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Posted: May 11, 2011

Growing solar “gardens”

New market opportunities have opened up

Tuukka Hess

The expanding market for distributed solar generation is undergoing a sea-change, driven by innovative financing models that decrease up-front customer costs through the use of solar-leasing arrangements and production-based solar services agreements. Yet certain market segments continue to prove elusive: What opportunities exist to serve the rental market or sites that are unsuitable to host solar facilities?

The Colorado Solar Gardens Act creates additional opportunities to serve these markets and affords project participants additional access to the tax, rebate and renewable energy credit incentives available to develop distributed solar facilities.

The Colorado Solar Gardens Act and CPUC Rulemaking

As defined by the Act, a community solar garden is a shared solar generation facility with a nameplate capacity of two megawatts or less, owned by at least 10 subscribing customers. Each customer purchases a "subscription," which conveys a proportional beneficial interest in the installed solar generation facilities, together with associated RECs.

Output is net-metered against the electricity bill of each subscribing customer in proportion to the size of that customer's subscription (with a deduction for existing on-site solar facilities). Subscriptions represent at least one kilowatt of capacity, and the size of each subscription is capped at 120 percent of each subscriber's average annual energy consumption at the premises to which the subscription is attributed.

The Act integrates with the Colorado Renewable Energy Standard, creating a market for community solar garden output. Under the RES, qualifying retail utilities must serve at least three percent of their retail sales with distributed generation by 2020. Community solar gardens qualify as "retail distributed generation," and - subject to a six megawatt cap that sunsets after three compliance years - utilities may fulfill their RES obligations with the output of community solar gardens.

The Act also carves out a market for community solar gardens no larger than 500 kW: qualifying retail utilities must purchase output pursuant to a standard offer contract, and - during their first two compliance years - they must purchase at least three megawatts or half of their retail distributed generation, whichever is greater, from community solar gardens of this size.

In September, the Colorado Public Utilities Commission instituted a rulemaking to implement the Act, and has since sponsored a series of workshops, issued draft rules, and solicited public comments. A host of entities have participated in the rulemaking, addressing a wide variety of issues. Participants have discussed and debated, among other things, organizational and capitalization standards, financing structures, ownership structures and third-party ownership and development arrangements, ownership of RECs, property tax liability, and interconnection and net metering rules.

The CPUC issued draft rules in February, providing that, among other things, RECs may be retained by community solar garden subscribers, and that no subscriber may own more than 40 percent of a community solar garden. Upon completion of the rulemaking, the CPUC will issue final rules addressing these topics.

Developing and Financing Community Solar Gardens

The Act and the accompanying CPUC rulemaking strive to preserve commercial flexibility, allowing market participants to enter into a variety of relationships to develop and finance community solar gardens. As always, developers and investors will need to closely scrutinize these relationships in order to maximize tax, rebate, and other available incentives.

In addition, however, project participants will also need to structure their projects with greater view to federal and state securities law. Depending upon the structure of the project, the issuance, offer, or sale of subscriptions may constitute "securities" under federal or state securities law; in an interpretive opinion, the Colorado Division of Securities stated that, in the absence of project-specific facts, it was "unable to conclude that a "security" does not exist with respect to the financial participation of subscribers in CSGs." Careful project structuring will be required to avoid this characterization.

Project participants are also well-advised to ensure that the terms of key project agreements negotiated during the development process are well-integrated and negotiated with financing requirements in mind, and that permitting and land use issues are engaged with at the outset.

When key agreements - such as the power purchase agreement, site leases and easements, engineering, procurement, and construction agreements, and operations and maintenance agreements - are not well-integrated or are not negotiated with a view towards obtaining financing, or project permitting and land use issues are not engaged with at the outset, project participants risk additional time and expense resolving issues that investors foreseeably raise. Careful project development establishes the basis for financing success.
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Mr. Hess is a member of the Project Development and Finance Group where he primarily represents renewable energy developers and off-takers and clients engaged in power transmission projects. He has experience encompassing a range of renewable energy project development and project financing activities, including agreements relating to site acquisition, equipment supply, operations and maintenance, interconnection, and power off-take. Prior to becoming an attorney, Mr. Hess was a regulatory analyst in the Energy Division of the California Public Utilities Commission.

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