Solar State of Mind: Expanding Community Distributed Generation in New York State

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1 Solar State of Mind: Expanding Community Distributed Generation in New York State Authors: Ariane Benrey, Ellie Kahn, Mark Kim David Maravilla, Jully Meriño Carela, Parth Vaidya Advisor: Professor Steven Caputo May

2 About this report This study is the product of a team of graduate students from the School of International and Public Affairs (SIPA) at Columbia University, as part of a Capstone consulting project for GRID Alternatives Tri-State, Inc. (GRID or GRID Alternatives). It reflects research, analysis, and modeling conducted between January and May 2017, and presents best practice for solar developers and other stakeholders, and actionable recommendations for use by New York State policy makers and agencies. GRID Alternatives Tri-State, Inc. GRID Alternatives is a non-profit dedicated to expanding solar access to low-income households in the Tri-State area of Connecticut, New Jersey, and New York. They provide free technical assistance and turnkey installation services to multifamily affordable housing providers who develop, own, and/or operate housing units. They also provide hands-on workforce development to job trainees and volunteers on their solar installation sites. This report comes as the result of their commitment to understanding the current obstacles to low-income community distributed generation deployment in New York State, and finding concrete solutions to overcome them. Any citation of this Capstone report (or any derivative thereof) must cite that the work was completed as a part of the Columbia University SIPA s Capstone program, under the guidance of a Faculty Advisor, Professor Steven Caputo and in collaboration with a student team (see authors). 2

3 Table of Contents Executive Summary...5 Introduction.8 Section 1. The New York State Energy Landscape 1.1 Reforming the Energy Vision (REV) Energy Production in New York State Energy Affordability in New York State Energy Affordability Policies Solar Policies 21 Section 2. Community Distributed Generation 2.1 What is Community Distributed Generation How CDG Works How CDG is Financed...47 Section 3. Financial Modeling and Analysis 3.1 Solar Costs Trends in New York State Overview of Modeling Exercise Modeling Results Cost Effectiveness of Incentives 66 Section 4. Recommendations.68 Conclusion.90 Acknowledgements Stakeholders Consulted 91 About the Authors 93 Abbreviations.95 Appendices Appendix 1. Definition of Low-Income..97 Appendix 2. Additional Energy Affordability and Energy Efficiency Programs..98 Appendix 3. Modeling Inputs 100 3

4 Summary of Figures and Tables Figures Figure 1.1 Statewide energy production mix Figure 1.2 Upstate and Downstate production mixes Figure 1.3 Distributed energy generation and peak load Figure 1.4 NYS retail electricity prices exceed the national average Figure 1.5 Solar installation costs are declining Figure 1.6 Low-income customers face high energy burdens Figure 1.7 Summary of CDG compensation under VDER Figure 2.1 Stakeholders of a community distributed generation project Figure 2.2 NYSERDA s response to questions posed in the PSC Order on Net Energy Metering Transition, Phase One of Value of Distributed Energy Resources, and Related Matters Figure 2.3 On-building installation model Figure 2.4 Remote installation model Figure 2.5 Networked installation model Figure 2.6 Example of CDG permitting process in NYS Figure 2.7 Interconnection process for CDG projects from 50 kw to 5 MW DC Figure 3.1 Cost/W trends in NYS, with forecast to 2019 Figure 3.2 CDG projects at current market cost Figure 3.3 Impact of access to debt on project IRR (NYC 250 kw and 50 kw) Figure 3.4 Impact of low interest rates on IRR and NPV of a model 250 kw in NYC Figure 3.5 Impact of low interest rates on IRR and NPV of a model 50 kw in NYC Figure 3.6 Impact of low interest rates on IRR and NPV of (A) 250 kw / (B) 50 kw Upstate models Figure 3.7 Impact of doubled MW block plus low interest rates on IRR and NPV for (A) 250 kw / (B) 50 kw models in NYC Figure 3.8 Impact of (A&B) doubled and (C) tripled MW Block plus low interest rates on IRR and NPV (A) 250 kw / (B) 50 kw Upstate models Tables Table 1.1 Low-income households and renters are disproportionately energy burdened Table 1.2 MW Block incentive levels Table 3.1 Median system cost/w Table 3.2 Current MW Block incentives Table 3.3 Cost to the State to increase NPV of projects by $1 4

5 Executive Summary Community distributed generation (CDG), or community shared solar, has been promoted as a way to address the low-income energy burden, while expanding access to clean distributed energy resources. Energy burden, a term that refers to the share of household income spent on energy, is disproportionally high for low-income New Yorkers, with over a million residential utility customers more than 60 days in arrears. 1 While solar is an excellent way to reduce that burden, without CDG, access to clean energy remains primarily limited to higher-income residential and business customers who own buildings, have high FICO credit scores and low debt-to-income ratios, and can afford the up-front costs of a solar installation. According to creditable estimates, less than 2% of solar installations in New York benefit low-income households. 2 CDG allows a single solar array or a network of arrays to serve multiple households. It therefore enables New Yorkers traditionally excluded from solar, such as those who lack access to capital, renters, or those whose roofs are unsuitable for solar installations, to have access to clean energy and receive corresponding benefits. New York State officials have recognized the benefits of CDG, not only in terms of increasing access to clean and affordable energy for lowincome customers, but also for the health impacts of displacing oil- and gas-based energy generation (which are often in their communities) as well as the green jobs and communitybuilding opportunities that solar development brings. Unfortunately, the July 2015 New York Public Service Commission (PSC) order establishing distributed generation has so far resulted in only 6 projects coming online, none of which have a dedicated low-income component despite the PSC offering to fast-track low-income projects. In order to address this issue, in March 2017 the PSC released an additional order that proposed a new value of distributed energy resources (VDER) for CDG projects and solicited comments on how to reduce barriers to CDG development and ensure low-income inclusion. Our efforts have brought to light many of the obstacles to expansion of CDG in New York State, including the following: 1. Roof space is expensive and rare in localities where high energy prices would make projects most attractive, particularly Downstate. 1 New York Public Service Commission, Proceeding on Motion of the Commission to Examine Programs to Address Energy Affordability for Low Income Utility Customers Staff Report. Case 14 M-0565, New York: PSC, June 1, An April 2017 study by Greentech Media, How Wealthy Are Residential Solar Customer? finds that 24% of solar offtakers in New York State are under 100% State Median Income, while for the purposes of our report, we define low-income as households below 60% of SMI (Appendix 1). However, GTM does find that New York State has the lowest proportion of low-income solar offtakers. 5

6 2. Customer acquisition and management can be difficult, particularly among households that are less familiar with solar and/or mistrustful of potential scams. 3. Project permitting and interconnection processes remain complex, time-consuming, and costly. 4. The uncertain policy environment regarding rate structures cast doubt over the longterm financial viability of CDG investments. 5. Low-cost financing is key to project economics, but can be difficult to obtain given the lack of maturity of the CDG market and perceived credit risk of low-income participants. Furthermore, through the financial modeling and analyses included in this document, we have determined that while costs of solar installations are decreasing, the industry is not yet ready to deliver affordable access to CDG for low-income customers without added incentives. These incentives help to balance the energy landscape where incumbent, largely oil and gas generators, possess a cost advantage over newer, renewable assets. In many areas, particularly Upstate, incentives are insufficient to support CDG projects. We determined that access to debt and increased up-front incentives are essential to make projects viable in the near term, and that using incentives effectively, can, in fact, generate outsized returns, greater than the original cost of the subsidy, for New York State. This report, based on policy analysis, expert interviews and financial modeling, examines the policy and economic contexts for CDG in New York State, describes case studies with different financial and logistical barriers to project implementation, and identifies best practices for solar developers interested in low-income CDG. The report concludes with a list of robust, implementable policy recommendations for consideration by the Administration of Governor Andrew M. Cuomo and relevant State agencies. The recommendations were chosen based on their impact as well as cost-effectiveness to the State and alignment with stakeholder objectives. 6

7 Industry Best Practices 1. Promote use of subscription management software. 2. Develop partnerships with mission-aligned outreach organizations. 3. Streamline interconnection applications at utility level. 4. Combine CDG projects with existing energy efficiency programs in order to maximize energy savings. 5. Implement subscriber backstops. Policy Recommendations 1. The PSC should reduce the minimum number of subscribers for all CDG projects to three. 2. NY Green Bank should institute a Debt Acceleration Program for CDG projects. 3. NY Green Bank should create a loan loss reserve fund for CDG projects. 4. NYSERDA should make EmPower funds available to make properties solar-ready for low-income projects. 5. NY Green Bank should provide lower-cost debt for low-income CDG projects. 6. NYSERDA should increase MW Block incentives for low-income CDG projects. 7. NY Green Bank & NYSERDA should require low-income offtaker contractual protections for projects receiving increased incentives. 8. NY Green Bank should pilot a program to assess alternative underwriting criteria. 9. NYSERDA should create an online subscriber waitlist with opt-in enrollment for low-income customers. 10. The PSC should mandate net metering rates for all CDG projects, in lieu of VDER. 7

8 Introduction Context and Problem Access to solar energy for residential and commercial consumers alike has grown significantly in the past decade, stimulated by technological improvements and forward-thinking public policies. Structuring this transformation to benefit all New Yorkers is a key challenge for the Cuomo Administration and advocates for clean energy, and the impetus for the Reforming the Energy Vision (REV) initiative that currently guides energy policy in New York State (NYS). The State currently faces a twofold challenge. First, the energy burden, that is to say, the percentage of monthly income spent on energy, is disproportionately high for low-income households. 3 New Yorkers energy bills are among the highest in the country. Various energy affordability programs already exist to help lower monthly utility payments, but solar would be a key to reducing further the energy burden for low-income New Yorkers. Second, low-income households have largely been left out of the solar and clean energy revolution, due to a combination of financial and policy obstacles. Utilities and policymakers are working to transform grid operations to account for new models of distributed and renewable electricity generation. The availability of net energy metering credits at retail rates has allowed owners of solar photovoltaic systems to reduce their energy costs and increase renewable energy production in New York State. Currently, however, distributed solar infrastructure is for the most part owned by higher-income residential and business customers who have access to the capital needed to cover the up-front costs of solar installations and/or the ability to take advantage of economically significant tax-based incentives (i.e. the investment tax credit and property tax abatement). The Cuomo Administration is dedicated to finding solutions to this two-pronged energy challenge, having set targets for clean and affordable energy access under the overarching framework of REV. Increased deployment of residential solar will reduce the burden of energy costs on low-income New Yorkers, while substantially expanding renewable energy production in NYS. 3 This report is using NYS Public Service Commission metrics to define low-income as below 60% of State Median Income (SMI), or 150% above the federal poverty line, and middle-income as below 80% of SMI. It does so primarily to maintain consistency and allow for cross-program analysis, as the State Median Income (SMI) criteria is used to determine eligibility for most New York State energy assistance programs. See Appendix 1 for further details. 8

9 Community Distributed Generation Community distributed generation (CDG), also known as community shared solar, has emerged as a solution to this dual problem. This form of energy distribution enables multiple households to benefit from a single solar energy installation by attributing a certain proportion of the output to participating meters via on-utility-bill credits. CDG has the potential to vastly expand solar production not only to those who lack access to capital, but also to renters and those whose homes are unsuitable for solar installations. CDG has therefore drawn the interest of New York policymakers and solar developers; however, it has led to the development of only six projects in the last two years. Despite political support and state incentives, the market for CDG remains extremely challenging, particularly when including low-income customers. Issues linked to financing challenges, creditworthiness, permitting and interconnection, customer acquisition and management, and siting. In addition, the current policy environment remains in flux, as the New York Public Service Commission (PSC) explores ways to facilitate community distributed generation throughout the State, while modifying the mechanisms by which solar energy flows are compensated, which increases uncertainty around this fledging industry. Report and Methodology This report provides new insight into the feasibility and obstacles to the deployment of community distributed generation in New York State, with a particular focus on strengthening access to solar for low-income multifamily buildings. To do so, it relies on a three-part qualitative and quantitative assessment of CDG today. First, it includes an analysis of existing policies and subsidies that affect CDG project development. This includes federal initiatives that support development of clean and affordable energy, such as the US Federal Investment Tax Credit (ITC) and Home Energy Assistance Program (HEAP) payments. It also analyzes the design and impact of New York State and municipal programs organized under the umbrella of REV. Second, it draws upon the insights generated by over thirty stakeholder interviews conducted with a wide range of policymakers, private sector developers, and non-profit actors. These interviews probe the experiences of players within the field and survey their recommendations for future policy. 9

10 Finally, to examine the economic feasibility of CDG projects in New York State, the report explores financial modeling of CDG projects in Upstate and Downstate. Specifically, it examines the sensitivity of project economics to key parameters in order to ascertain which levers are most effective to make projects viable while also guaranteeing substantial savings for lowincome customers, including: Varying the installation costs Access to low-cost capital State-level incentives This modeling exercise provides insight into economics of prospective CDG projects including constraints, break-even points for feasibility and cost-effectiveness of state-level policies. This information can be used as a foundation to put forth proposals to the Public Service Commission to improve project economics to attract larger, private-sector market participation. Report Outline Section 1 of the report seeks to lay out the current context for renewable energy and affordability policy in New York State, by providing an overview of the current electricity generation and energy affordability landscape. It summarizes existing State and federal energy policies, including a specific analysis of the REV framework. Section 2 focuses on community distributed generation, detailing how projects function in practice and why they appear to be a viable solution to the clean energy access and affordability challenges previously identified. It further describes the primary obstacles to largescale deployment and financing of CDG and suggests how these might be overcome by providing case studies and industry best practices. Section 3 provides an overview of the market analysis and financial modeling methodologies and results. It details the cost trends in solar installations in NYS, the impact of incentives and access to debt on project economics, and demonstrates how NYS can deploy resources effectively to generate outsized returns for CDG projects greater than the original subsidy costs. Section 4 lays out recommendations for NYS decision-makers regarding policy changes needed to overcome the current barriers to low-income CDG. As New York State considers additional comments on the value of solar energy for community distributed generation, this report aims to directly address many of the remaining questions identified by the PSC to ensure equitable access to the renewable energy revolution. 10

