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Community-shared Solar and Cooperative Ownership

By Andria Jacob, Solar Oregon Board Member

If you’re paying attention to the solar distributed generation market in Oregon, chances are that you’ve started to hear about community solar or community-shared solar. The idea is gaining popularity among energy policy makers and solar advocates because it seems to offer a solution to a number of market barriers and inequities. Community-shared solar delivers environmental, economic and social equity benefits, making it a true triple-bottom line opportunity. [1]

A variety of business models and ownership structures to achieve community-shared solar facilities have been implemented in different US jurisdictions. In Oregon and elsewhere, community-shared solar faces its own barriers, many of them related to state and federal policies and regulations.

This article focuses on one specific ownership model for community solar: the cooperative model. The cooperative model is worth exploring for a few reasons:

1. It does not necessarily rest on changing utility net-metering laws, which is considered a difficult political hurdle;

2. Cooperatives have been particularly effective in other sectors, including agriculture, community banking, and food industries. Renewable energy cooperatives have also been successful in Germany. While it is clear that the German context is vastly different from the U.S., it is still worth noting that cooperative structures have helped diversify and expand the solar customer base.

3. The cooperative business model and community solar projects share similar underlying philosophies and values.

Cooperatives offer some promise as a model for community ownership of solar distributed generation (DG) over the long term, but their success hinges to a significant degree on addressing limitations in how solar is currently financed, a debate that still needs to take place at the federal level.

What Is Community-Shared Solar?

Community-shared solar has varying definitions but it typically refers to one commercial- or utility-scale PV system that delivers power or economic benefit to multiple, individual participants whose meters are not located onsite, nor are contiguous to the solar facility. Community solar is a powerful concept in light of the fact that only 25% of residential roof square footage is estimated to  be suitable for hosting onsite solar. [2]

Community-shared solar presents a solution for:

  • Homeowners without enough solar access or with poor roof conditions that preclude solar installation,
  • Renters, a ratepayer class that’s often hard to effectively reach with programs and services, and
  • Those who will are not in a financial position to purchase or lease an onsite system.

Interestingly, community-shared solar can also offer a solution for the challenge of net-zero energy buildings. These buildings often have difficulty meeting the renewable energy requirements onsite. Wouldn’t it be great if owning a portion of a community-shared PV system could count toward the renewable energy requirement for net-zero certification?

Community-shared solar programs and offerings are springing up in a number of US states and cities in a variety of shapes and forms. The solar facilities themselves range in size from the tens of kilowatts up to about a megawatt or slightly bigger. Many are utility-led but not all. [3]

Cooperative Ownership of Community-Shared Solar
One specific model for developing community-shared solar is the cooperative. Cooperative ownership of solar DG is a model that has gained quite a lot of traction in Germany, where in contrast to the United States, over 45% of the distributed generation is owned by individuals. In the US, cooperative business models have been used successfully in a number of sectors, including electricity distribution, fisheries, agriculture and grocery.

Does the cooperative model promise hope as a potential model for community solar? Should legislation be enacted that makes it easier to enable cooperative ownership of solar distributed generation?

First, what is a cooperative?

A cooperative is defined by the Community Power Network as “an autonomous association of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly-owned and democratically-controlled enterprise.”

Put another way, “a cooperative is a legal entity owned and democratically controlled by its members. Members often have a close association with the enterprise as producers or consumers of its products or services, or as its employees.” [4]

Coops can be formed to benefit individuals, businesses, or communities and accordingly, there are different types of cooperatives. The most common types are consumer, producer and worker cooperatives.

Consumer cooperatives are owned by the people who buy the goods or use the services of the cooperative. Employees can also generally become members. Members vote on major decisions, and elect the board of directors from among the membership. Consumer co-ops include credit unions, child care cooperatives, electric and telecommunications cooperatives, food co-ops, health care co-ops, housing cooperatives, and many more. The outdoor retailer REI is one of the most widely-known examples of a consumer cooperative.

A community solar project would probably fit under the definition of a consumer cooperative. The Community Power Network website offers a number of renewable energy consumer cooperatives as examples (http://communitypowernetwork.com/node/9220), but these mostly seem to have been formed to aggregate purchasing power rather than as a means to finance and construct a PV system. The Tangerine Power-City of Edmonds-Sustainable Edmonds cooperative remains one of the only examples of a community solar project that uses a legal cooperative structure, as opposed to another type of special purpose entity like an LLC.

