others may be intimidated by the breadth and scope of what is ahead of them, which, in most cases, is very different from how they have traditionally operated. Accordingly, private solar developers and utilities should consider each other as potential partners instead of adversaries. Private developers naturally bring different skill sets that supplement those of the utility. For example, leveraging tax equity is one area that many private developers already understand.
Private solar developers
Many solar developers are intrigued by the opportunity presented by community solar. However they either don’t have the experience or the infrastructure for marketing to consumers or maintaining consumer relationships, which can be time and labor intensive. Some of these players are looking to partner with companies that have experience marketing to consumers, such as electricity retailers.
Rooftop solar developers
Many anticipate that rooftop solar would view community solar as a threat to their business model. However, there are many consumers who would rather own their system than participate in a community program. Further, community solar offers an option to the customer who can’t qualify for rooftop solar. If anything, community solar will add optionality to the market.
In the long run, this group only benefits by having more options. However, I have some caution that, in the race to market to consumers, there will be inconsistent and unclear messaging among community solar companies. This could lead to consumer confusion. Clarity and consistency will speed adoption and avoid confusion.
One target demographic for community solar is the low or moderate income consumer. According to a paper published last year by the GW Solar Institute, lower income households (those earning less than $40,000 per year) are less likely to own their roof and have limited access to financing. This group makes up about 40% of all US households but accounts for less than 5% of solar installations. Several policy objectives exist to increase solar adoption among this demographic. However, there is some concern that requiring such a set aside will impose yet another hurdle as community solar is getting off the ground. Creative developers find ways to use programs and often discover that program complexity serves as a barrier to entry for their competition.
Our clients are asking us about the ability to finance these projects and how such transactions are viewed by financiers. Certainly, one strategy is to emulate the business model in residential solar. That is, a community solar asset would have offtakers that are all individuals with a specified minimum FICO score. A harder example to underwrite would be a collection of offtakers that are a mix of consumers and businesses all with different credit ratings. By their nature, financiers try to avoid any sort of friction that slows deals down. Having to do a lot of underwriting for a number of different offtakers does just that. As such, financiers are working to develop models that allow them to underwrite such projects within their desired cost and time standards.
In my discussions with underwriters, some draw on the apartment underwriting analogy when considering this scenario. Whether it is due to lack of payment or customer churn, underwriters anticipate that 100% of the potential revenue from electricity (or apartments) will never be accounted for. Therefore, they broadly apply a revenue assumption of less than 100%. That being said, we are seeing a lot of interest by tax credit equity as well as lenders in the space. They understand that this industry segment will grow substantially and with judicious underwriting they too can participate in its explosive growth.
Our recent white paper on community solar explores issues further.
Written by Joel Cohn, a partner with CohnReznick, an accounting, tax and business advisory firm.