11 Section 1. The New York State Energy Landscape Executive Summary The New York State (NYS) energy landscape is currently undergoing a profound shift as technological improvements paired with a changing policy landscape drive the State towards a cleaner and more affordable energy future. The Renewing the Energy Vision (REV) plan developed by the Cuomo Administration seeks to drive this transition to an energy system of the 21 st century. REV priorities are linked to a dual problem. First, the New York State energy mix is currently credited as one of the cleanest in the nation, due to the large share of hydroelectric and nuclear energy. Despite this, a significant proportion of New York s energy needs is still met through traditional sources such as oil and natural gas, leading to emissions of over 30 million metric tons of carbon dioxide equivalent in Second, energy prices in New York are among the highest in the country, and low-income households face disproportionately high energy burdens. The challenge today is to ensure that REV targets are met, without leaving low-income households behind. This first section provides an overview of the current state of energy production and affordability in NYS, as well as the successes and shortcomings of existing policies that seek to change it for the better for all households, especially those in lowincome communities. Section 1.1 Reforming the Energy Vision (REV) Reforming the Energy Vision (REV) is the Cuomo Administration s energy strategy to build a cleaner, more resilient, and more affordable energy system for all New Yorkers. REV is focused on creating the grid of the 21 st century by transforming electricity production and distribution and the way in which utilities operate. It supports integration of a broad range of renewable energy sources into the grid and efforts to make them more competitive in the energy market. REV employs State initiatives that will animate markets and attract private capital for clean energy solutions. It seeks to empower each municipality in NYS in its path towards more sustainable and resilient energy systems. 5 Under the REV framework, the State has set ambitious emissions reductions and renewable energy production goals for the coming decade. An additional mission is to reduce the energy bills of all New Yorkers and, in particular, those who are low-income. Implementation of the 4 New York State Energy Research and Development Authority, New York State Greenhouse Gas Inventory: Albany, NY: NYSERDA, December 2016, revised February REV Initiatives, REV.ny.com, 11

12 REV agenda requires a coordinated effort combining regulations from the PSC, and financial assistance and subsidies from NYSERDA and NY Green Bank. Since January 2016, NYSERDA has been tasked with administering the $5 billion Clean Energy Fund (CEF). 6 The CEF budget is available for NYSERDA and NY Green Bank to distribute among a variety of loan and grant programs. Goals for the next ten years include achieving a cumulative 88 million MWh of renewable energy, 133 million tons of CO 2 equivalent reductions, and $39 billion in customer bill savings. 7 Within this overall budget, the CEF has $2.7 billion available for market development and $961 million for the NY- Sun initiative, which seeks to promote the development of a robust solar market in New York State. A further $782 million are available for NY Green Bank to establish financial markets for renewable energy projects, and $717 million for NYSERDA innovation and research. Finally, the CEF is expected to leverage $29 billion in private investments over its lifetime and reduce ratepayer collections by $1.5 billion by When you boil REV down, what it s trying to do is to set up a marketbased principle to drive capital to build this grid of the future. Richard Kauffman, Chairman of Energy and Finance, NYS (May 2, 2017, New York s Renewable Energy Future. ) In February 2017, the Cuomo Administration also expanded funding for the Energy Affordability Policy, which aims to lower the energy burden of low-income households to no more than 6% of their annual disposable income, bringing the total program benefits to $260 million annually. The program will provide direct bill assistance to close to 2 million low-income households. 9 6 Governor Cuomo Launches $5 Billion Clean Energy Fund to Grow New York s Clean Energy Economy, NY Governor s Office, January 21, 2016, 7 William Opalka, "NYPSC OKs $5.3B Clean Energy Fund," RTO Insider, January 24, 2016, 8 New York State Energy Research and Development Authority, Reforming the Energy Vision: Clean Energy Fund. NYSERDA, February Governor Cuomo Announces Expansion of Financial Benefits for Low-Income Utility Customers, NY Governor s Office, January 16, 2017, 12

13 Section 1.2 Energy Production in New York State NYS Production Mix In 2015, power producers in New York State generated 142,346 GWh of electricity, 10 placing it in the top 10 highest energy producers in the United States. 11 Overall, the New York State energy mix remains heavily reliant on traditional forms of power generation. Natural gas and nuclear power generation combined account for over two-thirds of total electric energy production (Figure 1.1). 12 However, NYS has made strides towards greening its energy supply. In 2015, 24% of electricity production was generated from renewable sources, or 32,000 GWh out of 142,000 GWh. Of the total, 18% was generated from large hydroelectric projects; small hydroelectric, wind, solar, and other renewables account for the remaining 6%. 14 Figure 1.1 Statewide energy production mix 13 There are clear distinctions between electricity sources for Upstate and Downstate residents. Large hydroelectric exists primarily Upstate, where it accounts for 30% of total electricity generation. This is primarily due to the location of the two largest hydroelectric plants, the Niagara River and the St. Lawrence Power Projects. Downstate New York, including the Hudson Valley, Long Island, and New York City, depends on natural gas for almost two-thirds of electricity production (Figure 1.2) New York Independent System Operator, Power Trends 2016: The Changing Energy Landscape. Rensselaer, NY: NY ISO, power-trends-FINAL pdf. 11 U.S. Energy Information Administration, Rankings: Total Net Electricity Generation, January Washington, D.C.: January ; To be specific, NYS is in 10 th position. 12 NY ISO, Power Trends NY ISO, Power Trends NY ISO, Power Trends NY ISO, Power Trends

14 Figure 1.2 Upstate and Downstate production mixes 16 New York State electricity generation and distribution infrastructure is facing new challenges. Current trends show that energy consumption in Upstate New York is gradually decreasing, while the energy needs of the Downstate region are increasing. Higher energy demand is unlikely to be met via an increase in hydroelectric production as there is little hydro capacity developable in Downstate regions. Much of the State s hydroelectric potential has already been tapped, and future expansion will likely be limited to repowering existing generation facilities by installing higher efficiency turbines or adding generation capacity to non-power dams. 17 Furthermore, in January 2017, Governor Cuomo announced his intention to close the Indian Point nuclear power plant. 18 Located in Westchester County, the plant has a 2,000 MW capacity, which represents approximately 10% of New York State s total electricity demand. 19 All of these issues lend new urgency for the need to the development and rapid scaling up of new forms of clean energy production in the State. Solar photovoltaic (PV) production provided less than 1% of New York s net electricity generation in However, the solar PV sector is expanding exponentially, having increased 16 NY ISO, Power Trends Hydropower in New York : A Workhorse Renewable Energy Technology, NYS Department of Environmental Conservation, 18 Patrick McGeehan, Cuomo Confirms Deal to Close Indian Point Nuclear Plant, New York Times. January 9, 2017, 19 U.S. Nuclear Energy Institute, Economic Impacts of the Indian Point Energy Center. Washington, D.C.: NEI, June Energy-Center.pdf?ext=.pdf. 20 U.S. Energy Information Administration, New York Electricity Profile Washington, D.C.: EIA, January 17,

15 more than 800% from December 2011 to December Four-fifths of the State s solar generation comes from customer-sited solar PV, rather than utility-scale projects. So far, ~300 GWh of customer-sited solar PV is generated each year, half from residential producers, and half from commercial producers. 22 Utility-scale projects are rarer, with one 32 MW utility-scale solar project currently online on Long Island and additional projects underway, also mainly on Long Island. Peak Demand and Distributed Generation Due to its proximity to offtakers, distributed generation may be of particular interest to New York State due to the trends in peak demand. Peak demand is growing at a faster rate than average energy consumption, putting grid infrastructure under strain and increasing costs of energy distribution We have a 50% renewable mandate by 2030 and we re not going to be able to achieve that goal on a cost effective basis or even in time if we keep doing things the old way just bolting things into the grid of Tesla and Westinghouse That grid was never intended to have renewables on it, never intended to have distributed resources. Richard Kauffman, Chairman of Energy and Finance, NYS for utilities 23. Studies have found that locating solar generation facilities near where it is consumed may reduce peak demand by approximately 750 MW by 2026, while also lowering annual grid-distributed energy usage by 3600 GWh in ten years (Figure 1.3). 24 In August 2016, the PSC officially adopted a Clean Energy Standard (CES), requiring utilities to procure 50% of the state s electricity from clean energy sources by Qualifying resources include solar PV, wind, biomass, and hydroelectric, with nuclear considered only as a bridge technology that cannot be counted towards the 50% mandate. The Clean Energy Standard was designed to replace New York Renewable Portfolio Figure 1.3 Distributed energy generation and peak load 21 Governor Cuomo Announces Nearly 800 Percent Growth of New York Solar Power Over Past Five Years, NY Governor s Office, February 21, 2017, percent-growth-new-york-solar-power-over-past-five-years. 22 NYSERDA, Patterns and Trends NY ISO, Power Trends Figure source: NY ISO, Power Trends

16 Standard (RPS), which expired in In addition to financial and grid efficiency benefits, CDG will therefore help NYS reach its CES environmental goals, including targeted reductions in greenhouse gas (GHG) emissions of 40% by 2030 and 80% by 2050 from 1990 levels. 25 New York State has managed to decrease carbon emissions by 15% since Approximately a quarter of these reductions have come from switching to cleaner electric power generation, primarily from coal and oil to natural gas. 26 If the State is to meet its official environmental targets and thus become a leader in sustainable development, it will need to continue to grow the share of renewables in the energy mix. Section 1.3 Energy Affordability in New York State Energy Prices New Yorkers consume substantially less energy on a per capita basis than any other state in the U.S., with the exception of Rhode Island. 27 Yet despite this fact, low-income New Yorkers face high energy burdens, meaning that they dedicate a high proportion of their monthly income to utility bills. New York State energy prices are higher than the national average by approximately 5 cents per kwh (Figure 1.4), making rates the 8th highest in the contiguous 48 states. 28 Customers in Consolidated 25 Governor Cuomo, Joined By Vice President Gore, Announces New Actions to Reduce Greenhouse Gas Emissions and Lead Nation on Climate Change, NY Governor s Office, October 8, 2015, 26 NYSERDA, New York State Greenhouse Gas Inventory: U.S. Energy Information Administration, Rankings: Total Energy Consumed per Capita, Washington, D.C.: EIA Figure Source: U.S. Energy Information Administration, New York Electricity Profile Washington, D.C.: EIA January 17, Figure 1.4 NYS retail electricity prices exceed the national average You typically find older and more challenged infrastructure in urban settings especially within former rustbelt cities. In many cases those same areas are low income communities. Paul Tyno, FruitBelt Neighborhood Solar Partnership 16

17 Edison (ConEd) service territories frequently face the highest electricity prices in the nation. 29 In recent years, energy prices both in New York and nationwide have declined slightly, primarily due to the availability of cheap natural gas. However, grid maintenance costs continue to rise as utilities struggle to update infrastructure that is on average over 30 years old and in some places even dates back to the 19 th century. 30 In addition, changing weather patterns due to climate change and severe weather events such as Superstorm Sandy cause costly damage to energy generation and distribution systems. 31 Meanwhile, solar energy has established itself as an increasingly cost-effective source of energy. The cost per-watt (W) of solar has been declining every year in New York State (Figure 1.5), from an average of $7/W in 2010 to just over $3/W today. 32 This trend is expected to continue, which should foster continued expansion of solar capacity and enable New York to reach the renewable energy targets laid out in the REV initiative. Figure 1.5 Solar installation costs are declining 29 Bill Sanderson, Con Edison s Business-Friendly Three-Year Rate Increase, New York Power and Light, January 24, 2017, 30 NY ISO, Power Trends Diane Cardwell, Matthew L. Wald, and Christopher Drew, Hurricane Sandy Alters Utilities Calculus on Upgrades, New York Times, December 28, 2012, 32 Data source: New York State Energy Research and Development Authority Solar Electric Programs, Solar Electric Programs Reported by NYSERDA: Beginning New York: NYSERDA, Last Update April 14, Dataset, 17

18 Energy Affordability Policymakers in New York have recognized that energy affordability must be a key policy priority. 33 In 2015, over 1 million residential electricity customers in New York State were in arrears more than 60 days, and 295,000 people had their electricity shut off by utilities for nonpayment. This represents approximately $800 million owed to utilities. 34 Within the ConEd service territory alone, 170,000 customers were in arrears a full 10% of the utility s customers. 35 We have a million New Yorkers struggling to pay their bills. Richard Kauffman, Chairman of Energy and Finance, NYS The toll that high energy burden has on people s wellbeing is well-researched, with increased impacts for children and the elderly. 36 Inefficient heating and cooling may lead to asthma, chronic respiratory disease, and heart disease. 37 The anxiety of not knowing how a utility bill will be paid has been linked to mental health issues such as chronic stress and depression. 38 When low-income households spend a larger share of their income on energy, this leaves less for other basic expenditures, including food and healthcare. Conversely, lower monthly bills can reduce stress and can have a positive impact on health. The issue of energy affordability is linked to one of equity, as access to affordable energy is not shared equally among New Yorkers. Instead, studies show Figure 1.6 Low-income customers face high energy burdens 33 New York Public Service Commission, Proceeding on Motion of the Commission to Examine Programs to Address Energy Affordability for Low Income Utility Customers Staff Report. Case 14 M-0565, New York: PSC, June 1, PCS Energy Affordability for Low Income Utility Customers Staff Report. Case 14 M Coreina Chan, Kendall Ernst, and James Newcomb, Breaking Ground: New Models That Deliver Energy Solutions to Low-Income Customers, Rocky Mountain Institute, 2016, p Diana Hernandez, Understanding Energy Insecurity and its Implications for Health and Equity, Presentation at Columbia University, March 23, 2017, 37 Khalil Shahyd, Study Highlights Energy Burden for Households and How Energy Efficiency Can Help, National Resource Defense Council, April 20, 2016, 38 Diana Hernandez, Energy Insecurity and its Implications for Health and Equity. 18

19 that energy burden is disproportionately high for low-to-moderate income households (Figure 1.6). 39 Table 1.1 Low-income households and renters are disproportionally energy burdened Household type Median annual income Income type Low-income* $24,998 $25,999 Non-low-income $90,000 $103,999 Building Renters $34,972 ownership $39,396 Owners $68,000 $80,100 *: Low-income 80% AMI Black: National (US) energy burden trends Green: Northeastern states data Median energy burden 7.2% 8.2% 2.3% 2.3% 4.0% 4.2% 3.3% 3.3% Median annual utility cost/sq. ft. $1.41 $1.61 $1.17 $1.34 $1.30 $1.66 $1.17 $1.35 Low-income households experience higher energy burdens relative to the national threshold (Table 1.1), primarily due to a combination of two factors. First, energy expenses are proportionally larger for households living on a smaller income. Second, data shows that lowincome customers pay more for energy per square foot in utility bills, which is partly due to less energy efficient housing. 40 Building retrofits required to improve the energy efficiency of aging buildings or upgrades to more efficient appliances or heating represents a significant investment that may not be financially feasible for low-income households and building owners. As the grid infrastructure and systems age, the costs for maintenance increase and energy costs will likely rise Figure source: Ariel Drehobl and Lauren Ross, Lifting the High Energy Burden in America s Largest Cities: How Energy Efficiency Can Improve Low Income and Underserved Communities, American Council for an Energy Efficient Economy, April Ariel Drehobl and Lauren Ross, Lifting the High Energy Burden in America s Largest Cities. 41 Ariel Drehobl, Lifting the High Energy Burden in America s Largest Cities: How Energy Efficiency Can Improve Low Income and Underserved Communities, American Council for an Energy Efficient Economy, Presentation, May 25,

