Community-scale solar can power corporations, too
There's a new way for companies to invest in renewable energy. Is it right for you?
A new option for corporations interested in fueling their operations with clean energy is arising: community-scale solar.
An insight brief (PDF) from RMI’s Shine initiative, which aspires to aggressively accelerate the deployment of community-scale solar systems in the U.S., details the opportunities that community-scale solar offers. Corporations are entering the renewables market in force, and they will find much to like in the community-scale solar market segment.
Corporate investment in renewables is growing
North American corporations have signed agreements to purchase power totaling more than 5.6 gigawatts from renewable sources since 2013, according to RMI’s Business Renewables Center, unlocking about $10 billion of clean energy investments.
These investments are growing rapidly: from 0.69 gigawatts by six companies in 2013 to 3.24 gigawatts in 2015, or 132 percent year-over-year growth since 2013. In all, 69 companies have committed to procure 100 percent of their electricity from renewables, and about 43 percent of Fortune 500 companies have sustainability goals. From long-established manufacturing companies such as 3M to upcoming technology companies such as Akamai, corporate CFOs are starting to see the benefits of renewables.
Since value and cost are known through the bill credit and the PPA price, respectively, community-scale solar presents a low-risk return.
The lion’s share of corporate renewables is bought through virtual power purchase agreements (VPPAs), in which renewable electricity is contracted and then sold into wholesale power markets. Corporations also can choose to install on-site solar, which is typically net-metered to their utility bill, allowing them to sell excess production back to the grid. A third option is to buy renewable electricity from a utility through a green tariff, as Switch agreed to do with Nevada Energy in July 2015. These options differ in size, price and risk structure. Some corporations — such as Google and Apple — pursue a combination of contract structures, sizes and locations to suit their business needs and sustainability goals.
Figure 1: Corporations have different options to procure renewables
Community-scale solar: A renewable electricity option for corporations
We define community-scale solar as distribution grid-connected solar arrays totaling between 0.5-megawatt and 5-megawatt. In states with a virtual net metering policy, this classification includes community or shared solar, where corporations can credit some or all of an off-site solar PV array’s electricity production to their utility bill if the array is sited in the same utility service area as their facility.
These regulations often specify a minimum number of off-takers. For example, Colorado’s regulations require at least five off-takers for each community solar array, and in New York, large off-takers can contract for no more than 40 percent of the power produced. Community-scale solar also can include 0.5 to 5-megawatt arrays developed for a single off-taker (a city, utility, or corporation).
As an example, Bloomberg L.P.’s New York City offices are powered by a 1.5-megawatt rooftop solar array near JFK airport, about 15 miles away. Through a New York State regulation called Remote Net Metering, every kWh produced by the solar array is credited to Bloomberg’s Con Edison bill for its Manhattan offices. Under the contract with the solar developer, Bloomberg is guaranteed to never pay more than the bill credit they receive. As Bloomberg’s head of sustainable operations, Michael Barry, commented: "I never pay more than the virtual net metering credit, and as the value of the credit rises, my savings increase."
The benefits of community -scale solar
We see three reasons why community-scale solar can be a good fit for corporations: the smaller scale; the different risk structure; and its nonfinancial benefits.
First, scale. Virtual PPAs represent most corporate renewables procurement, but at 20 to 200 megawatts they may be too large for some buyers (for example, a Russell 1000 corporation with a few offices and manufacturing facilities) even though electricity can be a significant cost for these customers. Sub-5 megawatt community-scale solar arrays can provide a solution.
Corporations can buy part of the solar electricity production from a shared solar system, giving employees or members of the local community a chance to buy the remaining clean electricity.
Second, community-scale solar has a different risk structure from virtual PPAs. Under a VPPA, a corporation agrees to pay a set price for 10 to 25 years through a power purchase agreement with a solar developer, and sells the electricity at floating wholesale market prices. Many corporations sign VPPAs as a hedge against rising electricity prices. A corporation will lose or make money when wholesale prices are below or above the fixed price, respectively.
Corporate community-scale solar commissioned under virtual net metering receives compensation through bill credits, typically set for the full duration of a PPA. Because value and cost are known through the bill credit and the PPA price, respectively, community-scale solar presents a low-risk return. (There are exceptions; in California, the value of virtual net metering bill credits is not fixed, but resets each year, creating exposure to another type of price risk.)
Third, community-scale solar delivers nonfinancial benefits. Corporations can buy part of the solar electricity production from a shared solar system, giving employees or members of the local community a chance to buy the remaining clean electricity. Such a corporate approach to shared solar can help to build a company’s external brand awareness and strengthen its internal culture. Corporations with a strong credit rating also can lend that payment reliability to support low- and moderate-income households’ access to solar, especially if they offer to play the role of a variable off-taker. For example, if a household defaults on its payments, the volume of electricity sold to the corporation can be increased. This reduces revenue risk for project sponsors and capital providers.
Corporations even can provide land or capital for community solar, without investing in the actual solar asset. Corporate campuses and office buildings in mixed-use development may be perfectly located for shared solar installations.
Given some corporation’s significant tax liability, they can also benefit from the federal government’s investment tax credit to offset some of their annual taxes. (This will require the support of accountants to mitigate impacts on typical valuation metrics, such as earnings per share.) Identifying ways to reduce tax liability while procuring solar energy at a savings could provide a win-win to corporations looking to strengthen their bottom line.
Importantly, community-scale solar in some cases can be the most financially attractive renewables option. Although utility-scale solar typically costs less per watt installed than community-scale solar, its value may be disproportionately lower, because its generation is often sold into wholesale power markets.
Hervé Touati, a managing director at RMI, summed it up this way: "Depending on state-level regulation, community-scale solar can, in some situations, (a) provide solar energy at a cost closer to that of utility-scale solar than of rooftop PV; with (b) avoided electricity costs that are closer to retail tariffs than wholesale market prices."
Does community-scale solar make sense for your company?
Corporate buyers need to evaluate state policies, credit structures and renewable energy credit allocation to decide if community-scale solar supports their goals.
Some form of virtual net metering is necessary to credit electricity production from an off-site solar array to a user’s utility bill. Fourteen states and the District of Columbia have some sort of virtual net metering policy in place (see Figure 2), although the value of bill credits varies widely.
New York’s Public Service Commission has ruled that net metering credits are accrued for each kilowatt hour contracted from a community solar array, whereas California’s Public Utilities Commission has ruled that net metering credits occur at the generation rate minus a $0.02–$0.03 killowatt-hour charge for utilities.
Obviously, the net metering bill-credit value greatly influences the economics and attractiveness of community-scale solar as a potential power-generation source for corporations and the communities they inhabit.
Figure 2: Virtual net metering policies and indicative credit values
Importantly, virtual net metering regulations change frequently. Some states, such as Massachusetts, have virtual net metering policies in place, but interconnection caps limit further project development. For a corporation, this means that opportunities to participate in community solar may be limited and can change frequently.
Most corporations recognize the business case for a robust corporate sustainability program, including the ways by which they procure and use electricity. As corporations explore community solar in specific states, renewable energy credit (REC) ownership is a key question to study for each utility area. Many utilities, such as Southern California Edison, own and retire RECs on behalf of buyers. Others, such as Xcel, keep community solar RECs. In Maryland, all RECs belong to the solar array owner.
RMI’s Business Renewables Center and Shine initiative actively track the corporate and community-scale solar markets. If your company is exploring community-scale solar, they’d like to hear from you at [email protected].
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