3 insights for community solar developers to maximize ROI
As states seek to redefine their energy future to mitigate climate change, they’re increasingly turning to community solar projects to get the job done. With gigawatts (GW) of capacity already installed in almost two dozen states, programs at the state and federal levels continue to strengthen incentives for further development.
Community solar projects aren’t the same as their utility-scale cousins. Instead of connecting directly to the transmission-level grid like utility-scale projects, community solar projects are more likely to interconnect to the distribution network, the part of the power grid that connects to homes and businesses.
That distinction provides direct benefits to communities by building storm and climate resilience, community wealth, and workforce opportunities. State and federal policies, as well as associated funds, have led to a staggering 11 GW of community solar-generated capacity in interconnection queues, but there’s still ample opportunity for growth.
To maximize the potential investment, developers and investors need to understand the current dynamics shaping the community solar project space.
The early bird gets the best incentives
Newly developed state community solar programs generally provide the best possible financial incentives before a sizable amount of capacity has made its way into the queue or onto the grid. Doing so allows stakeholders to take large, early steps to meet their clean energy and climate-minded targets.
Developers should consider moving quickly to pursue community solar projects when early-stage incentives are offered. Once the program matures, a significant amount of solar is installed, and a state may tailor its requirements to encourage more strategic installations.
Energy storage boosts project value
Although a community solar project fulfills a subscriber’s power needs during the day, it can’t meet the power needs overnight when the sun isn’t shining. Nevertheless, states want to be able to flexibly utilize solar power, despite its intermittency, so more are beginning to offer incentivized rates and adders to encourage the coupling of battery storage systems with solar projects.
Capitalizing early on a program’s storage incentives is necessary to maximize the return on the project’s investment, as illustrated in Figure 1 above. Similar to the community solar project as a whole, regulators are likely to revisit the rate incentives for adding storage as more systems come online, the grid’s needs change, and the relative value diminishes.
Sophisticated models visualize complex project benefits
As the regulatory value of project components shifts, so too will the actual financial value and resulting economic viability of a given project. Ensuring appropriate compensation over the course of a project’s lifetime requires complex, dynamic models that forecast revenue and rate restructuring.
As seen in Figure 2, a Maryland utility’s tariff rate components are projected to change over the next two decades to lower generation-side charges as a share of the total retail rate. That has implications for the overall value of a community solar project in post-program tenor, in markets where the new compensation rate may be influenced by the generation portion of the retail rate or the utility’s avoided cost of supply.
The incentives tied to community solar projects offer additional value to the grid, reflected in rates. Modeling different valuation scenarios is paramount to determining long-term project value—and will require complex predictive analysis to make decisive investments.
While community solar projects present a dynamic and evolving opportunity in the energy sector, developers must navigate these waters with agility and foresight. By seizing incentives early, incorporating energy storage, and employing sophisticated modeling to understand future revenue streams, developers can not only contribute to a sustainable energy future but also maximize their return on investments in this increasingly vital sector.