20 Section 1.4 Energy Affordability Policies In addition to the overarching REV framework, a number of policies and public assistance programs exist to help low-income households afford their utility bills and lower their energy burden. State and local governments have a strong interest in guaranteeing affordable energy to their constituents. In May 2016, the PSC published an order that set out to address the high-energy burden faced by 2.3 million low-income households in New York State. 42 It set a target that energy expenditures should not exceed 6% of any New York household s income. It tasked the State government, utilities, and private stakeholders to work together to streamline and harmonize services aimed at bringing down utility bills for low-income households. The order also allowed the utilities, primarily ConEd and National Grid, to grandfather in their existing low-income discount programs and have these programs apply to all household receiving HEAP payments, a federal assistance program aimed at reducing heating costs to low-income Americans. In addition, the PSC identified CDG as a tool to address energy affordability. To this end, it prioritized distributed generation interconnection for low-income solar projects in Phase 1 of the Order Establishing a Community Distributed Generation Program, allowing low-income CDG projects to skip to the front of the queue. 43 In addition to State and federal energy affordability programs, utility companies offer several discount rates and payment options to low-income households. Selected examples are included in Appendix 2. These are further complemented by existing weatherization and energy efficiency programs designed to directly reduce the electricity needs of customers, also detailed in Appendix 2. Among these, the EmPower program administered by NYSERDA provides free energy efficiency repairs and solutions to low-income homeowners and renters. Participating accredited contractors make recommendations as to how to best improve a home s efficiency to NYSERDA. If approved, the contractor installs the improvements at no cost to the homeowner or renter. Income eligibility is 60% of State Median Income New York Public Service Commission, Proceeding on Motion of the Commission to Examine Programs to Address Energy Affordability for Low Income Utility Customers. Case 14-M-0565, New York: PSC, June New York Public Service Commission, Proceeding on Motion of the Commission as to the Policies, Requirements and Conditions for Implementing a Community Net Metering Program. Case 15-E-0082, New York: PSC, July 17, EmPower New York Eligibility Guidelines, New York State Energy Research and Development Authority, 20

21 Section 1.5 Solar Programs and Incentives A number of policies and incentives have been established at all levels of government to support and accelerate the deployment of solar technology. Most focus on single-family residential solar, however, a select few specifically target multifamily buildings and/or lowincome households access to solar, with the understanding that it is these communities that face the highest barriers to obtaining clean energy. Federal Programs The Investment Tax Credit (ITC) is the primary means through which the federal government has supported the deployment of solar energy generation. Established in 2005 under the Energy Policy Act and expanded under the American Recovery and Reinvestment Act of 2009, this tax credit is designed to subsidize the acquisition of solar arrays by either residential, commercial, or utility array owners. The Business ITC allows investors to claim a tax credit equal to 30% of eligible expenditures for the solar system, including the price of the equipment and all installation costs, which has been successful in spurring solar project development. It will be progressively phased out in the coming years, and level off at a permanent 10% after As a permanent part of the Federal Tax Code, accelerated depreciation called Modified Accelerated Cost Recovery System (MACRS) is now available in its bonus depreciation form. Bonus MACRS allows tax owners of solar systems to deduct 50% of the eligible cost of a solar installation in year 1, with the rest over the first 5 years. New York State Programs and Incentives New York has additional incentives to entice its residents and businesses to go solar, most of which have since been grouped under the Statewide REV framework. Megawatt (MW) Block is a financial incentive offered by NY-Sun to help lower installation costs. It is a decreasing incentive based on how many MWs have been installed in various regions of the state. The total amount received depends on the region, system size and the current value of the MW Block incentive (Table 1.2) Business Energy Investment Tax Credit (ITC), U.S. Department of Energy, 46 New York State Energy Research and Development Authority, Residential/Small Commercial MW Block. NYSERDA, Commercial-MW-Block. 21

22 Table 1.2 MW Block incentive levels Current MW Block Incentive ($/W) 50 kw 250 kw NYC $0.70 $0.61 Upstate $0.40 $0.22 Highest Historical MW Block Incentive ($/W) 50 kw 250 kw NYC $1.00 $0.63 Upstate $1.00 $0.40 NY-Sun was launched in 2012 as part of the Cuomo Administration s goal to improve energy systems in NYS. It aims to install more than 3 GW of solar capacity by 2023, through a combination of programs and incentives that support the market of solar PV installations. 47 NY-Sun brings together NYSERDA, Long Island Power Authority, Public Service Enterprise Group Long Island, and New York Power Authority, to spur the growth of a successful and sustainable solar market in NYS. Affordable Solar allows homeowners who earn less than 80% of the Area or State Median Income to receive double the MW Block incentive to help lower the upfront cost of installing a solar system. The incentive is paid directly to a NY-Sun participating contractor who, in turn, uses the incentive to lower the cost of the installation. In order to qualify for Affordable Solar, homeowners must first take steps to improve energy efficiency in their home, for instance by replacing incandescent lighting with LEDs and switching to low-flow faucets. 48 Renters are not eligible for this incentive. NYS ITC is available for up to $5,000 in tax credits under limited circumstances. Net energy metering (NEM) is a State policy that nets the generation and net usage on a given meter. Under net metering, owners of a solar array are allowed to sell excess generation to the grid from systems of less than 25 kw installed capacity for residential systems and less than 2 MW for non-residential systems. They are compensated at retail rates, meaning the full dollar amount that the utility charges its customers, rather than wholesale rates, which is the price electricity providers pay for utility-scale energy. 47 About NY-Sun. New York State Energy Research and Development Authority, Programs/Programs/NY-Sun/About. 48 Frequently Asked Questions - Affordable Solar. New York State Energy Research and Development Authority, Solar/FAQ. 22

23 Net metering versus the Value of Distributed Energy Resources in the Value Stack In March 2017, the PSC issued an order transitioning away from a traditional net metering model to the development of a Value of Distributed Energy Resource (VDER) tariff that seeks to more accurately reflect the true value of distributed solar. Special provisions have been made for CDG, in order to facilitate the transition from net metering to VDER. Net metering is not a transparent subsidy, meaning it s a payment to customers beyond their cost to be a [utility] customer, that is being subsidized by non-solar customer... there are better ways to value solar. Stakeholder interviewed [The PSC] undervalued the value stack. Adam Flint, Southern Tier Solar Works One of the criticisms of net metering is that it does not reflect the true value of solar energy. According to some, net metering undervalues solar, because it provides additional social, environmental, and public health benefits beyond its simple energy value. Others claim that net metering overvalues solar, because customers are not fully paying for the grid services that they use. Finally, there is an equity issue with having net metering be financed by surcharges on utility bills paid by all energy customers, while the benefits go primarily to those able to afford solar, typically higherincome customers. In March 2017, the PSC approved and released an order to resolve this issue and better determine the VDER while at the same time encouraging the development of CDG. The proceeding seeks to incorporate a new pricing mechanism called the Value Stack. The move will not affect residential single-family system owners, who will continue to net meter at retail rates. Nor does it affect existing net metered projects, which will be grandfathered in and receive retail rates until All other solar projects will be compensated based on the amount determined by the Value Stack. CDG projects have received special allowances to ease the transition from net metering to Value Stack. In addition to the Value Stack, they will receive a market transition credit (MTC), which will eventually disappear. In order to calculate the Value Stack compensation of solar (Figure 1.7), Phase 1 calculations will take into account the following: 49 Zonal locational-based marginal price including losses 49 New York Public Service Commission, In the Matter of the Value of Distributed Energy Resources. Case 15-E- 0751, New York: PSC, March 9, and New York Public Service Commission, Proceeding on Motion of the Commission as to the Policies, Requirements and Conditions for Implementing a Community Net Metering Program. Case 15-E-0082, New York: PSC, March 9, p

24 Capacity value based on retail capacity rates for intermittent technologies and the capacity tag approach for dispatchable technologies based on performance during the peak hour in the previous year Environmental value which will be based on Renewable Energy Credit prices or the Social Cost of Carbon Demand Reduction Value and Locational System Relief Value, based on a deleveraging of utility marginal cost of service studies Figure 1.7 Summary of CDG compensation under VDER Community distributed generation projects developed between March 2017 and January 2020 that have already paid 25% of interconnection costs benefit from Phase One Net Energy Metering, which is identical to traditional net metering but only applies for 20 years. For the rest of the projects, Phase 1 VDER compensation is determined based on a Value Stack. Low-income CDG The Order not only addressed VDER, it also put the onus on NYSERDA and NY Green Bank to help increase low-income CDG activity. In order to spur low-income CDG projects, the PSC has recommended that NYSERDA investigate whether the CEF can be directed to stimulate projects and whether more funds should be allocated to the CEF. The Commission has recommended that utilities allow for interzonal solar energy offtaking. This should allow households to subscribe to solar systems outside of their service areas and NYISO zones. A PSC Staff proposal on low-income CDG will be submitted by September 1, 2017 that will address of some the suggestions made by the PSC in the March 2017 order. The analysis and 24

25 recommendations described in this report aim to be directly responsive to the questions the PSC intends to address before its next order. 50 Municipal Programs A number of municipalities in New York State have laid out additional initiatives to spur the expansion of local solar markets. Solarize campaigns are organized locally to support homes and businesses in a locality for group purchasing of solar arrays with the intention of achieving economies of scale. NYSERDA works with community-based organizations and local stakeholders to provide technical assistance and marketing material to help educate local business owners and consumers on their options for solar. It also helps the group in selecting a competitive installation contractor. This program may prove particularly effective for getting lowincome homeowners involved with solar projects. In NYC, solar benefits from a significant property tax abatement, equal to 20% of the system cost over four years, within a limit of $250,000 total abatement. The incentive, as with all tax credit-based incentives, does not benefit organizations already exempt from property taxes, such as non-profits. 50 New York Public Service Commission, In the Matter of the Value of Distributed Energy Resources. Case 15-E and New York Public Service Commission, Proceeding on Motion of the Commission as to the Policies, Requirements and Conditions for Implementing a Community Net Metering Program. Case 15-E-0082, p

26 Section 2. Community Distributed Generation Executive Summary Following REV s mission to support solar development, CDG has emerged as a model for making solar energy accessible to all segments of the population. Its deployment would contribute to ensuring an equitable distribution of financial and other benefits linked to solar energy. CDG addresses many of the limitations low-income households face when trying to gain access to solar energy, including unavailable roof space, property age, and lack of rental control over properties. CDG also provides economies of scale with costs spread across multiple offtakers. In this section, we explore the background and development process of CDG. We also highlight some of the barriers and challenges of the CDG development process and identify best practices currently available to mitigate certain constraints. Section 2.1 What is Community Distributed Generation? Community distributed generation (CDG) allows a single solar system or network of systems to serve multiple, dispersed households. In the United States, CDG emerged in 2006 when a new federal policy permitted electricity distribution from solar projects to multiple users. In a typical CDG project, the site for a solar installation is owned or leased by an entity, which can be a utility, solar developer, residential or commercial landlord, municipality, community or non-profit organization. This entity brings together a group of subscribers and hires a contractor to install the solar panels. Subscribers earn credits on their electricity bill for their share of energy produced, without necessarily having a solar system on their own roof. 51 Several configurations of CDG projects are possible. The actual solar panels can be located on the subscribers roof, on a neighboring roof, or on a remote ground-mounted site. Rooftop CDG systems are designed to generate either a fraction of or the entire load required by the offtakers. The anchor tenant is usually the owner or landlord, and a large portion of energy generated goes to offset the common area loads. Ground mounts are typically larger, and attract offtakers from anywhere within a larger radius in the utility s service territory. 51 Interstate Renewable Energy Council Community-Shared Solar: Diverse Approaches for a Common Goal Model Rules for Shared Renewable Energy Programs. 26

27 CDG in New York State: Order Establishing a Community Distributed Generation Program In New York, CDG was enabled in July 2015 by the PSC Order Establishing a Community Distributed Generation Program. 52 Implementation of the PSC order began on October 19, CDG policies fall under the umbrella of REV, specifically those REV initiatives focused on improving access to renewable energy for customers that install solar, small wind, or other distributed generation source on their own property. The basic legal framework of all CDG projects (Figure 2.1) requires the following: 53 The project site can be the subscribers roof, a neighboring roof, or a remote groundmounted location. The sponsor is responsible for managing memberships and interfacing with the utility, but may also own or operate the project. Sponsors can be project developers, energy service companies (ESCO), businesses and non-profits, as well as partnerships among these entities. The sponsor provides the utility with a list of subscribers and their percent allocation of the array s output before the interconnection to the grid takes place. This list may be updated on a monthly basis as subscribers leave and join. The project may be organized around an anchor, typically the system owner or building landlord, who can take up to 40% of the total system energy production. Any utility customer may be a subscriber to a CDG project in the same utility zone. The share of production of each subscriber appears as a credit on his or her monthly utility bill. Each project must have a minimum of 10 subscribers (though there are proposals to reduce this number, see Recommendation 1), with each member being allocated at least 1,000 kwh per year. A subsequent amendment specified that on-site CDG on buildings with fewer than 10 units are exempt from this requirement. The terms of membership, including payment structure and provisions for existing subscribers, are set by an agreement between subscribers and the sponsor. 52 New York Public Service Commission, Proceeding on Motion of the Commission as to the Policies, Requirements and Conditions for Implementing a Community Net Metering Program, Case 15-E Figure source: David Feldman et al. Shared Solar: Current Landscape, Market Potential, and the Impact of Federal Securities Regulation. National Renewable Energy Laboratory, April

28 Figure 2.1 Stakeholders of a community distributed generation project Initial implementation of CDG by the PSC prioritized projects that included at least 20% lowincome membership, thus establishing an incentive to include people traditionally excluded from solar markets. Nevertheless, as was noted in subsequent proceedings by the PSC, Phase 1 failed to generate any low-income CDG projects. Thus, to determine how to ensure success in Phase 2, the PSC established working groups including: barriers and technical constraints to participation; standardized customer contracts; energy-efficiency requirements; marketing; data sharing; financing; and potential business models. Unfortunately, this process has also Americans are locked out of the solar market because they are renters, low income or have unsuitable roofs. Kelly Roache, Solstice Initiative stalled, and the PSC disbanded the working groups until an undetermined date in the future. To address the shortcomings resulting from the initial order establishing a CDG in NYS, the PSC requested stakeholder input on several issues as part of its Order on Net Energy Metering Transition, Phase One of Value of Distributed Energy Resources, and Related Matters 54 (Section 1.5), including: A) mitigation of bill impact and CDG project costs, 55 B) strengthening participation of low-income customers, 56 and 54 New York Public Service Commission, Order on Net Energy Metering Transition, Phase One of Value of Distributed Energy Resources, and Related Matters. Case 15-E-0751 and 15-E-0082, New York: PSC, March 9, Staff is directed to work with NYSERDA, the utilities, and market participants to develop and file a proposal for next steps that can be taken to reduce, eliminate or mitigate market barriers, bill impacts or CDG project costs. Topics include: development costs, consolidated billing, customer maintenance costs, and interconnection costs. PSC ruling March 9, 2017, Section G 56 The Commission directs Staff to work with utilities and interested stakeholders to consider an interzonal CDG credit program designed to provide benefits from CDG projects interconnected in service territories and load zones other than that of the low-income participant. The Commission also supports NYSERDA s continued investigation into enabling low-income customer participation in CDG projects, and directs NYSERDA to file CEF investment chapters to support programs aimed to encourage and incentivize low-income participation in CDG 28

