Chapter 7: Community Solar Business Structuring

chapter 7 cover

Project Readiness Questions

  1. What are the different revenue models for community-driven solar businesses, and how do you evaluate which one is right for your organization? 
  2. Will you plan to sell your project or operate it for the long-term? 
  3. What are the elements of a LMI community solar business plan? 
  4. How do you build and maintain a pipeline of projects, including scheduling?
  5. How do you present your project to a potential funder?

Background

There are several primary business models that organizations can use to build a business line in LMI Community Solar. Choosing the correct roles depends on staff capacity, level of solar knowledge, financial assets, and risk tolerance. Consider the business models and ask yourself where you fit in. When evaluating which business model is right for your organization, it is important to consider several factors:

  1. Regulatory Context: must be compatible with local and state regulations
  2. Skill-Level: must reflect the solar knowledge level of your organization
  3. Staff Capacity: must reflect the staff capacity that your organization can dedicate
  4. Investment: must reflect the assets that your organization is able and willing to invest
  5. Risk Tolerance: must reflect the risk tolerance of your organization for a solar venture

If you are providing a service, it is also critical to consider customer demand for that service. The revenue model should be aligned with the needs and preferences of potential customers. For example, if customers are more interested in owning a share of the solar project, an ownership model may be more appropriate. Ultimately, the choice of revenue model will depend on the specific needs and goals of the community-driven solar business. Careful analysis of the internal concerns above, along with the market and customer demand will help you pick between the most appropriate revenue models below.

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    Most common business for companies participating in community solar development.

    • Regulatory context. Possible in all states, but if you are not working in a state that allows third-party ownership, you must have special approval to develop the project on behalf of a regulated utility, electric cooperative, or municipal utility.
    • Structure. Solar developer brings a deal together without intending to be the owner, investor, or operator. Developer leads all tasks to make a deal happen.
    • Skill-level. Requires your organization to be a solar expert.
    • Staff Capacity. Requires the highest level of capacity.
    • Investment. Ownership of development process. Major investment in staff capacity and ability to work without earning money for some time, but no ownership of real estate or solar assets required, otherwise known in the industry as “Sweat Equity.”
    • Risk Tolerance. High risk in not being paid until certain milestones are reached. Low risk in that no other assets are required.
    • Revenue Model. Earns a “developer fee” for structuring a deal once certain milestones are reached.

    EXAMPLES
    Standard Solar and Pivot Energy. For more examples, visit Solar Power World’s list of 2022 Top Solar Developers.
     

    Great work if you can get it, but requires exceptional expertise and is very uncommon.

    • Regulatory context. Possible in all states, but if you are not working in a state that allows third-party ownership, you must have special approval to develop the project on behalf of a regulated utility, electric cooperative, or municipal utility.
    • Least common business model for developing community solar because most other interested parties in projects require developers to have investments in projects, otherwise known in the industry as “skin in the game.”
    • Structure. Solar development consultant is paid hourly to bring a deal together without intending to be the owner and operator. Consultant leads all tasks to make a deal happen.
    • Skill-level. Requires your organization to be the most expert and in-demand solar developer.
    • Staff Capacity. Requires some of the most specialized community solar development knowledge and experience.
    • Investment. Ownership of development process. Major investment in staff capacity, but no sweat equity required.
    • Risk Tolerance. Zero risk because you are paid for work performed.
    • Revenue Model. Earns an hourly rate for structuring a deal.

    Solar project ownership without land ownership. Second most common business model for companies participating in community solar development.

    • Regulatory context. Possible in all states, but if you are not working in a state that allows third-party ownership, you must have special approval to develop the project on behalf of a regulated utility, electric cooperative, or municipal utility.
    • Structure. Solar developer leases land owned by someone else to install solar and operate it for a fixed period of time. Solar developers pay a fixed fee for the right to lease. Solar developer designs, finances, installs, and operates solar systems and provides benefits, or brings in another financial backer to fund development and share ownership.
    • Skill-level. Requires your organization to be expert or have the capacity to learn.
    • Staff Capacity. Requires a very high level of capacity.
    • Investment. Ownership of development process. Major investment in staff capacity, but no sweat equity required.
    • Risk Tolerance. High risk in not being paid until certain milestones are reached. High risk in operating systems and ensuring performance.
    • Revenue Model. Earns a “developer fee” for structuring a deal once certain milestones are reached and then cash flow from operations.

