Photo Credit: photo courtesy of Convergence Energy, Steve Johnson
The California Assembly’s Utility & Commerce Committee just advanced a bill called the Community-Based Renewable Energy Self-Generation Program, or SB843, with a 10-to-2 vote on Monday. This 2,000-megawatt program would create a new $7 billion market for renewable energy. The bill’s passage was a critical win for the Golden State, signaling momentum and strong interest in expanding 'shared solar,' also known as 'solar hosting,' 'solar gardens' or 'offsite solar.'
How Does Shared Solar Work?
The concept of shared solar is remarkably similar to what one might experience in a community vegetable garden. In this system, which is called community-supported agriculture (CSA), a parcel of land is identified, planted with crops and harvested. Each month, the participants (owners or subscribers) receive their “share” of production and are provided with a box of tomatoes, carrots or other vegetables.
With shared solar, a parcel is identified, solar panels are installed and generation is fed directly into the grid. Each month, the project’s owners or subscribers are virtually allocated their “share” of the power generated as a bill credit directly on their electric bill. Simply stated, shared solar allows solar panels set up in one location to credit customers located someplace else.
Why Do We Need Shared Solar?
Traditional rooftop solar installations have a number of limiting prerequisites and requirements. First, only property owners can participate. Therefore, renters and lessees are left out of the solar market.
Second, there must be adequate physical space available for the installation. If the property is a condominium (especially a high-rise), it probably won’t have enough physical rooftop space to accommodate all of the panels needed to supply renewable energy to the residents.
Third, even if the physical space is available, an installation may fail for a number of technical reasons. For example, there could be too much shading or a lack of a southern orientation.
Fourth, a rooftop may only have several years of useful life remaining. Many property owners are reluctant to install solar panels if their roof has five or ten years remaining. Typically, a roof nearing the end of its useful life will need to be replaced prior to installing panels -- otherwise, it would be necessary to remove the panels, replace the roof and reinstall the solar panels.
Fifth, there are some people who would prefer not to have construction projects on their property. Installing solar panels is an involved process that can impose a number of inconveniences for the property owner. In addition, any time the roof membrane is penetrated, it increases the risk of leakage and other property damage. Many people would rather not have the hassle of the construction project on their own home or facilities.
Leave No Green Electron Behind
Shared solar solves all of these problems and more. First, anybody (including owners or renters) can participate in a shared solar project, own a subscription and obtain a bill credit on their electric bill. “Going solar” is no longer just for property owners.
Second, since the shared solar project is physically decoupled from the meter that is being credited, the project can be located in low-cost areas that have superior solar performance. For example, a shared solar project located in a sunny part of town can provide solar credits to a subscriber located in a foggy coastal zone that is not well suited for solar. Projects can be located on degraded, underutilized land such as sides of freeways or tops of landfills.
Third, since the shared solar project is physically located in ideal sunlight conditions, it would not be subject to the shading or orientation limitations of the subscriber’s home or business location.
Fourth, the condition of the roof or the number of years left in its useful life is no longer a factor in the ability for that individual or company to participate.
Fifth, a solar garden subscription provides the ultimate in convenience for the subscriber. It does not require any hardware to be installed onsite, nor does it interfere with the subscriber’s location or lifestyle. No construction is required, since the project is located offsite.
Solar Made Simple
Many Americans enjoy the use of web servers that aren’t physically located at their home or business. The internet has evolved to the point where servers have been migrated offsite and onto the cloud. Server hosting and cloud computing are excellent examples of situations where it makes more sense to remotely locate assets instead of placing them in your own home or business.
While some people may still choose to run their own server farms, most of the servers we use today are hosted in more suitable offsite locations where professionals are responsible for their proper care and maintenance.
From a consumer’s perspective, shared solar provides extraordinary ease and convenience. There is no need to draw up architectural plans, apply for permits, or endure the hassle of a construction crew on your roof.
Shared solar projects can be built on disturbed lands located on urban-infill parcels that are close to the load centers. This has particularly strong environmental benefits because of the pressure it relieves on sensitive desert habitats. In addition, shared solar projects reduce the need for expensive and inefficient transmission lines.
Financing Advantages
Increasing market adoption of solar energy is tightly correlated with consumer economics. SB843 enables new financing models to reduce transactional friction and lower overall costs.
Just as the advent of the residential solar lease has transformed the industry, now another financial model has the potential to unleash a new wave of solar adoption. By enabling individuals to own or lease solar panels that are located offsite, we can significantly increase market participation, especially by individuals or organizations with no other solar options available.
The finance community is particularly interested in the new shared solar model because it solves one of their significant challenges: addressing the default risk. Numerous residential leasing models have appeared on the market in the last few years, but qualifying for these programs has proven to be difficult. Most programs require credits scores of 720 or higher.
One reason for the high credit score requirement is that the capital markets view residential solar equipment as having a salvage value of zero. While most individuals acknowledge that used solar panels have some kind of value, the capital markets do not have a robust and transparent secondary aftermarket to rely on.
Therefore, financing a solar panel becomes a very different proposition then, say, financing a car. With a car, the finance community has a standardized “template” and process for dealing with defaults. If the car lessee stops making their monthly payments, the asset can be repossessed and sold in a well-established automobile auction network.
However, if a homeowner stops paying their monthly solar lease, the process of climbing on a roof, repossessing the panels and then selling the asset is overly complex and not yet standardized. In addition, some solar manufacturers are reported to void their warranty if a panel is moved from its original installation location. Hence, the salvage value is zero to the finance community.
No Roof? No Problem
With a shared solar project, if a subscriber fails to pay their monthly subscription fee, their generation credits can be allocated to the next subscriber. There is no roof to climb or asset to repossess. The shared solar project’s panels stay in the ground at the same location where they were installed.
Similar to the community vegetable garden, nothing needs to be “removed” from the subscriber’s location if a participant ends their subscription. The next box of tomatoes, carrots or other vegetables can simply be provided to the next participant.
As such, the issue of default risk is mitigated and instead is better represented and understood as a “vacancy risk.” If one participant ends their subscription, there is a period of “vacancy” between the end of their term and the beginning of the next subscriber’s term.
This vacancy risk can best be evaluated by analyzing the underlying value proposition to the consumer. If the shared solar project creates tangible cost savings for the consumer, the project will invariably have a waiting list with people lined up to get their chance at a subscription. Another mitigation tool for vacancy risk is to implement minimum contract lengths, similar to the mobile phone industry.
Similar bills are in various stages of consideration and implementation throughout the U.S. and excitement around this new model is building. With Monday’s passage in the Utility and Commerce Committee, SB843 is now one step closer to becoming law in California. If it passes on the floor of the Assembly and is signed into law by the governor, the bill has significant market transformational implications. This is certainly one to watch.
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Lee Barken, CPA, LEED-AP is the Energy and Cleantech Practice Leader at Haskell & White, LLP and serves on the board of directors of CleanTECH San Diego and as Vice-Chair of the WREGIS Stakeholder Advisory Committee. Lee writes and speaks on the topics of renewable energy project finance, green building, IT audit compliance and wireless LAN technology.