29 C) preparation for the launch of VDER Phase Two in May NYSERDA, one of the agencies explicitly prompted to respond to these issues, released a draft presentation to stakeholders on their initiative (Figure 2.2). 58 Figure 2.2 NYSERDA s response to questions posed in the PSC Order on Net Energy Metering Transition, Phase One of Value of Distributed Energy Resources, and Related Matters projects. Finally, the Commission directs Staff to consider options to encourage low-income participation in CDG under the VDER Phase tariffs, including tailored approaches for CDG projects that comprise a majority of lowincome offtakers. PSC ruling, section H 57 PSC ruling, section K 58 Figure source: New York State Energy Research and Development Authority, LMI Community Solar Initiative Concept. Albany, NY: NYSERDA, April 3,

30 Benefits of Community Distributed Generation CDG projects share the general environmental benefits of any solar array displacing oil- and gas-based generation, including reduced GHG emissions and pollution, which, in turn, enhances public health (e.g. lower asthma and cancer rates), protects the natural environment, and significantly reduces volatility in variable costs (because the energy source is provided for free by the sun, the marginal cost of a kwh of solar is virtually zero). 59 The main benefit of CDG within the context of this study is that it addresses many of the limitations those traditionally excluded from solar face when trying to gain access to solar energy. This includes roof space, property age, and lack of renter control over properties. The comparatively large scale of CDG projects may help in spreading the initial high upfront costs and achieving economies of scale. Thus, CDG has been posed as a solution to the two-pronged problem of equitable clean energy access and energy affordability. Furthermore, CDG projects have the ability to provide local jobs and build community. 60 As suggested in a recent report by the Interstate Renewable Energy Solar is a priority for New York City, and community solar is best way to do that at scale. Ben Mandel, NYC Mayor s Office of Sustainability Council, low-income CDG can help enhance the economic wellbeing of these communities through providing pathways for residents to more directly participate in and benefit from the clean energy economy, including the creation of employment opportunities David Feldman et al. Shared Solar: Current Landscape, Market Potential, and the Impact of Federal Securities Regulation. National Renewable Energy Laboratory, April Giancatarino, Anthony Community-Scale Energy: Models, Strategies and Racial Equity: A Scan of Community Innovation around Efficiency and Renewable Energy. New York, NY: Center for Social Inclusion. 61 Interstate Renewable Energy Council, Shared Renewable Energy for Low- to Moderate-Income Consumers: Policy Guidelines and Model Provisions,

31 Section 2.2 How CDG Works 2.2a CDG Installation Models On-building installations Figure 2.3 On-building installation model A multifamily building can host a CDG project by installing solar PV panels on its roof and limiting subscribership to building residents (Figure 2.3).62 The landlord, be it a publichousing agency, non-profit, or private LLC, either owns the system or leases the roof space to a developer or sponsor. In this scenario, the array owner directly links the system generation to the host meter, which typically powers shared spaces, such as hallway lights and elevators. The energy produced that is in excess of shared spaces load is then distributed among participating residents of the building. Not all residents are necessarily required or invited to participate. As the PSC CDG order currently stands, the sponsor is responsible for ensuring that appropriate portions of the energy credits are distributed to participants by providing up-to-date subscriber lists to the local utility. The utility is then responsible for applying credits to the accounts of the participating subscribers. Remote installations Figure 2.4 Remote installation model Remote installations can either be groundmounted or on a nearby roof, so long as they are within the same load zone as the subscribers (Figure 2.4).63 Utilities (if allowed a special dispensation by the PSC), commercial or residential property owners, developers, non-profits, or other entities can own the system. In remote installations, there may or may not be an anchor tenant. Instead, Figure source: David Feldman et al. Shared Solar. National Renewable Energy Laboratory, April Figure source: David Feldman et al. Shared Solar. National Renewable Energy Laboratory, April

32 all electricity generated could conceivably go to subscribers. There must still be a project sponsor responsible for managing subscribers and communicating subscriptions to utilities. Remote installations tend to have more flexibility, as membership is not limited to single buildings and larger rooftops or open land may be leveraged to increase solar capacity and achieve economies of scale. However, being remote may eliminate many of the social engagement aspects of CDG projects, unless additional steps are taken to actively engage subscribers in the project, for example, through workforce development or volunteer options. Anchors Master-metered buildings CDG projects typically have an anchor, the largest energy offtaker of the solar array (see page 27). In New York, an anchor may take no more than 40% of the energy produced by the solar installation, and the sponsor must then distribute the rest to the surrounding community. An anchor can play multiple roles in a CDG project, from offering land or roof space for a solar installation, to providing financial backing, to community engagement. Anchors can be a number of different kinds of actors, including hospitals, schools, warehouses, government agencies, big-box stores and malls, churches, community-based organizations, and public housing complexes, among others. It would be helpful if there is an anchor to serve as a backstop. Bruce Schlein, Citi Bank [The] most financeable is a single system with anchor offtaker who is credit rated [you can] balance that out with an unrated subscriber base. Ed Rossier, US Bank Master-metered buildings, wherein all electricity charges are included in the rent and paid to the utility by the landlord, pose a particular challenge for on-building solar installations. In this situation, utilities are not able to credit individual bills and thus ensure that members reap the monetary benefits of solar. Since monitoring distribution of benefits would be cumbersome and costly in a mastermetered property, we have chosen to exclude master-metered tenants from this report and analysis. Anchors will tend to have larger roofs or greater access to vacant land, enabling larger installations and better economies of scale. They can also serve to sponsor or backstop the project financially. They are frequently better able to leverage their good credit and balance sheets to support affordable loans and simplify due diligence for the investors. In an interview with a major tax equity investor, anchor tenants were seen as a major way to mitigate perceived financial risk, if the anchor was willing to offtake and pay for energy from drop-out or defaulted customers. (See the example of FruitBelt Neighborhood Project page 33 for further description of the benefits of an anchor.) 32

33 Networked installations Figure 2.5 Networked installation model Networked installations are comprised of arrays on multiple roofs distributed across a service area (Figure 2.5). 64 The FruitBelt Neighborhood REV demonstration project currently underway in Buffalo, NY adheres to this model. Numerous buildings, often singlefamily owned or rented, install arrays on their roofs that exceed the capacity needed by the host household. When large numbers of roofs are enrolled, the excess generation is pooled and offered to neighbors who cannot host solar themselves. Networked installations share many of the same community-building benefits as on-building installations. In addition, these kinds of projects can achieve economies of scale in terms of bulk purchasing, financing, and installing. They may also improve grid efficiency, which is a hypothesis currently being tested in the FruitBelt Neighborhood REV Demonstration project. However, the numerous interconnections and installations require substantial labor, administration, and host acquisition costs. The project in Buffalo has suffered from a dearth of suitable roof space and is not on track to achieve its 500-kW goal using this model. FruitBelt Neighborhood Solar REV Demonstration Project Project Type: Networked Installation, quasi-cdg Capacity: 500 kw (target), ~25 kw online as of Jan 1, 2017 Location: Buffalo, NY 65 The FruitBelt Neighborhood Solar Partnership in Buffalo, NY runs one of several REV demonstration projects intended to pilot new project types and perform research. This project will be a 100-system networked installation located in a low-income area of Buffalo, the FruitBelt neighborhood. A main goal of the project is to assess how highly distributed generation impacts peak load and grid performance, with a secondary goal of providing clean energy and bill credits to low-income households. 64 Figure source: David Feldman et al. Shared Solar. National Renewable Energy Laboratory, April Implementation Plan for Fruit Belt Neighborhood Solar REV, National Grid, January 4,

34 All arrays are owned by the local utility (National Grid), and the projects are financed using funds collected from renewable energy fees on utility bills, and installed free-of-charge on 100 participating homes. The local hospital, Buffalo Niagara Medical Campus, serves as an anchor, facilitating community outreach and helping to organize the project. The program was marketed through utility-sponsored mailings and through contracting with a canvassing organization. This project is not strictly CDG, but has an initial period of quasi-cdg wherein in the first 2 years, 50 subscribers who have expressed interest but are unable to host solar themselves (because they are renters or have unsuitable roofs) will receive credits of $15+. After 2 years, all savings would revert to host households. This Partnership has struggled to find enough suitable roofs, as many homeowners who have expressed interest require substantial roof repairs. National Grid has a budget of $2,000/household for roof repairs, but in many situations, these funds are insufficient. In the next stages of the project, National Grid has revised their strategy to include anchor hosts (e.g. churches, community-based organizations) in order to reach their capacity targets. Key Takeaway: Not all roofs are able to accommodate a solar PV array without substantial upgrades. Making sufficient funds available for upgrades will allow the State to bring more solar capacity online. In addition, anchor host sites may enable larger arrays and facilitate the inclusion of more offtakers. 34

35 2.2b Customer Acquisition and Management In all CDG projects, initial identification of potential customers can be difficult. Although many of the stakeholders interviewed for this report note a growing familiarity with solar energy among the public, solar contracts remain relatively complex and require a significant investment of time and effort. It is even more difficult for low-income customers, who tend to be particularly wary of potential scams due to a history of ESCO abuse. Typically, getting the first members is most difficult, due to unfamiliarity with solar markets and lack of trust in developers. Most solar companies rely on traditional community outreach, using partners such as community groups, local government, and churches that are well-established and trusted within the target neighborhood. As solar penetration in a neighborhood grows, so does word-of-mouth. Participants are able to see and potentially engage through volunteering in the installation of the solar array. Visibility may seem trivial, but studies have shown that when an individual sees neighbors install solar photovoltaics, the likelihood of following suit dramatically increases. 66 This, in effect, provides peer-to-peer marketing for future projects. In addition, when individuals feel more engaged in a project, they may be more committed to prioritizing payment of bills and expenses associated with it. If you want people engaged, get it on the roof they see it every day. Paul Tyno, FruitBelt Neighborhood Solar Partnership Many developers choose to delegate subscriber acquisition and management to dedicated companies (ESCOs). Historically, ESCOs were able to do so at the lowest cost, as they were able to draw upon existing customer service departments. Recent inquiries by the PSC into claims of ESCOs overcharging customers found that New York State low-income customers who chose service from an ESCO paid almost $96 million more than they would have for service supplied by their default service utility. As a consequence, as of December 2016, ESCOs are banned from selling electricity to low-income customers. 67 Today, progress in software development and automation may drive down the cost and effort required for subscriber acquisition and management. Portals such as the one developed in partnership between the NYC Mayor s Office of Sustainability and City University of New York (CUNY) serve as platforms to connect energy consumers, developers, and roof owners (see 66 Ben Schiller, If Your Neighbor Gets A Solar Panel, You re Going To Want One, Too, Fast Company, October 30, 2014, 67 New York Public Service Commission, Order Adopting a Prohibition on Service to Low-Income Customers by Energy Service Companies. Case 12-M-0476 New York: PSC, December 16, 2016, F6B7C1D64A16. 35

36 Case Study below). For example, UtilityAPI is changing how energy usage data is released by utilities. Most software will likely be used to facilitate back-end management by developers, rather than to directly interface with low-income consumers. Although studies show that lowincome households are increasingly making use of online tools to track bills, many still do not have access to internet. In New York City, for instance, almost 20% of households have no internet at home or on their phones. 68 Best Practices: Subscriber Management Promote use of subscription management software. Scaling up CDG enterprises will require increasingly cost- and time-effective subscriber management processes. On the customer acquisition side, initiatives exist to facilitate connection of potential subscribers with solar CDG developers (for one such example, see Shared Shared NYC Gateway below). However, not all low-income customers may have ready access to the internet, and therefore customer-facing software solutions may not be useful for these communities. On the back-end subscriber management side, developers must make use of effective online tools to streamline internal processes and interactions with utilities. As things stand, many developers still rely on Excel spreadsheets to consolidate customer names, account numbers, and amount of energy used, information that is then sent to the utilities to correctly assign credits. While this may work on a small scale, it will quickly become cumbersome, driving up inefficiencies and administrative costs for both project managers and utilities. The market is already working to streamline and automate these processes. Some solar developers such as SunShare and SolarCity have developed their own in-house software, while utilities such as ConEd are planning to introduce similar software in the near future. Early movers such as the Clean Energy Collective (CEC) have developed software-as-a-service systems that facilitate billing processes. We recommend that developers interested in growing their CDG business engage with software companies to find technological solutions best suited to their needs. This may take the form of an open-source platform made freely available to anyone, or it could be a tool tailored to the needs of a particular solar developer. Given the rapid growth of the 68 Mayor de Blasio, HUD Secretary Castro, and T-Mobile Announce 5,000 Families in Bronx Public Housing to Receive Free Tablets and Mobile Internet Service, NYC Mayor s Office, December 16, 2016, families-bronx-public-housing#/0 36

37 market, free or low-cost software should be available to sponsors operating to benefit underserved communities. Case Study: Shared Solar NYC Gateway The Shared Solar NYC gateway is a joint venture between NYC Solar Partnership, Solarize NYC, and CUNY. This initiative uses a webpage to bring together solar hosts, developers and subscribers, thereby eliminating many information barriers and outreach costs, particularly for low-income communities. The gateway has not yet facilitated any projects, which CUNY attributes to difficulties finding appropriate roofs in New York City. However, the project has attracted a large number of potential subscribers, demonstrating that there is a demand for CDG. Key Takeaway: Online platforms may help alleviate customer acquisition costs, but siting remains a major barrier, particularly in dense urban areas. 2.2c Siting Rooftop solar Rooftops are a popular choice for installing solar panels for residential/small-scale projects. However, rooftop installations are not available to everyone because of the following constraints: Roof space: Based on an average solar panel size of 15 sq. ft. and generation of W DC, typical power generation density is between W/sq. ft. The roof area required to accommodate a 50 kw system is therefore approximately 3,300 sq. ft. 69 For a given system size, required area of roof space can be impacted by these factors: Roof orientation (ability to place panels south-facing) Obstructions (e.g. pipes, HVAC systems, dormer) Shading (from neighboring buildings/trees) Existing fire code provisions 69 U.S. Department of Energy, SunShot Initiative Rooftop Solar Challenge II, New York City Multifamily Solar Guide, CUNY, March 2015, 37

