Community Solar Gardens

A new bill being considered in the Colorado legislature would create "Solar Gardens." Solar Gardens allow people to participate financially in owning part of a solar array even if they do not have a suitable site on their own property. My reading of the proposed legislation is that subscriptions in a Solar Garden would be financial securities, and fall under securities laws. That’s probably a good thing.

Solar for Everyone

Solar panels are elitist: They cost a lot of money, and only homeowners with good solar access can usefully install them. This means that renters and people who can’t come up with at least $5,000 to $10,000 worth of cash or credit can’t own them. That’s the problem Colorado House Bill 10-1342 (HB1342): Community Solar Gardens aims to correct.

HB1342 defines a Community Solar Garden(CSG) as "A solar electric generation facility with a nameplate rating of two megawatts or less… where the beneficial use of the electricity generated by the facility belongs to the subscribers to the community solar garden." A subscriber is a "retail customer of a qualifying retail utility who owns a subscription and who has identified one or more physical locations to which to which the subscription shall be attributed" withing the same county or municipality as the CSG. The bill allows subscribers to change the premises to which a subscription is attributed, and also to sell them to other qualifying subscribers, something which is necessary in case a subscriber were to move out of the county or the utility’s territory.

It’s a worthy idea, although local solar installers are concerned that the superior economics of large installations will eat into their market share, by easing the requirements in House Bill 10-1001 for customer-sited generation. People who own perfectly good sites for rooftop solar may instead choose to buy a CSG subscription because of the convenience and potentially lower price. I think fears that residential customers who are good candidates for rooftop solar might instead subscribe to CSGs are overblown. Although the economics may be better, buying solar in Colorado is not yet a great investment because of the cost an return involved. Instead, I believe people are investing in solar because it gives them satisfaction to think that they are using green energy, and because they want to show off their environmental bling to their neighbors. I know that some people are more interested in the bling aspects of solar panels than the economic aspects, because otherwise there would not be a market for fake panels in Japan, although I don’t know of anyone who knowingly bought fake solar panels in the US.

On the other hand, there is currently a multiplier in the bill which would allow 2 kW of CSG subscriptions to substitute for 3 kW of rooftop solar that I think needs to be fixed to avoid undermining the residential set-aside of Colorado’s renewable energy standard as envisioned in HB 1001.

Energy Sprawl

My greatest concern with the bill is not that it will cause a move towards large installations, but that it will lead to more ground-mounted installations taking up open space, contributing to Energy Sprawl. No matter what you think about the economics of photvoltaics, one advantage that they have over almost every other type of electricity generation (both fossil and renewable) is that they can be placed on otherwise unused rooftops and other structures, giving a use to otherwise wasted space. Only energy efficiency and conservation have less physical impact on the environment than rooftop solar. Some people have told me that their air conditioner ran less after they put solar on their roof.

Any law which makes solar more likely to be ground-mounted than rooftop is a step in the wrong direction. I think the bill should be amended to prohibit CSGs from being ground-mounted, effectively limiting them to large rooftops and other structures such as awnings for parking lots. This would also have the effect of doing something to limit the practical size of CSGs to available rooftops, which would probably make the solar installers a bit happier.

The Secondary Market for Community Solar Garden Subscriptions

Provisions for a secondary market for CSG subscriptions are included in the bill, since a subscriber moving out of the county in which their CSG is located will not be able to benefit from their subscription. The secondary market and and other security-like characteristics of subscriptions may make them a useful financial tool for small investors. Most importantly, a CSG subscription is (as intended) an excellent hedge against rising electricity prices.

The only real reason to hold a CSG subscription for the long term is as a hedge against rising electricity prices because, like all utility-subsidized solar installations in Colorado, the utility ends up owning the Renewable Energy Credits (RECs), which are defined as all the “environmental attributes of the electricity.” Although most people with solar panels don’t understand this, the fact that they cannot legally claim the RECs means that they are using electricity that is just as dirty as any other Coloradan, with the exception of direct purchasers of RECs or Carbon Offsets, such as Windsource or Colorado Carbon Fund subscribers.

