Three Common Community Solar Business Models
The way subscribers receive benefits by participating in community solar vary based on local policy and regulations. Successful models have the following features in common:
- A billing mechanism to apply compensation to individual subscriber bills
- A solar rate that is as high or higher than the current electricity rate (retail value) to yield a positive return
Business models differ based on who develops and owns the solar array. There are three common business model structures based on ownership:
Utility-owned community solar is the most common structure used across the country. In this model, the local utility owns the solar array, and then sells or leases panels to subscribers or sells a set amount of solar electricity at a fixed rate for a defined term.
Subscribers participate in the community solar project by purchasing a share in the project in return for credits on their electricity bills. The value of those bill credits is typically determined by legislation or the regulation. Depending on the program design, subscribers may purchase the share entirely upfront or pay a monthly fee to the utility. Current laws in Illinois do not allow investor-owned utilities to own generation, including distributed generation like solar photovolatics. Therefore, this model is currently not applicable in Cook County.
The developer-owned model is a common one in many parts of the country. In this model, a solar developer designs, builds, owns, and operates the community solar development. The developer finds a host site and leases it over the term of the agreement. The developer also secures the necessary financing, permits, and insurance to construct the community solar project. Typically, the developer would work with a Subscriber Management Organization (SMO) to acquire subscribers and manage subscriptions. Subscribers either buy or lease panels or purchase increments of solar power (kW) or electricity (kWh). The utility provides billing credits to subscribers for their share of the electricity generated from the community solar array. The developer operates and maintains the system as needed.
The developer-owned model is becoming more prevalent and is likely to become a viable option in Illinois. Developers with experience in community solar also typically have the technology to monitor solar generation and help manage the bill crediting functions required for community solar.
Special Purpose Entity Model
In this model, a business entity, known as a special purpose entity (SPE), owns the community solar project. This entity can be a for-profit or nonprofit organization. While this model helps to ensure that most of the benefits of the community solar project are kept within the community, there are some challenges depending on the SPE organization.
For-profit organizations with a “tax appetite” can take advantage of significant tax credits and other tax incentives available for solar development. These benefits translate into significant financial returns. Conversely, nonprofit organizations, or newly created for-profit entities with little tax appetite, cannot access these tax benefits directly.
Nonetheless, the non-profit SPE model has been successfully implemented. Examples include the 22 kW community solar project in University Park, MD or the 1.3 MW installation in Fort Collins, CO. Business models vary based on ownership and incentives, for instance:
- Some SPEs require partnering with capital and tax investors that share in the benefits and incentives, but allow ownership to stay with the SPE.
- Some nonprofit SPEs work with donor communities to fund the project, foregoing most incentives.
- Other SPEs are taking advantage of recent Internal Revenue Service (IRS) laws1 that allow Renewable Energy Credits (RECs) and tax incentives to be passed through to subscribers without the complexity of tax investor partnerships.
Whatever the structure established for an SPE model, it can involve complex legal, financial, and regulatory preparation in exchange for potentially greater benefits for the community.
1 In late August 2015, the IRS issued a private letter ruling to an individual investor of a community solar array in Vermont, allowing to take advantage of the 30 percent federal tax credit according to Section 25D of the Internal Revenue Code.