38 Roof age: Solar PV systems have an estimated lifespan of years. The roof supporting any such system must therefore have at least years of good life remaining at the time of installation. 70 If a roof does not meet the requirements for a solar installation, roof upgrades would be needed and would add to the overall cost of the project. New York State has many old buildings that may require significant roof upgrades in order to host a solar rooftop project (see FruitBelt Neighborhood Project). Not a lot of people are willing to give up their roof space for years. Dan Giuffrida, Safari Energy Roof usage rights: Before installation of solar rooftop projects, it is also imperative to consider roof ownership and development rights. Some buildings (e.g. co-operatives) may have roofs as a common resource, which can affect the permissions required to secure roof-usage rights (see Section 2.2e). Additional considerations are required for historical buildings, which face strict municipal codes to preserve architectural integrity. Open land/ground mounted solar For rural areas, ground mounted systems may be preferred. For a 250 kw CDG project (serving around 50 households), roughly 50,000 sq. ft. of open land would be required. 71 Selection of suitable open land for ground mounted solar depends on the following factors: 72 Cost Ownership Shading, trees, or other obstructions Current/potential usage Distance from the load station/power lines 70 U.S. Department of Energy SunShot Initiative Rooftop Solar Challenge II. 71 U.S. Department of Energy SunShot Initiative Rooftop Solar Challenge II. 72 Sara Matasci, Ground Mount Solar Panels: Top 3 Things You Need to Know, Energy Sage, April 3, 2016, 38

39 Siting considerations for urban settings Available roof space in NYC is reduced substantially because of fire code provisions, which may take up to 11% of roof area for fire access paths. This is 3 times greater than fire code requirements for other areas in NYS. 73 Placing a solar system on a roof is a 20- to 25-year commitment. There is an opportunity cost to choosing Roof space is a huge barrier in NYC. Solar developer to build solar instead of keeping that space open for future, potentially more profitable ventures. Open land ground mounted systems are rare in urban regions, because of the high price of land, small lot sizes available, and shading due to adjacent structures. Rural areas may have more open land available for CDG. Best Practices: Customer Acquisition & Siting Developing partnerships with mission-aligned outreach organizations. Outreach and educational barriers have traditionally restricted low-income customers from benefiting from solar. One critical factor affecting low-income outreach programs is trust. Information, benefits and other aspects of participation in CDG projects should come from trusted leaders and organizations in order to generate maximum participation. These may include non-profit community organizations, churches, schools/colleges, hospitals, community centers, affordable housing developers, and others. This also includes government agencies that may have a higher willingness to reach out to underprivileged neighborhoods than traditional market actors. We believe that this targeting approach of partnerships with trusted leaders and mission-aligned outreach organizations will provide a quicker response than would otherwise be possible when establishing working relationships and educating various organizations. Such partnerships may also facilitate the search for available roof or ground-mount space, particularly as established organizations such as churches and community centers tend to be located in larger buildings than many residences. Furthermore, mission-aligned 73 Christian Roselund, Solar in the Big Apple, PV Magazine, August 22, 2016, 39

40 organizations may be more willing to participate in low-income projects even if they generate only modest returns and may be more tolerant of potential setbacks and issues. Finally, low-income households may feel more at ease with projects organized through a trusted partner. Case Study: CDG Project with Low-Income Participation Project Name: San Miguel Power Community Solar Type: Remote-sited CDG, ground-mounted Capacity: 1.1 MW Location: Bedrock, CO Colorado passed the Community Solar Gardens Act in 2010, which allows homeowners to purchase shares of centralized solar installations. Furthermore, Colorado requires that 5% of the electricity of each solar garden be reserved for subscription by low-income households. The San Miguel Power CDG project is a 1.1 MW system located on 7 acres of rural land in Colorado. When construction plans were announced in 2012, it was the largest CDG system in the country. 74 The system is owned and operated by Clean Energy Collective, but was developed in close partnership with a local energy cooperative, the San Miguel Power Association. This large system has ~5,000 shares available at 235 W each at a cost of $705/W, with an additional rebate (depending on location). One share is expected to generate $45 in savings each year. Customers are invited to purchase multiple shares up to 100% of their historical usage. So far, at least one customer purchased 100 shares. 75 To include lower-income individuals and renters, Clean Energy Collective partnered with a local credit union to create a program for long-term financing at interest rates as low as 2.25% for a 3-year loan or 5.5% for a 10-year loan. Unlike many solar loans, the loan was secured using the value of the panel itself instead of on homeownership, thus enabling renters to participate. 76,77 Key Takeaway: Working with mission-aligned organizations in both the clean energy and 74 Becky Mashburn, SMPA Community Solar Offering Sunny Solution for Members, Simply Solar CPS Energy, September 4, 2012, 75 Collin McRann, Paradox solar farm about half sold, Telluride Daily Planet, December 1, 2014, 76 Laurel Passera, Shared Solar Financing Goes Local, IREC, February 3, 2014, 77 CEC Launches Community Solar Garden Financing Program, Clean Energy Collective, April 17, 2012, 40

41 financial sectors can allow developers to create flexible models that meet the needs of a diversity of customers, including renters and low-income customers. 2.2d Subscription and Contract Structure While CDG projects across the country demonstrate a diversity of crediting models, currently the major types include volumetric and monetary. Volumetric credits are based on the number of kwh produced by the portion of the array associated with the subscription, whereas monetary crediting may be flat-fee or adjusted as a percent of the overall solar production. Monetary crediting is usually used in virtual net metering, which is not currently allowed for residential customers in New York; therefore, this section will focus on volumetric crediting. In most CDG projects, subscribers own shares in a given number of panels or a certain percentage of the total array. There is no specific formula for determining the share size, but it does not usually exceed 100% of historical energy usage for that household. In most instances, the share size is between 15-75% of historical usage. 78,79 Many CDG projects allow subscribers to buy multiple shares so as to increase the amount of their energy savings. Most subscription models require an upfront payment to purchase a share of solar generation. A frequently used range of up-front payments in Colorado and Michigan projects is $700-$800 for an average sized panel, though some large shares may be in the thousands of dollars. 80,81 Frequently, there is an additional monthly charge for the subscription, which should be substantially less than the solar generation bill credit received each month. Some models have allowed for no upfront costs, instead providing a pay-as-you-go service wherein the fees are deducted from future energy bill savings. This is typically the case in projects that include low and moderate income households, who tend to be less able to make large upfront expenditures. 78 Solar Rewards Community Minnesota Subscriber FAQs, Xcel Energy, March 18, 2015, Subscriber-FAQs.pdf. 79 National Rural Electric Cooperative (NRECA), Solar Case Studies, 80 National Rural Electric Cooperative (NRECA), Solar Case Studies, 81 Beverly Corbell, DMEA Completes Construction On Two New Solar Arrays, The Watch, July 20, 2011, July_ pdf. 41

42 Most CDG regulations require that a contract be drafted between the array sponsor and the subscriber that details the benefits of the program, dispute resolution, contract termination fees, and duration of the agreement. New York requires sponsors to have contracts with all subscribers. Many states stipulate that contracts provide specific consumer protections such as guaranteed savings, specific disclosures, or limited subscription price escalation. Since renters tend to be more transient than homeowners, contract length and termination fees can be a major barrier for renter participation. Renters and others who are uncertain about their short- or long-term living situations may be reluctant to enter into multi-year contracts. Unfortunately, longer contracts with high termination fees are generally viewed as more favorable by financial backers, as they want to ensure that there is always an offtaker available to receive the energy and/or pay subscription fees. Balancing these two forces will be difficult, particularly as systems last approximately years. Anchors may also enter into contracts to take on excess energy in case of subscriber drop-outs. They may receive the excess energy at the subscriber rate, or at a lower rate so as to encourage the sponsor to find a new subscriber. However, in New York, anchors are entitled to no more than 40% of total generation. 2.2e Project Permitting, Interconnection & Approval Processes Project application costs can be divided into two segments: permitting costs related to State and municipal regulations; and interconnection costs related to connecting a distributed generation system to the utility-managed grid. 82 Government permitting The solar industry regularly claims to be strangled by administrative red tape, a problem that stems from multiple permitting authorities, documentation requirements, filling processes and fee structures across municipalities. 83 Each municipality in NYS has the power to set their own procedures for permitting. Figure 2.6 describes the key steps for CDG permitting across the State. Red tape - it s been an issue for as long as solar has happened in NYS. Solar developer 82 Understanding Solar PV Permitting and Inspecting in New York State, New York State Energy Research and Development Authority (NYSERDA) NY-SUN Team, September 2016, 83 Tom Zeller Jr., Solar Firms Frustrated by Permits, New York Times, January 19, 2011, 42

43 Figure 2.6 Example of CDG permitting process in NYS In an effort to streamline municipal permitting processes in NYS, in 2013 the government instituted the Unified Solar Permit. In participating municipalities, this single application replaces all other solar permitting procedures. Thus, a developer can submit a simplified application form along with relevant documents to the municipality s Department of Buildings (DOB). The department will then issue building and electric permits for the project within 14 days of application. However, only projects that are less than 25 kw DC are eligible for this permit, thereby excluding most CDG projects. Utility interconnection In order for distributed generation systems to be interconnected to the grid, developers must sign a contract with the utility, potentially pay system upgrade costs, and cover an interconnection fee. 84 Utilities are required to clearly identify costs related to the applicants interconnection to the grid. In turn, applicants are responsible for paying for the cost of the interconnection and, where needed, for the upgrades to the grid. The Department of Public Services monitors the application process to ensure that utilities address applications in a timely manner New York State Public Service Commission, Standardized Interconnection Requirements and Application Process for New Distributed Generators 5 MW or Less Connected in Parallel with Utility Distribution Systems, February 2017, p New York State Public Service Commission, Standardized Interconnection Requirements and Application Process for New Distributed Generators 5 MW or Less Connected in Parallel with Utility Distribution Systems, February 2017, p

44 The interconnection process differs for projects that are 50 kw or less and for those with capacity beyond 5 MW. Figure 2.7 describes the utility interconnection application process for project sizes 50 kw to 5 MW. Systems under 50 kw have an expedited interconnection process that does not require an engineering study. Figure 2.7 Interconnection process for CDG projects from 50 kw to 5 MW DC Best Practices: Interconnection Processes Streamline interconnection applications at utility level. During conversations with solar developers operating in New York State, it has become apparent that some utilities are better able than others to provide clear, straightforward project interconnection applications. ConEd, for instance, has established a dedicated Distributed Generation Group, responsible for talking to external stakeholders about applications, rates, policies, and educating developers about the interconnection process. Employees are on hand to answer questions and provide recommendations at every step of a project s development. It has earned a reputation for being a strong and willing partner for solar interconnection. Utilities and regulators must continue to prioritize streamlining methods across the State. 2.2f Project Operation and Maintenance (O&M) O&M is an important element to a solar system to optimize solar production, monitor performance, reduce risk, protect asset value, and comply with applicable regulations. 86 Operations of the solar system involve monitoring, administration of operation, protocols and documentation. Maintenance involves preventive procedures, administration of maintenance, 86 Glenna Wiseman, Solar Is NOT Maintenance Free: The Growing U.S. Solar O&M, Solar Power World, February 8,2014, 44

45 and improving performance. 87 Typically, O&M is outsourced to third-party providers, though some solar system owners, including utilities, operate and maintain the system in-house. 88 According to a study conducted by the Federal Energy Management Program, average O&M costs for distributed generation systems vary from $21 (+/- $20) kw/year for systems <10 kw to $19 (+/- $10) kw/year for large systems >1 MW. 89 Since solar systems have an asset life up to 25 years, proper design and implementation of operations and maintenance will have an impact on the performance and longevity of the system. Best Practice: Energy Efficiency Programs Combine CDG Projects with Existing Energy Efficiency Programs in Order to Maximize Energy Savings. In order to maximize savings, energy audits and weatherization measures should be taken before subscribers offtake from a CDG project. Weatherization programs for low-income homeowners and renters already exist in New York. Making subscribers aware that they can tap into no-cost energy efficiency upgrades will maximize utility bill savings and lower energy burden. Weatherization measures can produce energy savings of over 20% annually 90. This means a weatherized household will consume less energy from the grid and the solar array, thus further reducing the amount they pay for utilities each month. Some of the causes of high utility bills include the age of the housing stock, household conditions, and energy consumption. When signing up for a CDG program or opting into the online portal (see Recommendation 9), subscribers should receive information on nocost energy efficiency options available to them. Outreach should also be done by community partners in neighborhoods where CDG projects are in the process of being developed. 87 T.J. Keating, A. Walker, K. Ardani, Best Practices in PV System Operations and Maintenance, Solar Access to Public Capital (SAPC) Working Group, Version 1.0, NREL, March 2015, 88 Cedric Brehaut, The Growing Split Between Solar Operations and Maintenance, GreenTech Media, January 21, 2016, Maintenance. 89 T.J. Keating, A. Walker, K. Ardani, Best Practices in PV System Operations and Maintenance, NREL. 90 About the Weatherization Assistance Program (WAP), New York State Homes & Community Renewal, 45

46 EmPower and WAP both offer home assessments to identify ways to improve efficiency. While both are administered by the State, EmPower is funded by NYSERDA and WAP by the U.S. Department of Energy. Both programs offer similar weatherization measures including sealing of cracks and leaks, insulation, appliance replacement, and lighting updates. Income eligibility for both programs is set at 60% of the State Median Income. 91,92 These programs perform energy audits and work with homeowners and renters to help them understand where there are opportunities to improve energy usage. This also helps them become more energy literate, which, in turn, encourages behavioral changes to reduce energy consumption. There are restrictions on the kinds of improvements renters can make since they don t have full control over the building where they reside. For example, heating and windows upgrades may have to be completed by the building owner. Another issue is that possible cuts to the WAP from the current Presidential administration will affect the amount of funds available for energy audits and weatherization. New York City has energy efficiency programs targeted more towards building owners, but this can also reduce energy bills for their tenants. Similar to EmPower and WAP, the NYC Retrofit Accelerator offers free personalized advice on ways to increase energy efficiency. While it does not offer no-cost solutions, the program connects building owners with qualified contractors and helps them find financing and funding such as cash incentives to help offset the cost of weatherization measures. Launched in 2009, NYC Cool Roofs offers no-cost or low-cost installation of a white reflective layer painted on NYC roofs. In 2012, NASA found that white roofs were 42 degrees Fahrenheit cooler than those with black surfaces; lower roof temperatures can help reduce energy usage. 93 Priority is given to non-profits and affordable housing buildings. 94 We recommend that all buildings installing low-income CDG on their roofs first receive the protective coating if they meet all rooftop criteria. 91 EmPower New York Eligibility Guidelines, New York State Energy Research and Development Authority (NYSERDA), 92 About the Weatherization Assistance Program (WAP), New York State Homes & Community Renewal, 93 Bright Is The New Black: New York Roofs Go Cool, NASA, March 7, 2012, 94 NYC CoolRoofs Initiative, NYC Mayor s Office, 46

