Learnings & Applications: Community Solar

Based on A Guide to Community Shared Solar: Utility, Private, and Nonprofit Project Development

Terminology

• DIFEI (pronounced “Diffy”) — This refers to the central business organization that I propose to oversee the construction and management of all projects, as well as oversee the trading platform and listing of new projects; “Distributed Investment Framework for Energy Infrastructure”

Project Structure

It would make most sense to utilize the Special Purpose Entity (SPE) model for each of the new solar assets that DIFEI would develop and list on the platform given the ability to distribute the Investment Tax Credit (ITC), have multiple non-utility owners, and partition Renewable Energy Certificates (RECs).

The utility-sponsored model prevents participant ownership in the system, and investors outside of the utility’s jurisdiction would be unable to benefit (which is the point of the framework — unlocking new investment). Utilities would still be allowed to invest in the new projects similar to a hedge fund buying larger shares in companies, but are probably more pertinent in the PPA phase.

Revenue Structure

Since the goal of DIFEI is to spur renewable investment from anyone, anywhere, at any amount, it makes more sense to sell the produced electricity through a PPA than virtual net metering. Although net metering can avoid income taxes, it must be integrated with each individual investor’s utility, significantly increasing overhead administrative costs. Additionally, investors may not even hold shares in a project for the duration between energy bills, effectively rendering virtual net metering useless. The sale of energy from the PPA would be partitioned on a pro rata basis to investors as dividends during each billing phase from the utility or organization that is purchasing the power.

With regards to RECs, I see two paths forward:

• An upfront per-installed-watt basis sale to reduce the overall cost of building the solar installation, as well as reduce the administrative cost of trying to continuously sell RECs on a per MWh basis
• Distribute the RECs on a per-MWh, pro rata basis to investors, allowing them to claim RECs with direct proof of ownership via the Blockchain

A large benefit of the Blockchain structure is instant public verification of RECs, so creating a public marketplace to instantly buy and own RECs on a per MWh basis could be enticing to companies and utilities seeking to meet renewable energy goals. This sale of RECs would create additional dividend income for investors throughout the ownership of a project. Since ownership frequently changes, I think it would make more sense to distribute RECs on a per-MWh basis so that no single, early investor claims the entire renewable benefit. While an upfront per-installed-watt basis sale could reduce the investment price, I hypothesize that the benefit of transferring ownership of the REC as project ownership changes outweighs this reduction.

On the platform, I see two investor scenarios around RECs: one group wants the RECs to claim themselves (eg., Apple Inc. wanting to be 100% powered by renewables), and one group not needing RECs and wanting revenue from their sale. Thus, it is important that the platform meet the needs of both investors and offer to separate REC ownership from energy production ownership.

Tax Benefits

My initial findings are that (depending on future research towards active vs passive income qualifications) it would make more sense to allocate the ITC to DIFEI and reduce the initial investment cost of a new system than to distribute the ITC on a pro rata basis to investors. The guide states that the ITC can only be applied to passive income for passive investors in community solar, but the guide also states that income from personal investing in stocks is considered active income. Since DIFEI blends the two, more research is needed to determine where this income lies. Dividends from energy produced could be passive income, while income from speculation on the share price of a project could be active income. Assuming that the majority is considered passive income, and assuming that the average investor has a low tax appetite for passive income credits, the ITC could be applied to the SPE behind each individual project, thereby reducing the initial cost and lowering the barrier to investment.

While the current commercial ITC is 30%, it will step down to 26% in 2020, 22% in 2021, and 10% thereafter. Thus, over the lifetime of DIFEI, the net effect of the ITC will become increasingly insignificant, especially if it is entirely eliminated at a future date. Nevertheless, there is still a discussion to be had around passing the ITC to individual investors or by having the SPE take the ITC to reduce costs. Large companies could seek to invest in exchange for tax credits, so there are upsides to both models.

Solar Services Agreement (SSA)

It will be important to analyze the benefits of owning the land that the solar installation is built on versus the benefits of creating an SSA with a site host to avoid land purchase costs. There is a continuous aim to mitigate risk in DIFEI investments, so while an SSA is a legally binding contract, prices could change for land use at the termination of the contract. By avoiding an SSA altogether and purchasing the land that the solar installation will be built on, DIFEI could reduce future risk for the assets.

Purchasing large tracts of land obviously increases the cost structure and would be factored into the cost per installed watt of a listing on the DIFEI exchange. Further research on a cost-analysis between land purchasing and SSAs is needed to determine the best course of action. An additional option would be having a separate holding entity associated with DIFEI purchase the land and sign predictable, standardized SSAs with new DIFEI assets.

Securities Compliance

The asset listings on DIFEI undoubtedly fall under the class of securities offerings since 1) a person invests money (through the DIFEI platform) 2) in a common enterprise (the individual SPE created for a new installation) 3) with an expectation of profits or other valuable benefits (energy sale dividends, RECs, ITCs) 4) primarily from efforts from someone other than the person providing the money (DIFEI performs operations and maintenance on solar farms, negotiates PPAs and SSAs, and oversees the trading platform). Given that project sizes will have large variance, and given the goal of allowing anyone (unaccredited investors and accredited investors) to invest any amount in the project, attempting to circumvent securities regulations through a private placement exemption would be futile. This exemption only allows 35 unaccredited investors to participate when there could be 100s or 1000s of share offerings for a project.

While securities compliance adds significant overhead administrative costs, DIFEI will oversee many projects, so the securities compliance will be repeatable, allowing for economies for scale as multiple projects are developed under the same regulatory environments. Thus, while a one-time securities compliance wouldn’t make sense, the cost is justifiable since countless future projects will be able to use the already-developed legal framework. Further research is needed on creating the securities listing while utilizing blockchain technology. The goal is to create a publicly available security (similar to stock in a public company) that can be bought by any unaccredited investor or organization.