    EXAMPLES: Nexamp and Sunshare.

    Offers most control of community solar development but is uncommon because landowners typically do not want to take on risks of solar development.

    • Regulatory context. Possible in all states, but if you are not working in a state that allows third-party ownership, you must have special approval to develop the project on behalf of a regulated utility, electric cooperative, or municipal utility.
    • Structure. Cash purchase of community solar for use on property already owned by solar developers.
    • Skill-level. Requires your organization to be expert or have the capacity to learn.
    • Staff Capacity. Requires high level of internal capacity.
    • Investment. Model that requires largest investment. Requires sweat equity, property ownership and dedication for solar, and upfront cash to invest or ability to secure loans. Because most property owners interested and capable of installing solar power need power on site, they do not choose to do community solar, making direct ownership of community solar very uncommon. The model is more common in multifamily housing, especially affordable housing, where most energy is already used by LMI residents.

    EXAMPLE: Enterprise Community Development 2.2 Megawatt Community Solar Project.

    Provides organizations that serve LMI residents with substantial assets to support community solar without taking on major risks.

    • Regulatory context. Possible in states that allow 3rd-party ownership of solar assets. Otherwise, the business model must be done in partnership with regulated utilities, electric cooperative, or municipal utility.
    • Structure. A community organization can sign a contract to purchase upfront all or a share of the solar electricity production from a community solar project for a long-term contract. This model serves as an excellent way for community organizations to foster solar development in communities by guaranteeing demand for power but entails very little solar knowledge and risk for organizations. The organization controlling the power controls how much goes to LMI customers and determines the amount of benefits to LMI.
    • Skill-level. Requires least knowledge of solar development.
    • Staff Capacity. Requires least upfront staff capacity but requires ongoing subscription management.
    • Investment. Requires no upfront cash but requires ability to guarantee long- term purchase of solar power upfront. Does not require property or solar ownership.

      Offers least control of community solar development process, but enables organizations to minimize risk and upfront investment while being able to perform the special community engagement pieces that make LMI community solar projects unique.

      • Regulatory context. Possible in states that allow 3rd-party ownership of solar assets. Otherwise, the business model must be executed in partnership with regulated utilities, electric cooperatives, or municipal utilities.
      • Structure. The organization signs a contract with a solar developer to provide subscription management services to a 3rd-party owner, regulated utilities, electric cooperatives, or municipal utilities. This model serves as an excellent way for community organizations to begin working in the community solar industry and use the service offering as a platform for future project development. The organization can harness its community relationships to reach and sign up LMI subscribers. Otherwise, they do not have any other control of the process.
      • Skill-level. Requires least knowledge of solar development and most knowledge of LMI communities.
      • Staff Capacity. Requires less upfront staff capacity but requires ongoing staff for customer service and ongoing upkeep of the subscriber pool.
      • Investment. Since work is fee-for-service, it requires very little sweat equity without payment, but over time, if an organization wants to scale this business model, it will require investments in software to manage the process.

      Warning: Often community organizations venturing into this space underestimate the ongoing hours and cost required to perform this work and low-bid themselves.
      NON-PROFIT EXAMPLE: Groundswell.
      FOR-PROFIT EXAMPLES: Wunder Capital, a major solar financier, lists several subscriptions management companies as the best and pre-approves them for Wunder-funded projects: Arcadia, PowerMarket, Ampion, Solstice, and Common Energy.

      Similar to Fee-for-Service Development from the developer perspective in terms of deal structuring, skill-level, capacity, investment, and risk. The big difference is ultimate ownership of the solar and benefits by a cooperative of members.

      In some cases, community solar may be achieved through the development of cooperatives. This section explores some cooperative models for bringing groups of people together to finance community solar, all structured to lower the cost of electricity and provide access to solar power to interested individuals. Cooperative community solar developers believe that ownership matters. If they own their energy resources, they are theirs to fully control. The benefits of ownership include the right to have a say in the management of the project and access to profit-sharing.