47 Section 2.3 How CDG is Financed Existing Solar Financing Structure Solar projects are generally characterized by relatively low operational costs but high upfront costs. Solar financing remains a niche segment, particularly for CDG projects. The current solar market relies on existing federal, state, and local incentives to facilitate financing structures to make projects economically viable. Tax-Equity Structure One of the common forms of financing involves tax equity investors who have other tax liabilities and aim to take advantage of tax incentives available for solar projects. This type of financing tends to be relatively more complicated and may involve structures that are particular to the project. For example, one form of tax-equity financing structure is a sale-leaseback transaction where a project sponsor develops and constructs a solar project, sells the assets of the project to a tax-equity investor(s), and then the sponsor leases the system from the taxequity investors. The tax-equity investor(s) captures the projects tax benefits while it receives lease payments from the project sponsor. The project sponsor maintains responsibility on operating and covering expenses on the project and pays lease payments to tax-equity investors, which are funded from revenue generated from selling solar energy produced net of operating expenses. Another version of tax-equity financing is the partnership flip model where both tax-equity investor and sponsor (though at a lower level) share in the financing, risk and return of the project rather than an outright sale lease-back transaction. Under this structure, typically the tax-equity investors initially receive the benefits of the project through accelerated depreciation and tax benefits until a defined return is achieved, typically in or around year six. Once this milestone is reached, the project sponsor flips to % ownership and receives the remaining project cash flows. While these are not exhaustive examples of the many iterations of tax-equity structures deployed in the market, this type of financing is relatively complicated and requires extensive understanding of accounting and legal implications. 95 Accelerated Depreciation Investors can also be motivated to take advantage of the accelerated depreciation under the Modified Accelerated Cost Recovery System (MACRS), where the solar asset is depreciated over 95 David Fledman and Mark Bolinger, On the Path to SunShot, NREL. 47

48 the first 5 years of operation, and which lowers the taxable base in the early years of the project. Current ITC and MACRS can amount to approximately 56% of the installed costs of a solar system. 96 Until 2019, solar projects are eligible for bonus depreciation treatment where the year 1 depreciation is 50% of the eligible cost of the solar system. Power Purchase Agreements A purchase power agreement (PPA) with anchor or high-credit quality offtakers represents another form of financing structure. A PPA is a financial arrangement between a project sponsor, who is responsible for providing energy generation and operating the system, and subscribers, who purchase the energy produced from the system at a fixed price, typically at or lower than the utility s retail rate. PPA agreements typically range from 10 to 25 years. The purchasers of solar generation are typically high-credit quality counterparties, who have a demonstrated track record of meeting cash obligations. This helps reduce underwriting risk for financial institutions and investors. These types of structures incorporate debt financing and/or tax equity with the project sponsors retaining a portion of the equity. For solar subscribers, a PPA provides the advantage of avoiding upfront costs associated with ownership, reduces energy costs, and limits risk as it avoids the responsibility for the operation and maintenance of the system. Since solar project upfront costs represent a financial barrier, particularly to lowincome households, PPAs provide accessibility to solar for broader community bases and income levels, assuming the credit risk can be managed. The project sponsor or third-party investor benefits from the cash flow generated from the project, depreciation, and tax-benefits available. However, PPAs involve negotiations, administrative costs, and real estate implications that may represent a challenge to this model. 97,98,99 Diversity in Financing Models for CDG Currently, there are no clear, standard financing models for CDG projects. For those CDG projects that are in the pipeline or developed and operating, financing structures have been tailored to the specific projects and availability of incentives. It appears iterations of tax-equity financing have been relatively more market-accepted. However, tax-equity structures are typically complicated and less cost-effective than cheaper debt financing, while the latter form 96 David Fledman and Mark Bolinger, On the Path to SunShot, NREL. 97 Kieran Coleman, Thomas Koch Blank, Curtis Probst, and Jeff Waller, Financing Community-Scale Solar, How the Solar Financing Industry Can Meet $16 Billion in Investment Demand by 2020, Rocky Mountain Institute, February 2017, 98 What is a Solar Power Purchase Agreement? Solar Energy Industries Association, 99 Solar Power Purchase Agreement, US Environmental Protection Agency, 48

49 of financing remains difficult to obtain. Some examples of financing structures for CDG projects include a third party owner utilizing ITC and MARCS under PPA agreements (Sacramento Municipal Utility District: SolarShares Program), utility-financed (United Power: Sol Partners Cooperative Solar Farm, Colorado), a combination of tax equity, secured loan and sponsor equity (Co-Op Power 595kw project in Green Field), tax equity flip (Tri-County Electric Cooperative), and co-op member-funded (Okanogan County Electric Cooperative). 100 Challenges to Solar Financing Since CDG is a developing segment of the solar market, financing remains difficult to obtain. These projects need to demonstrate asset performance in order to establish a track record for financial institutions and investors Perceived constraints on credit and financeability make some developers less interested in community distributed generation. Ben Healy, CT Green Bank to get comfortable with the underwriting risks and thereby facilitate maturation of the solar financing market. Moreover, there have been only a limited number of CDG projects that have been developed, each requiring a demanding level of investment underwriting relative to a traditional investment opportunity in a mature asset class. The CDG market is taking steps to reduce this burden with proposals to standardize terms. For example, NREL formed Solar Access to Public Capital, a working group intended to standardize contracts, develop best practices, and build databases to facilitate solar projects. This process standardization may reduce due diligence requirements for third-party investors. 101 Additionally, the ability to obtain debt financing may be influenced by project system size, specifications, and geographic location. For example, certain solar projects may have difficulty in obtaining financing due to low credit ratings or are relatively too small to receive financing on a stand-alone basis. Since solar output is dependent on the sun, there are many variables that may impact production, such as weather, that can influence the financing components of a project. In other words, unshaded, sunnier locations may receive more debt financing due to higher levels of certainty in regards to energy production Isaac Baker, Co-Op Power, Community Shared Solar For All, NRECA, Solar Case Studies, and Jason Coughlin, Jennifer Grove, Linda, Irvine, Janet F. Jacobs, Sarah Johnson Phillips, Leslie Moynihan, Joseph Wieldman, The Community Solar Guide: Utility, Private, and Non-profit Project Development, U.S. Department of Energy, November 2010, Michael Mendelsohn, Mark Urdanick, John Joshi, Credit Enhancements and Capital Markets to Fund Solar Deployment: Leveraging Public Funds to Open Private Sector Investment, NREL, David Fledman, Mark Bolinger, On the Path to SunShot, NREL. 49

50 Structuring potential CDG projects also requires balancing opportunities to take advantage of tax credits and the degree of leverage it assumes. Tax-equity investors may be cautious with projects taking on too much debt financing as in a potential default, tax benefits may be recaptured. Moreover, there may be some limitations on the amount of leverage for a given project to the extent tax equity investors want to fully take advantage of the tax credits available and accelerated depreciation. 103 [Low-income inclusion] introduces risk, whether real or perceived, which leads to higher finance costs and potentially higher operating costs due to increased turnover and unremitted revenues. Dennis Phayre, Enter Solar There s no correlation between credit score and ability to pay. Solar developer Based on conversations with stakeholders, another primary challenge with financing low-income CDG projects is the perception of high credit risk within the low-income segment. Providers of financial capital use FICO scores as one of the main metrics to determine credit quality of consumers. During the underwriting process, FICO scores and other consumer information are used to determine default probability and credit riskiness. 104 Generally, lenders require minimum FICO scores of 700 to finance solar projects. 105 Nationally, the average low-income household FICO score is around While not all low-income households will have low FICO scores, there is a perception among financial actors that they pose an increased risk of default. In most cases, the assumption of financing for a potential CDG project resides at the sponsor level, but underlying subscriber credit quality and perception is a factor in the ability to obtain financing. To mitigate this underwriting risk, there are financial institutions that provide capital with certain creditenhancement products, including anchor offtakers or requiring sponsors to pre-pay a specific amount. However, tax-equity investors with limited project-level debt facilitate the majority of these CDG projects. 103 David Fledman, Mark Bolinger, On the Path to SunShot, NREL. 104 Coreina Chan, Kendall Ernst, and James Newcomb, Breaking Ground: New Models That Deliver Energy Solutions to Low-Income Customers, Rocky Mountain Institute, Gregory Hall, Progress, But Community Solar Still Isn t Shared, Cadmus Group, Robert Harrow, Average Credit Score in America: 2017 Facts & Figures, ValuePenguin, 50

51 Best Practices: Subscriber Risk Mitigation Implement subscriber backstops. One of the challenges of CDG is guaranteeing a project s continued profitability considering that subscribers could drop out. With fewer subscribers than originally planned, the system may fail to meet estimated rates of energy offtake, and thus fail to generate stable returns. In the case of CDG systems serving low-income subscribers, this uncertainty increases the project s financial risk and hinders developers chances of accessing low-cost funding for the project. An identified best practice is the implementation of subscriber backstops to ensure a constant rate of energy offtake in CDG projects. There are several different alternatives. One possible method is creating a subscriber waitlist, which stakeholder interviews suggest is typically set at between 5 10% of total subscribers depending on the project size. Thus, if one subscriber drops out, there is another immediately ready to step in and take that place. Another method involves making an agreement with the anchor tenant to take up excess energy within the limit of 40% of total production, per the PSC s CDG order. Both of these alternatives may be effective ways to mitigate the performance and profitability ramifications of subscribers dropping out of the project, while still allowing developers to continue their work with low-income communities. This best practice is associated with some challenges. For instance, subscriber backstops potentially increase subscriber management costs because of the need to maintain an upto-date record of potential subscribers. This practice also assumes that there will be sufficient demand for CDG in low-income communities to generate a waitlist. Implementing subscriber backstops is a relatively simple measure to mitigate the financial risk of CDG projects serving low-income individuals. This measure increases acquisition and management costs given the need to either sign up interested low-income individuals in the project s waitlist or reach out and partner with an anchor organization. However, these increased costs are likely to be offset by benefits stemming from mitigating project s financial risk through ensuring stable returns. Assuming that there is sufficient demand for CDG, this measure has the potential to reduce project risk. 51

52 Special Purpose Entities (SPE) In order to ensure regulatory compliance and maximize tax benefits, project sponsors will often form special purpose entities. For example, since a non-profit does not pay income tax, they may create a for-profit SPE to own the system in order to take advantage of tax credits. A utility may form an SPE in order to maintain compliance with regulations that forbid them from directly owning generation facilities. NY Green Bank Over the course of our research we interviewed Alfred Griffin, President of NY Green Bank, which is a division of NYSERDA. NY Green Bank s mission is to accelerate clean energy deployment in NYS by working in collaboration with the private sector to transform financing markets, and this includes efforts to stimulate activity in a variety of sectors, including CDG. 107 NY Green Bank s investments are driven by consistent, ongoing conversations with, and outreach to, private sector project developers, financiers, ESCOs, and others actively working to advance clean energy projects in New York State. NY Green Bank focuses on areas where there are opportunities that create attractive precedents, standardized practices and roadmaps that capital providers can willingly replicate and scale, and on areas where there is limited liquidity today. This is the case for the current emerging market for CDG, particularly relating to low-to-moderate income opportunities. Through ongoing conversations and evaluations performed at NY Green Bank, Alfred Griffin has found that low income is not directly affiliated with poor credit and there are a significant number of low- and moderate-income individuals with good FICO scores. Greater familiarity among developers, ESCOs, and financiers with the perceived and actual risks that exist would be helpful in terms of moving the market forward. Key Takeaway: NY Green Bank could potentially play a number of different roles to support the low-income CDG space, including but not limited to, providing financing for shorter term contracts, providing debt financing, or providing credit enhancement for tax equity investors. 107 Mission, NY Green Bank, 52

53 Connecticut Green Bank In 2011, Connecticut became the first US State to create a Green Bank. There mission is to ensure energy security and community prosperity by realizing CT s environmental and economic opportunities through clean energy finance and investment and achieve cleaner, cheaper and more reliable sources of energy while creating jobs and supporting local economic development. The CT Green Bank has over $130M in assets and derives its principal revenue stream from a $0.001/kWh surcharge on electricity bills. The Bank supports projects in underdeveloped markets or involving riskier underlying assets/customers, which would otherwise not receive financing. They offer loan origination, co-investment with private investors, credit enhancement, and securitization functions. CT Green Bank finances energy efficiency upgrades for low-income residents, pre-development loans to enable customers to get over initial hurdles such as auditing and specification/design costs associated with both efficiency and solar projects, and community distributed generation projects. Connecticut Green Bank works closely with public and private partners. For example, they partnered with the Connecticut Housing Investment Fund to ensure that low-income households have access to low-cost energy efficiency loans. To securitize a pool of solar loans, CT Green Bank collaborated with Mosaic, a crowdfunding investment firm, with the CT Green Bank originating loans through its partner Sungage and then packaging them for investment via Mosaic s platform. 108 They have also partnered with PosiGen, a private developer that offers no-money-down, nocredit check solar installations to low-income customers in order to expand low-income solar generation in the state. To date, there are approximately 12 low-income, master-meter multifamily projects in process in Connecticut. In an interview with Ben Healey, the Director of Clean Energy Finance, however, we determined that CT Green Bank is playing a very hands-on role in getting such projects off the ground. We suggest that they have gone beyond their role as a provider of low-cost capital to facilitate customer management and other administrative aspects of the project. Key Takeaway: CT Green Bank is partnering with private financial institutions on creative financing solutions to scale-up CDG projects in the State. 108 Michael Mendelsohn et al. Credit Enhancements and Capital Markets to Fund Solar Deployment: Leveraging Public Funds to Open Private Sector Investment, NREL, February 2015, 53

54 ConEd Shared Solar Pilot Program for Low-Income Customers Project type: Networked Installation, quasi-cdg Capacity: 3 MW (target) Location: New York City, NY In October 2016, Consolidated Edison Company of New York, Inc. (ConEd), the utility that serves New York City and some surrounding areas, petitioned the Public Service Commission to waive the restriction on utility ownership of electricity generation facilities in order to develop a pilot low-income CDG project. The program aims to install 3 MW of generation on ConEd-owned properties around New York City, and aims to provide net 7% savings for low-income customers within their service territory, with energy offtake sized proportionally to 12-month historical usage. Customers will pay for their subscription on a pay-as-you-go basis, with credits and subscription fees applied directly to customers utility bills. ConEd plans to recoup costs through subscription fees. Subscribers will be entitled to participate if they are enrolled in ConEd s low-income program and also in either a ConEd or NYSERDA no-cost energy efficiency program. The pilot program aims to determine which program design features are well received by low-income customers and determine whether CDG projects are an effective way to provide access to distributed energy resources to low-income subscribers. ConEd s implementation plan is due to be released at some point in The ConEd Shared Solar Pilot Program was authorized by the PSC in order to address a specific market failure, namely the low penetration of solar for low-income households. It is an exception to the ban on utility-owned electricity generation in New York State. This question of utility-owned generation remains highly controversial; many stakeholders are wary of utilities moving back into the generation space, fearing unfair competition and market distortions. Key Takeaway: Utility-owned CDG affords streamlined customer acquisition given that utilities already have customer bases and subscriber information. However, many stakeholders expressed concerns about utility-owned generation interfering with market competition and increased costs given utilities high cost of doing business. 54