Although the secondary market for CSG subscriptions is likely to be very illiquid, it will probably become a good direct indicator of local expectations for utility rates. CSGs will not be much use to speculators, however, because there are restrictions in the bill which limit the investment to only 120% of estimated electricity usage at the designated physical location of the subscription. Nevertheless, experienced local market professionals with an understanding of market psychology may be able to make small profits trading subscriptions, since the illiquid and unprofessional nature of the market will likely make prices extremely volatile and subject to strong behavioral biases. When electricity rates are rising, subscription prices will likely overshoot their true value as potential subscribers overestimate future increases, and prices will likely undershoot if falling natural gas prices lead to falling interest in CSG subscriptions.

Allowing investors into the subscription market would probably create a more liquid and stable market for subscriptions, but such an outcome is unlikely because of the general public distaste for speculators. It’s also impractical because of the fact that payments to subscribers are at the retail electricity rate, which is considerably higher than the owners of commercial solar farms are allowed, and hence are effectively subsidized by all utility customers, over and above the direct subsidies given to encourage solar in Colorado.

CSG subscriptions have other aspects that will be familiar to investors. The law allows for the CSG to finance the purchase of a subscription (buying on margin.) It also allows the payments for electricity production to either go to offset the subscriber’s electricity bill, or to go to the CSG sponsor. In the latter case, I could see a small subscriber buying a small subscription, and enrolling in the equivalent of a Dividend Reinvestment Plan (DRIP): rather than cash payments, the electricity generation would be used to increase the size of the CSG subscription over time, until the subscriber decided to start taking cash payments. A CSG with a large number of subscribers enrolled in DRIP-like plans might add a new solar module to the farm every month, in order to keep up with the growing subscriber base.

CSG subscriptions could become a valuable financial planning tool for retirees and others on fixed incomes. Because a CSG subscription rises in value with utility rates, an owner would be better able to budget for the utility bill, no matter how wildly electricity prices gyrate. As subscription prices fall with the falling cost of photovoltaics, I can see the purchase of a CSG subscription becoming standard financial advice for retirees.

CSG Subscriptions as Securities

Although professional investors and speculators will have at most a limited role in the trading of subscriptions, CSG subscriptions may legally be securities. The legal definition of a "Security" is an investment in an enterprise with the expectation of profit from the efforts of other people. If I’m right and the draft law is not changed, CSG subscriptions will fall under Colorado securities regulations. (Because CSG subscriptions cannot be sold outside the state, they are clearly matter for Colorado security regulators.)

For small CSGs set up by community organizations, this is unlikely to have a tremendous impact, because securities laws include a number of exemptions for sales to a small number of related individuals. (Note that this is not intended as legal advice! I am not qualified to give legal advice, and even a small CSG should need to consult with someone familiar with the relevant laws.) For large CSGs with many subscribers, securities law may actually require the delivery of a prospectus and fall under a variety of other rules about communications that apply to the CSG developer and its representatives. In general, this is probably a good thing, since it provides a strong legal framework under which regulators will be able to sanction unscrupulous CSR developers who might be tempted to cold-call unsophisticated utility customers and over-promise the benefits of a small subscription in a Solar Garden.

Conclusion

The intent of Community Solar Gardens is a good one, because it allows many more people the opportunity to hedge their electricity price risk. The people in most need of such a price hedge, those living on small fixed incomes, generally do not have both the home ownership and credit that installing a solar system requires. So I’m glad to see Colorado pioneering this concept, and it will be very interesting to see how CSGs and the market for their subscriptions evolve when the final bill passes. With luck, and a few people emailing Claire Levy, the bill’s sponsor, that final bill will have been amended to exclude ground-mounted Community Solar Gardens, and help preserve Colorado open space.

I also hope that some among the majority of my readers who are not in Colorado will suggest your own legislators consider local variations of this idea.