      • Regulatory context. Only possible in states that allow 3rd-party ownership of solar assets. Under a dividend model, community members unite to raise funds, install, and own a cooperative solar installation. Upon completion of the installation, the cooperative members receive a recurring dividend payment for the electricity produced by their proportional share of the solar installation. While individual homes may not receive clean power, the cooperative contributes to a more renewable future. People Power Solar is a Californian organization working to expand access to solar energy through the dividend model of solar cooperatives.
      • Structure. A group of interested renters or homeowners organize together to purchase ownership of a community solar project. The coop serves as a Fee-for- service Developer, bringing the cooperative members together, finding a site, securing financing, overseeing the installation, and transitioning the project into operation. Members purchase panels and co-locate them in the shared array. They earn the federal tax credit and any other renewable energy incentives for their share of the membership. The members hire an organization to ensure system operations and maintenance. Members get paid back over a set number of years and after that they receive the panels’ production for free for the life of the system, which is 20-25 years.
      • Skill-level. Requires much more community organizing knowledge than other models.
      • Staff Capacity. Requires much more staff time on community engagement than any of the other models.
      • Investment. Requires high level of internal capacity, sweat equity, and assets to secure upfront cash to construct solar array
      • Investment. Model that requires smaller cash investment relative to others but an enormous amount of sweat equity. Shared ownership has many positives, but structuring cooperative investments is incredibly time consuming because of the number of small investments, which increases transaction costs, staff costs, and development timing.

      EXAMPLE: Community Energy Co-op, Brattleboro Food Co-op.

      Considerations when Choosing a Business Model

      • What are the outcomes your organization is seeking?
        • Energy savings for properties
        • Energy savings for LMI residents
        • Environmental benefits
        • Fee income from revenue generated from the sale of solar energy produced
        • Investment opportunities
        • Steady electricity pricing for a fixed term

      • Is your organization interested in generating new income streams and prepared to address risks?

      • Does your organization have the ability to finance assets through a combination of equity and debt?

      • Is your organization able to provide guarantees for debt?

      • Does your organization have experience and/or interest in gaining experience with any of the phases of developing and owning real assets?

      When Should We Sell?

      Not all developers are installers or operators of solar. Some companies like to conceive of projects. Other companies like to build projects that are already conceived. Other companies like to operate projects that are already built. Achieving each stage of the cycle creates more value but requires more investment and more risk. Fee-for-Service Developers can work up to site control without making a direct investment in equipment. Yet, communities are looking to work with companies that they can trust and rely on. Please keep in mind that selling a project may go against the original promise of long-term ownership and violate trust.

      Chapter 7 community solar development chain

      Community Social Development Value Chain 
      When a community solar project is developed, there are two main options for what to do with it: sell it to a third party or operate it for the long-term. Here are some considerations for determining which option is best:

      • Financial Goals. One of the main considerations when deciding whether to sell or operate a community solar project is financial goals. If the primary goal is to maximize short-term profits, selling the project may be the best option. However, if the goal is to generate long-term revenue and establish a steady income stream, operating the project for the long- term may be more appropriate.
      • Expertise and Resources. Another factor to consider is the expertise and resources needed to operate a community solar project. If the organization has the necessary expertise and resources to operate the project, it may be more cost-effective to keep it and operate it for the long-term. However, if the organization lacks the expertise or resources to operate the project, selling it to a third party may be the better option.
      • Risk Tolerance. Operating a community solar project for the long-term can come with risks such as changes in energy prices or equipment failure. If the organization has a low risk tolerance, selling the project may be the better option to avoid the risks associated with long-term ownership.
      • Social and Environmental Goals. If the community solar project was developed with social and environmental goals in mind, such as reducing greenhouse gas emissions or providing access to renewable energy for low-income communities, operating the project for the long-term may align better with those goals. Selling the project may result in a loss of control over how the project is operated and whether those social and environmental goals are maintained.
      • Market Conditions. Market conditions can also play a role in the decision to sell or operate a community solar project. If there is a high demand for community solar projects and favorable market conditions, selling the project may be more lucrative. However, if market conditions are unfavorable or there is a lack of demand for community solar, operating the project for the long-term may be the better option.

      Ultimately, the decision to sell or operate a community solar project for the long-term will depend on the specific circumstances and goals of the organization. Careful analysis of the financial, social, and environmental considerations can help determine the best option.