55 Section 3. Financial Modeling and Analysis Executive Summary In our analysis, we find CDG project economics in New York challenging under existing incentives, financing options, and current installation costs. In order to encourage CDG projects across New York, our analysis shows that increasing current MW Block incentives is a highly use of public funds for improving project economics. Moreover, we believe that the State should facilitate access to competitive financing through NY Green Bank to help build market confidence in the sector. The combination of increasing MW Block with access to affordable financing should make CDG projects viable, while also providing substantial savings to customers. This will potentially accelerate CDG development across New York. As project installation costs decrease, NYS may begin phasing out or stepping down incentives, as MW Block is already designed to do. However, until such time as project costs are sufficiently low to generate returns without added incentives, NYS should provide additional support to encourage CDG projects, especially if they include low-income customers. Introduction To understand the economic feasibility of CDG projects in New York, we modeled numerous scenarios to explore project economics and sensitivities to key variables. In our models, the City of Buffalo is used to represent Upstate and New York City is used to model Downstate. While two cities cannot fully capture the diversity of contexts in New York State, they represent two divergent points on a spectrum and should provide a broader understanding of local marketplace dynamics, as well as interconnection, siting, and infrastructure constraints across NYS. We also examined two system sizes, a 50 kw DC nameplate to represent a small system and a 250 kw DC nameplate to represent a large system in each location. For all models, we assumed that a CDG project guaranteed 20% savings to customers. Given the many variables that may influence project economics, certain technical parameters were kept constant (see Appendix 3 for further details on modeling). This modeling exercise provides insights into economics of prospective CDG projects including constraints and break-even points for feasibility. This information can be used as a foundation for policy recommendations and further studies to put forth proposals for improving project economics so as to attract market participation. 55

56 Section 3.1 Solar cost trends in New York State In New York, there is wide dispersion of installed costs per watt across location, residential or commercial systems, and system size. The variability in total installed costs may be influenced by local labor costs, local regulatory environments, infrastructure and structural considerations, permitting costs and turnaround times. This study relies on total installed costs data sourced from the NYSERDA Solar Electric Programs database 109 and the latest report from NREL titled U.S. Solar Photovoltaic System Cost Benchmark. 110 There are limitations with solely relying on these data sources. For example, the NYSERDA Solar Electric Programs database includes only self-reported information for projects completed or currently in the pipeline where costs may not be reflective of current market rates, particularly as solar equipment costs have significantly declined in recent years (Figure 3.1). The NREL data does not always account for the variations in project contexts. Figure 3.1 Cost/W trends in NYS, with forecast to Cost/W trends in NYS have been declining, which is largely attributed to significant declines in solar equipment costs. As we extrapolate the data, we expect cost/w to continue to decline. 109 Solar Electric Programs Reported by NYSERDA Ran Fu et al. U.S. Solar Photovoltaic System Cost Benchmark: Q1 2016, September 2016, NREL, 56

57 Section 3.2 Overview of modeling exercise For this exercise, we used NREL s System Advisor Model (SAM) to run the financial and policy analysis. SAM is open-source performance and financial modeling software focused on renewable energy analysis. As SAM is a comprehensive and robust tool, it is trusted by a range of industry stakeholders. In order to ensure projects were, in fact, providing substantial savings to customers, all models assumed a 20% discount on utility bills (see Appendix 3 for more detail on this target). Installation costs In order to determine the installation cost/w for a solar array in New York State, we used historical data available from the Solar Electric Programs Reported NYSERDA Database. 111 We calculated the average, medium, maximum and minimum prices from January 2016 to February 2017 for solar systems sized between 40 kw to 60 kw to represent a small system (50 kw model) and 150 kw to 500 kw to represent a large system (250 kw model). To determine the impact of project costs on returns, we ran the models at a range of installed cost/w with the NREL forecast as a minimum cost ($2.07/W for a 200 kw commercial system) and the area median actual project costs from January 2016-February 2017 derived from the NYSERDA dataset as a maximum. 112 We believe this provides a realistic range of project costs from which we determine breakpoints on project economics under currently available incentives while targeting a 20% savings Modeling targets: 10% IRR 20% customer savings $1 of State funds generates improvement greater than $1 in project economics on current utility bills to PPA rates. We use 10% unlevered, after-tax returns as the target the market requires to pursue these projects. 113 In our findings, New York City projects gained an internal rate of return (IRR) of 10% at an install cost of around $2.00-$2.50/W depending on system size. For the model Upstate project, the NREL forecast price of $2.07/W was not low enough to provide an IRR. To determine the rate at which install costs were sufficiently low to generate an IRR, we continued iterating the model at 111 Solar Electric Programs Reported by NYSERDA Ran Fu et al. U.S. Solar Photovoltaic System Cost Benchmark: Q1 2016, NREL. 113 David Fledman, Mark Bolinger, On the Path to SunShot. NREL. 57

58 lower costs. The Upstate projects did not reach 10% IRR until costs dropped to $1.60-$1.80/W (Figure 3.2). Figure 3.2 CDG projects at current market cost: Despite declining cost/w, without additional incentives CDG projects remain uneconomic at current market costs. (A,B) Based on existing incentives, in NYC, cost/w would need to decline to $2.00-$2.50/W to achieve 10% IRR. (C,D) For CDG projects in Upstate New York to achieve 10% IRR, cost/w would need to decline significantly below current market levels to $1.60-$1.80/W. Despite declining cost/w, without additional incentives CDG projects remain uneconomic at current market costs. Given that these models still include current levels of incentives and retail net metering rates, it will likely be some time before it will be feasible to scale back incentives without stifling CDG growth. New York State should continue to monitor trends in installation costs in order to determine the impact of regulatory decisions on the market. It would be detrimental to solar development to remove incentives before costs are low enough to accommodate such changes. 58

59 Defining the base case A base case was created using the median price from the NYSERDA database (Table 3.1). The median price is a more accurate representation of costs as there were a few outliers that skewed the data. Table 3.1 Median system cost/w. Based on median system cost/w sourced from NYSERDA database, Upstate systems are around $1.00/W lower than Downstate. Name plate Downstate Upstate 50 kw $4.04 $ kw $4.06 $3.00 The base case also assumed that current incentives remain available for solar, including the 30% Federal ITC, $5,000 New York State Solar Tax Credit, and the MW Block (MWB) incentives, which vary by region (Table 3.2) Table 3.2 Current MW Block incentives. The MW Block incentive is $0.30/W lower Upstate than Downstate for a 50 kw name plate system and $0.39/W for a 250 kw name plate system. Name plate Downstate (ConEd region) Upstate 50 kw $0.70/watt $0.40/watt 250 kw $0.61/watt $0.22/watt Incentive models In order to determine which policies and incentives have the biggest impact on a project s financial viability, we ran the following model: Base Case: Median cost/w, Current MWB & 0% debt Isolated MWB: Median cost/w, Double MWB & 0% debt Isolated low-cost loan: Median cost/w, Current MWB incentive & 50% debt - 0%, 2%, 3.49%, market rate Combined MWB & interest rate incentives: Median cost/w, Double MWB incentive & 50% debt - 0%, 2%, 3.49%, market rate 59

60 We chose to double the MW Block, as NYS already provides this incentive to low-income homeowners to install single-family solar through the Affordable Solar program. The interest rates chosen are similar to those provided by NYSERDA s On-Bill Financing program (3.49%) and HPD efficiency loan rates (2% and 0%). Section 3.3 Modeling results The importance of access to capital Our models demonstrate that access to capital greatly improves project economics. When comparing the same project with no debt or 50% market-rate debt, the debt case has substantially higher IRR, even when faced with high installation costs (Figure 3.3). 114 Many representatives of commercial financial institutions interviewed for this report indicated that smaller CDG projects (<1 MW) would likely not be worth their attention, as the financing costs are high and somewhat constant regardless of project size. However, as more loans are originated, due diligence costs will fall due to streamlining and standardization. This indicates that there is a limited, transitional role for the State in providing access to capital for initial projects in order to build market confidence in the sector. Figure 3.3 Impact of access to debt on project IRR (NYC 250 kw and 50 kw). CDG project economics significantly improve on an IRR basis with debt financing. As illustrated below, projects with debt generate a positive IRR at higher system cost/w than comparable projects without debt. In addition, access to debt below market rates may improve project economics while also enabling 20% savings to customers. As part of the model, we analyzed the impact of interest rates set at and below market-rate. 114 Market interest rate is defined as L (3 month LIBOR). See Appendix 3 for further details 60

61 The impact of lower-cost debt was substantial across both locations and array sizes. For example, in New York City, a 250 kw system would gain an IRR of over 10% with interest rates at 3.49%, compared to no IRR with market interest rates (Figure 3.4). Figure 3.4 Impact of low interest rates on IRR and NPV of a model 250 kw system in NYC. Lower interest rates further improve project economics. For a large NYC system, rates at 3.49% or lower generate an IRR that would be market-acceptable. This demonstrates the importance of affordable financing to grow the CDG market. Despite the fact that the 250 kw NYC system reached 10% IRR with 3.49% interest rates, this was not true for any of the other models run. The 50 kw system in NYC only approached 10% IRR when the interest rate on the debt declined to 2%. This presents a compelling case for Figure 3.5 Impact of low interest rates on IRR and NPV of a model 50 kw system in NYC. Given relatively high cost/w for smaller systems, interest rates must be lower for such projects to be viable. 61

62 having partners within the municipality, such as HPD, use their low-cost financing programs to support such projects at their standard rates (such as 0%-2% for HPD) (Figure 3.5). While net present value (NPV) was improved under low-cost debt, this incentive alone is insufficient to make Upstate projects viable (Figure 3.6). To spur projects Upstate, layering of incentives will likely be necessary. Figure 3.6. Impact of low interest rates on IRR and NPV of (A) 250 kw / (B) 50 kw Upstate models. Given the lower cost of energy in Upstate New York, project economics remain challenging despite cheap, low-cost debt financing. 62

63 Advantages of MW Block incentives Based on the modeling results summarized in Figure 3.7, we find that doubling the MW Block incentive generates positive NPV for Downstate projects, while providing 20% savings to customers. However, without access to debt, they are not enough to bring returns to 10%. If New York City projects are financed by debt (even at market rates), project returns soar, raising IRRs over 60%. If the MW Block were doubled for these projects, NY Green Bank could provide market-level interest rates for the initial projects to prove the concept to the private market. If successful, the private market could then take up the charge and finance similar projects. Figure 3.7 Impact of doubled MW block plus low interest rates on IRR and NPV for (A) 250 kw / (B) 50 kw models in NYC. Project economics in NYC for both 250 kw and 50 kw models are meaningfully improved with the combination of doubled MW Block and low interest rate debt financing. This illustrates the positive impact of these two proposals for the development of a CDG market. 63

64 For a 50 kw system Upstate, the model project generates returns with a 3.49% interest rate, but in the 250 kw system, the project only reaches 10% IRR when paired with a 2% interest rate. Unlike New York City, the doubled MW Block incentive would not generate returns Figure 3.8 Impact of (A&B) doubled and (C) tripled MW Block plus low interest rates on IRR and NPV (A) 250 kw / (B) 50 kw Upstate models. Project economics Upstate for both (A) 250 kw and (B) 50 kw models are also meaningfully improved with the combination of doubled MW block and low interest rate debt financing. However, given the lower cost of energy in Upstate New York and the already low MW Block rate, doubling this incentive is insufficient to generate acceptable market returns. When MW Block is tripled, NPV is finally positive for an Upstate 250 kw system (C). 64

65 Upstate unless paired with a below-market interest rate. Since the New York City MW Block incentives are higher to begin with, a doubling increases the incentive by a much larger magnitude than Upstate. If New York State seeks to use MW Block as a major lever to spur projects Upstate, it would need to provide MW Block incentives closer to current (standard, non-affordable Solar) New York City levels, or triple their current levels (Figure 3.8). We acknowledge that some of the returns generated under some of these scenarios are quite large. We do not mean to suggest that the State should subsidize projects so they generate IRRs close to 100%. Instead, we seek to demonstrate the impact of various levers on project economics. One potential limitation of the analysis performed here is the assumption that there is no real estate value or opportunity cost to tying up roof space for 20 years. While, these projects generate returns, much of these returns are likely to be consumed by economic rents paid to scarce factors, namely, roof space. In addition, as project costs decline, many of these incentives will no longer be necessary. It is important that the State continue monitoring trends in installation costs and project economics when modifying incentive levels and structures. We have determined that, for the time being, incentivization is necessary for the CDG market to establish a foothold in New York State, especially if projects include low-income offtakers receiving guaranteed savings. 65

66 Section 3.4 Cost effectiveness of incentives Increased MW Block is more cost-effective than low-cost debt The NPV of all projects modeled in this report were consistently more sensitive to MW Block incentives than low-cost debt incentives. For example, we determined that to increase NPV of the Upstate 250 kw system by $1.00, the State would only need to spend $0.68 on MW Block. To achieve the same improvement in NPV, the State would have to spend $1.15 if using a lower interest rate incentive (3.49%) (Table 3.3). Interviews with developers revealed a consensus that MW Block would most likely have the largest impact on project economics. This model confirms that this large impact may also come at lowest cost to New York State. Combining increased MW Block with access to debt is cost-effective and can make projects viable When considering incentives in isolation, MW Block was most cost-effective. However, layering MW Block with access to debt contributed to an increase in NPV and also allowed project IRRs to reach 10%. For the base debt case, we assumed a market interest rate and therefore assumed that this imposed no cost to the State. For other interest rates, we determined the present value of the difference in cash flows between the discount rate and the market rate (Table 3.3). Subsidized Upstate projects cost less As discussed previously in this section, Upstate projects appear to have more difficulty achieving returns. This is likely caused by a combination of lower energy prices and reduced incentives. However, additional incentivization is less costly for Upstate projects. For example, doubling the MW Block in NYC requires the state to contribute an extra $0.61-$0.70/W, whereas Upstate it only requires $0.22-$0.40/W. If an increase of magnitude, rather than proportion, is considered, the same cost would be incurred by tripling or even quadrupling the MW Block incentive Upstate. As we saw in Figure 3.7 above, tripling the MW Block to $0.66/W for the Upstate 250 kw model made projects highly economic, at a cost of only $0.44/W to the state. Just doubling the MW Block for the larger NYC project ($0.61/W) would cost more than tripling the Upstate rate. As such, the New York State PSC should consider providing similar magnitude subsidies to Upstate low-income CDG projects as to Downstate projects, rather than simply proportional increases as are provided in the Affordable Solar Program. 66