Tom Konrad PhD CFA

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10 Comments

  1. Richard Mignogna said

    Tom,

    Your concern with energy sprawl is, of course, quite warranted. However, it is not limited to just solar electric generation. In spite of the fact that an individual wind turbine has a small footprint, the sprawl associated with proliferating wind farms is every bit as much of a concern. And now, according to a recent report in the Denver Business Journal, the Highland Park Wind Energy developer (Clear Creek Power, LLC) has uncloaked and divulged plans for a 40-turbine wind farm along the high mountain ridges in the Arapahoe National Forest along the I-70 corridor. I am all for clean power but is there no sacred ground that will be left untouched in the name of renewable energy development? The only thing green about some of this is the dollars that are flowing into developers’ hands. There are reasonable and rational approaches to developing new energy sources and then there is pure, unvarnished economic self interest masquerading renewable energy policy.

  2. […] Community Solar Gardens « Clean Energy Wonk […]

  3. Tom said

    Rich,
    I agree with you that Energy Sprawl is a problem with all forms of generation – including fossil. I thought I made that clear in the article, which focused on solar because it’s about the Community Solar Garden bill. The difference with solar is that solar at least has the *option* of not causing sprawl… wind turbines need to be in windy places, and ridgelines are ideal. Rooftops are usually nearly worthless for wind generation.

    So, while I think that energy sprawl should be mitigated where it is practical, I think that wind development on ridgelines is worth the Sprawl. We are going to have to clutter up our landscape with renewable energy generation if we don’t want that landscape to bake and dry up from climate change. It’s a lesser of two evils.

    • Richard Mignogna said

      Tom,

      I agree with you that rooftop solar will do more to avoid energy sprawl with regard to deploying renewables than some other approaches. I didn’t mean to imply otherwise. And, parking lot shade/generators, BIPV and other novel applications, in my opinion, hold great promise. If we want to avoid sprawl, why don’t we adequately incentivize ground source heat pumps and geothermal electrical generation? The answer is because the solar guys have a better lobby, not because they have a better technology. Moreover, I do not subscribe to the doom and gloom philosophy that posits that we must deploy renewable generators anywhere and everywhere or the world will come to an end. Power generation is not necessarily the highest economic or social use of our land resources and climate change due to anthropogenic global warming is not the only, last, and biggest problem facing mankind. I prefer a reasoned and rational approach that keeps it all in perspective.

      • Tom said

        Rich,
        I agree that incentives for efficiency do a lot more to reduce energy sprawl than solar. When I have a choice between incentives for efficiency and incentives for solar, I always choose efficiency.

        The CSG bill presents a choice between different incentives for solar, so efficiency is beside the point. The CSG bill does not add any incentives for solar, it changes the way those incentives are allocated, and will probably result in lower-cost solar being built than without the bill. I’m pushing for the variation I think leads to the best result.

        Climate Change is not the only or last problem to face mankind. But other than the threat of nuclear war, I don’t know a bigger one. Further, climate change makes all war more likely, by displacing people and undermining economies and social networks.

        As for the highest economic use for land resources, we need to generate the power *somewhere* if we are to have an economy.
        If we don’t have an economy, *nothing* has economic value. The only economic choices are about where and how to do the generation.

        The choice should not be framed “should we have wind on this ridge line or no wind at all?” as you seem to be trying to do. The question has to be “Which ridge lines should we have wind on?”

  4. […] 8, 2010 at 3:02 pm · Filed under Policy Yesterday, I wrote about Community Solar Gardens (CSGs) and their uses from an investment perspective. One of the goals of CSG legislation is to allow people without access to large amounts of credit […]

  5. Joy Hughes said

    At sites like our Westminster Solar Garden, we will be able to offer not for profit subscriptions to low income people at around $1 per watt.

  6. […] may be drawbacks, too.  A proliferation of non-rooftop projects could lead to something called “energy sprawl,” a concept I first read about over at Clean Energy Wonk by Tom Konrad.  Energy sprawl is […]

  7. […] way the Colorado bill is worded, anyone may take advantage of the law who is a customer of a qualifying retail utility […]

  8. […] may be drawbacks, too.  A proliferation of non-rooftop projects could lead to something called “energy sprawl,” a concept I first read about over at Clean Energy Wonk by Tom Konrad.  Energy sprawl is […]

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