The City of Portland Bureau of Planning and Sustainability (BPS) commissioned some legal research into cooperatives and community solar in 2011 through its relationship with US DOE and National Renewable Energy Lab. In general, the findings concluded that a community solar cooperative could be established in Oregon, but that some significant barriers exist.

Cooperatives and Securities
Cooperatives are usually formed by selling subscriptions or memberships. This is sometimes referred to as patronage. Whenever an entity or person is selling an investment interest of any kind in an entity, securities regulations may apply. The process of securities registration and compliance adds time, complexity and cost to the endeavor.

In many states, cooperatives have specific exemptions that relieve them from securities registration. BPS’s legal consultants were able to find three specific exemptions relating to cooperatives in the Oregon Revised Statutes (ORS), but none of them specifically applied to solar project development.

Therefore, any newly forming cooperative would need to seek an opinion from the State of Oregon. The question is two-fold: 1) does the sale of memberships to a community solar co-op constitute the sale of a security? and 2) if so, might a community solar co-op qualify for an exemption? The Oregon Department of Consumer and Business Services, Division of Finance and Corporate Securities oversees securities registration. The Oregon Department of Commerce, Corporate Division, also seems to have weighed in on specific cases.

There is some interest in exploring a legislative fix to ORS during the upcoming legislative session that would add “renewable energy” cooperatives to the list of cooperatives currently exempted from securities registration in Oregon (see article "SB 1520 to Facilitate Cooperative Ownership of Solar" for more information).

Cooperatives and The Federal Investment Tax Credit
However, even if the securities issues can be resolved, financing poses another set of hurdles. Since such a significant portion of solar financing comes from monetizing federal tax credits and depreciation, community-shared solar project developers must find a tax equity partner to be party to the deal, or forgo 30-55% of the available leverage (and really, who wants to do that?) Engaging in solar tax equity finance so far has proven to be the province of an elite cadre of Wall Street investors. These large banks are attracted to large-scale deals, which are not often of the same scale as community solar projects.

If tax equity finance is the chosen route, than the cooperative structure must be carefully designed so that the actual owner of the PV system is an entity that is eligible to receive the available federal and state tax benefits. In the Edmonds project, a cash grant was taken in lieu of the ITC (known as the 1603 grant), which greatly simplified the tax issues for the cooperative. Unfortunately the 1603 cash grant program terminated in 2012.

BPS’s legal consultants did devise a conceptual framework for a cooperative community solar project in Oregon that uses the ITC and an investment entity (this entity consists of the developer and the tax equity partner). The model relies on a capital lease arrangement between the cooperative and the project entity.

At the outset the cooperative raises sponsor capital and obtains debt financing to construct the system. Prior to the completion of the solar facility, the cooperative enters into a capital lease with the project entity. The project entity receives revenue from selling power to the site host through a PPA and also takes the federal tax benefits and makes lease/rent payments to the cooperative. In this way, the coop members receive some financial benefit from their investment.

After the tax benefits are extracted, the tax equity investor may be bought out by the developer. At the end of capital lease terms, ownership finally passes from the system lessor (the co-op) to the lessee (the project entity). This process seems somewhat counter to the reasons that a group of people would form a community solar co-op in the first place, but it does take all the financial pieces and puts them together in a legal way.

Conclusion
Cooperatives are an interesting model for community solar because of their democratic and participatory underpinnings, but they still pose a raft of complex and costly problems that have limited their growth domestically.

Over the long-term, policies at the federal level will need to be overhauled to better support and foster a strong market for solar distributed generation in the United States. Until then, the states can pave the way by removing barriers where possible, even if they don’t resolve all the problems at once.

At the state level, enabling cooperative ownership of community solar projects by exempting renewable energy cooperatives from state securities regulation and thus reducing risk for project developers and community-based owners, could reap important benefits down the road as the federal landscape evolves.

 

[1] Please note that community-shared solar differs from the popular, community-based buying programs called Solarize that have taken place in numerous Oregon communities and beyond. Solarize campaigns are community-driven, bulk buying efforts that are typically led by local volunteers and involves a set geography. In contrast to community-shared solar programs, Solarize campaigns are usually focused on onsite residential sales/leasing and installation.

[2] See http://www.nrel.gov/docs/fy09osti/44073.pdf

[3]  For a good background report on community solar, check out the National Renewable Energy Laboratory’s report, “A Guide to Community Solar: Utility, Private, and Non-Profit Project Development.” http://www.nrel.gov/docs/fy11osti/49930.pdf.

[4]  http://www.nrel.gov/docs/fy11osti/49930.pdf

 
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