      Action Items

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      Evaluate which Community Solar business model is the best fit for your organization. Watch this video to consider where your organization can add the most value and what a 3-year business model would look like.

      Put together a Community Solar Business Plan using this template to summarize the project that will be moving forward in the pipeline. A Low-to-Moderate Income (LMI) community solar business plan should include the following key elements:

      1. Market Analysis: This section should provide a thorough analysis of the target market for the LMI community solar project, including demographic and economic data. It should also identify any competitors and assess the demand for community solar in the target market. For more information on performing Market Analyses for community solar, see NREL’s DIY Solar Market Analysis Webinar Series: Community Solar Scenario Tool.
      2. Product/Service Line: This section should describe the specific community solar products or services that the business will offer, including pricing and financing options.
      3. Marketing and Sales Strategy: This section should outline the marketing and sales strategies that the business will use to attract and retain customers, such as outreach to community organizations, advertising campaigns, and referral programs.
      4. Management and Organization: This section should detail the organizational structure of the LMI community solar business and provide information on the management team and their qualifications.
      5. Financial Plan: This section should include a detailed financial analysis of the LMI community solar project, including revenue projections, expenses, and cash flow projections. It should also identify any sources of funding, such as grants or loans.
      6. Risk Assessment: This section should identify any potential risks and challenges that the LMI community solar business may face, such as changes in government policies or market fluctuations, and provide strategies for managing those risks.
      7. Legal and Regulatory Requirements: This section should outline the legal and regulatory requirements for operating a community solar business in the target market and provide a plan for compliance.
      8. Implementation Plan: This section should provide a detailed plan for implementing the LMI community solar business, including timelines, milestones, and resources needed.
      9. To get you started, see LMI Community Solar Business Planning Outline.

      1. Schedule each stage of the community solar project carefully, with milestones and deadlines clearly defined.
      2. Create a project management plan that includes a timeline for each stage of the project, along with specific deliverables and tasks. Use this development tracker tool to remain organized and keep track of all your developments in the pipeline. Learn more about how to use the development tracker tool here.
      3. Regularly review the progress of each project and adjust the schedule as necessary to account for unforeseen delays or changes in project scope.
      4. Establish strong relationships with local stakeholders, including community organizations, utility companies, and government agencies, to ensure smooth and efficient project development and implementation.
      5. Maintain a disciplined and strategic approach that focuses on meeting the needs of the community and delivering tangible benefits, such as job creation, energy cost savings, and environmental sustainability.

      Prepare and provide a pitch deck presentation selling a project to an investor. Use the materials you developed over the course to prepare a comprehensive and compelling presentation that effectively communicates the value of your community solar project to potential funders. Focus on specific points that investors want to know to evaluate their interest in your project, refer back to lender videos (1 & 2) for context. Use this template to fillI. 

      Include: 

      1. System Details
      2. Site information
      3. Project Financial Summary
      4. Development Timeline
      5. Development Team Members
      6. Organizational chart
      7. System Operation and Maintenance Plans
      8. Subscriber Management Plan
      9. Community benefits: Power production value and community savings
      10. Financing

      Refer to Credit Ready Solar checklist to ensure your project is ready for financing.

      Join and learn about Community Power Accelerator to connect to developers, investors, philanthropists, and community-based organizations to work together to get more equity-focused community solar projects financed and deployed.

      Eyes on Equity

      Your choice of community solar business model will impact the benefits that are available to LMI communities and how they flow down to those residents. When selecting a business model, please also consider your equity goals and their impacts below.

      • Job creation. Consider the number of jobs that could be created through different business models and which business models may result in more jobs.
      • Non-profit partnership. If your organization is not a non-profit, consider partnering with a non-profit with experience providing benefits and community engagement to LMI communities.
      • Cooperative ownership. Cooperative models provide a democratic and participatory structure that allows members to collectively own and benefit from projects. This can create a sense of ownership and empowerment within an LMI community.
      • Utility-sponsored Community Solar. In the states where you must partner with a local utility, rural electric cooperative or municipal utility to pursue community solar, it is still possible to provide community empowerment and economic benefits to low-income households. Make an impact however you can and continue to push for change.

       

       

      Additional Resources