67 Table 3.3 Cost to the State to increase NPV of projects by $1. An incentive is considered cost-effective if increasing NPV by $1 costs the State $1 or less. This analysis indicates that increasing MW Block incentives is the most cost-effective mechanism to improve project economics. The combination of increased MW Block incentives and debt financing at market-rates generate additional NPV. However, we believe higher MW block incentives plus low-cost financing options would accelerate CDG development. Modeled incentive Marginal cost of additional incentives to achieve +$1 NPV Buffalo 250 kw Buffalo 50 kw NYC 250 kw NYC 50 kw 2x MWB (no debt) market interest N/A N/A N/A N/A 3.49% interest % interest % interest x MWB + market interest x MWB % interest x MWB + 2% interest x MWB + 0% interest x MWB (no debt) x MWB + market interest x MWB % interest x MWB + 2% interest x MWB + 0% interest Blue text indicates models with IRR > 10% Shaded cells indicate cost-effective incentives (>$1) 67

68 Section 4. Recommendations Based on the policy analyses, stakeholder interviews, and financial modeling exercises described in this report, we have developed 10 recommendations that represent the most impactful steps New York State policymakers can undertake to facilitate CDG projects and include low-income households in NYS. While the recommendations will need to be implemented by specific agencies, the Cuomo Administration should also use this document to inform its political priorities and encourage agencies to adopt them. These recommendations are specifically targeted to be responsive to the questions raised in the March 2017 PSC Order on Net Energy Metering Transition, Phase One of Value of Distributed Energy Resources, and Related Matters, 115 in particular: A) Mitigation of Bill Impact and CDG Project Costs 116 Recommendation 1. The PSC should reduce the minimum number of subscribers for all CDG projects to three. Recommendation 2. NY Green Bank should institute a Debt Acceleration Program for CDG projects. Recommendation 3. NY Green Bank should create a loan loss reserve fund for CDG projects. B) Strengthening Participation of Low-Income Customers 117 Recommendation 4. NYSERDA should make EmPower funds available to make properties 115 Public Service Commission, CASE 15-E-0751 and 15-E March Staff is directed to work with NYSERDA, the utilities, and market participants to develop and file a proposal for next steps that can be taken to reduce, eliminate or mitigate market barriers, bill impacts or CDG project costs. Topics include: development costs, consolidated billing, customer maintenance costs, and interconnection costs. PSC ruling March 9, section G 117 The Commission directs Staff to work with utilities and interested stakeholders to consider an interzonal CDG credit program designed to provide benefits from CDG projects interconnected in service territories and load zones other than that of the low-income participant. The Commission also supports NYSERDA s continued investigation into enabling low-income customer participation in CDG projects, and directs NYSERDA to file CEF investment chapters to support programs aimed to encourage and incentivize low-income participation in CDG projects. Finally, the Commission directs Staff to consider options to encourage low-income participation in CDG under the VDER Phase tariffs, including tailored approaches for CDG projects that comprise a majority of lowincome offtakers. PSC ruling, section H 68

69 solar-ready for low-income projects. Recommendation 5. NY Green Bank should provide lower-cost debt for low-income CDG projects. Recommendation 6. NYSERDA should increase MW Block incentives for low-income CDG projects. Recommendation 7. NY Green Bank & NYSERDA should require low-income offtaker contractual protections for projects receiving increased incentives. Recommendation 8. NY Green Bank should pilot a program to assess alternative underwriting criteria. Recommendation 9. NYSERDA should create an online subscriber waitlist with opt-in enrollment for low-income customers. C) Preparation for the Launch of VDER Phase Two in May Recommendation 10. The PSC should mandate net metering rates for all CDG projects, in lieu of VDER. 118 PSC ruling, section K 69

70 A. Mitigation of Bill Impact and CDG Project Costs The PSC, NYSERDA, and NY Green Bank should continue to take steps to reduce current barriers to all CDG projects in NYS. There is a role for policy in facilitating projects, but a key takeaway from our analysis is that financial support is required to stimulate the development of the CDG market in the State, until such time as project installation costs are sufficiently decreased. Recommendation 1. The PSC should reduce the minimum number of subscribers for all CDG projects to three. Objective: Reduce siting barriers and administrative burden Organizations including GRID Alternatives, Natural Resources Defense Council, and Environmental Defense Fund requested the PSC reconsider the CDG 10-subscriber minimum, stating that it would hinder solar access opportunities, particularly in urban areas and low- and moderate-income communities. 119 In response, the PSC moved to amend CDG membership requirements in March of 2017, removing the 10-subscriber minimum for onsite systems installed on multifamily buildings with fewer than 10 units. However, the 10-subscriber minimum for buildings with 10 units or more still stands. 120 This requirement presents an additional barrier to implementing a project and reduces flexibility in project models. For example, if there is an 11-unit building in which only 9 households agree to participate, the sponsor would have to find additional subscribers outside the building but within the same load-zone. In addition, tall, narrow apartment buildings with many units but small roofs may not be able to host an array sufficiently large to ensure significant bill impacts for 10 subscribers. This would disproportionally impact urban areas, where such buildings are more commonplace. We have chosen a subscriber minimum of three to ensure that projects comply with the 40% maximum system offtake per subscriber, and therefore keep within the spirit of CDG. 119 Public Service Commission. Joint Request of the City Of New York, Solar One, Grid Alternatives, Natural Resources Defense Council, the Association for Energy Affordability and Environmental Defense Fund to Waive the Minimum Membership Requirement for Community Distributed Generation Projects Sited at Properties with Multiple Residential Units, New York: PSC. Case 15-E September 1, Public Service Commission. Order Modifying Community Distributed Generation Membership Requirements, New York: PSC.Case 15-E March 13,

71 Advantages: Reduces administrative barriers to CDG projects Facilitates a diversity of project models Lies within the regulatory mandate of the PSC Has strong support among CDG stakeholders Challenges: Could be perceived as violating the spirit of CDG Takeaway: CDG projects should be allowed to flourish in a diversity of contexts. The 10-subscriber minimum introduces additional barriers to implementation with no tangible benefit. We recommend that the PSC eliminate the 10-subscriber minimum requirement for all CDG projects in its next Order. 71

72 Recommendation 2. NY Green Bank should institute a Debt Acceleration Program for CDG projects. Objective: Create market-oriented mechanism to incentivize current projects while recapitalizing for future projects. As our modeling exercise demonstrated in Section 3, access to debt greatly improves project economics. We propose creation of a Debt Acceleration program, which seeks to maintain a circular flow of funding between the NY Green Bank and CDG projects. More specifically, the NY Green Bank provides debt to a CDG project in a co-financing operation with a private investor. NY Green Bank, co-financers, and project developers establish a targeted internal rate of return (IRR) for that particular project. When the IRR is achieved, NY Green Bank-funded debt will accelerate. We believe this program distributes project risk between the NY Green Bank and private investors more than a traditional financing structure. This program can be deployed either in isolation or in conjunction with our loan loss reserve recommendation (Recommendation 3) and can be used when originating loans described in Recommendation 5. As the project begins to generate returns, ongoing cash flow will address principal interest and amortization (both purposely below-market) with residual cash flow captured by the private coinvestors. Once the established target IRR is achieved, future residual cash flows will be applied to accelerate debt repayment to NY Green Bank (no make whole provision). Once the NY Green Bank funded debt is repaid, all remaining future residual cash flows will again go to the private co-investors. This proposal addresses the high upfront cost serving as a barrier to CDG development in New York by facilitating access to debt. Moreover, the ability for the program to accelerate repayment of the loan to allow the NY Green Bank to redeploy these funds to other projects addresses any funding constraints of the bank. As the market continues to develop and economic returns improve, we believe this program will balance the ability of the market to access affordable financing through NY Green Bank and achieve a target equity return, while protecting the bank s capital. The concept of this proposal has been formulated from innovative partnerships that are becoming more common in the oil and gas industry. With the decline in commodity prices, certain oil and gas companies partnered with private investors to continue drilling new wells as they were starved of capital. Specifically, private investors provided capital to drill new wells on the company s acreage and received the benefit of the cash flow up until an agreed return was achieved. After achieving this return, the remaining cash flow was split between the private 72

73 investor and the oil and gas company, with the latter capturing the majority of the residual cash flow. This type of partnership solved two issues: these oil and gas companies now had access to capital to generate additional cash flow streams from drilling new wells; and private investors captured attractive returns. Our proposal is a formulation of risk-sharing concept already adopted in the market place. 121 Advantages: Provides access to debt for current CDG projects in the long term Spreads risk burden Maintains a steady flow of capital for NY Green Bank Stimulates private-sector capital, which is in line with the mission of NY Green Bank Challenges: May prove difficult to define IRR targets in the fledgling CDG market Takeaway: Since access to debt has major impacts on project economics, NY Green Bank should implement a Debt Acceleration Program to share in the risk burden, provide access to debt and thus facilitate project development. 121 California Resources Corporation and Macquarie announce joint venture to invest up to $300 million in oil & gas properties, California Resource Corporation (CRC), April 19,2017, 73

74 Recommendation 3. NY Green Bank should create a loan loss reserve fund for CDG projects. Objective: Reduce credit risk for institutions providing financing to CDG projects. A loan loss reserve serves as a first-loss position on investments and is a credit enhancement tool used in the marketplace to facilitate financing transactions. 122 The CT Green Bank has established several loan loss reserve programs, in which the CT Green Bank takes first loss on the investment up to a specified amount. For example, as part of CT Green Bank s Low Income Multifamily Energy Loan program, the bank set aside approximately 8.5% of the entire loan fund to serve as first loss. 123 Loan losses in excess of the reserve fund are borne by the investors. This credit enhancement tool is used to facilitate private, institutional financing of investments as the credit profile of the investment improves with the partial transfer of risk to the bank. Moreover, a loan loss reserve fund allows for more competitive financing rates given the risk mitigation it provides for the lending institutions. We recommend NY Green Bank provide similar loan loss reserve funds or first-loss programs to encourage participation among lending institutions in CDG projects across the State. We propose a loan loss reserve fund representing 5-10% of the total portfolio principal amount, which is a common market structure that adopts this type of credit mitigation tool. 124 Advantages: Facilitates private-sector participation in CDG projects Enables competitive financing rates and flexible terms for CDG projects Signals commitment to CDG by NYS Challenges: Requires strict underwriting standards given first loss position Takeaway: We recommend NY Green Bank establish a loan loss reserve fund representing 5-10% of the total portfolio principal amount in order to stimulate the market for CDG. 122 Kieran Coleman, Thomas Koch Blank, Curtis Probst, and Jeff Waller, Financing Community-Scale Solar, How the Solar Financing Industry Can Meet $16 Billion in Investment Demand by 2020, Rocky Mountain Institute. 123 Comprehensive Plan Fiscal years , CT Green Bank, Loan Loss Reserve Fund Risk-Sharing Formula, Office of Energy Efficiency & Renewable Energy (energy.gov), 74

75 B. Strengthening Participation of Low-Income Customers Low-income CDG projects will need further support given the barriers identified in this report. The following recommendations are oriented towards increasing low-income participation in CDG projects, protecting low-income subscribers from fraud and abuse, and ensuring that projects that include low-income subscribers are financially viable. More specifically, we recommend that the New York Green Bank and NYSERDA work together to offer a one-stop low-income CDG incentive package including MW Block (Recommendation 6) and low-cost debt (Recommendation 5) with low-income contract requirements (Recommendation 7). Recommendation 4. NYSERDA should make EmPower funds available to make properties solarready for low-income projects. Objective: Reduce up-front costs and increase siting options. As has been pointed out in this report, one of the main barriers to installing rooftop solar, whether it be on a single-family home or CDG, low-income or otherwise, is site constraints (Section 2.2). The age or condition of the roof or wiring may render it unfit to carry an array. If substantial repairs are required, this may impose high upfront costs that can derail a solar project. This has been a barrier to many projects (see FruitBelt Neighborhood Project, page 33) and likely limits the amount of solar electricity that can be brought online Statewide. In response to the March 2017 PSC Order Net Energy Metering Transition, Phase One of Value of Distributed Energy Resources, and Related Matters, NYSERDA has established an LMI Community Solar Initiative that aims to incentivize projects and facilitate low-income participation in CDG. 125 NYSERDA explicitly identifies EmPower as a potential mechanism to support customer outreach and education. We propose NYSERDA expand this mandate to enable EmPower resources to be used, not just for outreach, but also to ready low-incomeinhabited properties for solar installations. Under the current EmPower program, which is administered by NYSERDA, roof and electrical system repairs and replacement are not eligible for funding. We recommend EmPower make their funding available to cover costs to make a property solar-ready, up to $12,000 per building, for when the upgrade is required specifically to accommodate a CDG system with low- 125 Public Service Commission, CASE 15-E-0751 and 15-E-0082, March

76 income offtakers. This number was chosen as it represents the lower bound of average roof replacement costs and would avoid diverting substantial funds from the program s original services. 126 Grants to repair or replace roofs and electrical systems in preparation for the installation of CDG solar arrays will help alleviate a major hurdle to the development of the CDG market in NY and make more properties viable for CDG. In addition, this recommendation leverages established programs and funds, thereby reducing administrative burden. Advantages: Expands the pool of suitable roofs Reduces amount of upfront capital needed Leverages existing programs rather than creating new ones Takes advantage of institutional knowledge of current systems Aligns with energy affordability goals of the EmPower program Challenges: May limit the pool of funds available for the program s weatherization/efficiency goals Takeaway: NYSERDA should make existing EmPower weatherization funds available for necessary roof and electrical repairs associated with low-income CDG projects in order to reduce site constraints and up-front costs. 126 Home Buying Institute Average Cost of Roof Replacement, "People in New York (one of the more expensive regions) can expect to pay $12,000 - $14,000, on average, for a complete roof replacement job." 76

77 Recommendation 5. NY Green Bank should provide lower-cost debt for low-income CDG projects. Objective: Prove the viability of the CDG market and incentivize projects that include lowincome New Yorkers. Access to debt is essential for projects to become financially viable and for the scaling up of CDG in New York State, as described in Section 3.3. Low-cost debt is available for low-income homeowners to perform solar and energy efficiency upgrades to their homes. In addition, public housing agencies often have access to low-cost loans to perform similar upgrades. The NY Green Bank should make lower rates available to CDG developers who include lowincome customers in their projects. We propose the interest rate be proportional to the number of low-income subscribers, with no-interest loans for projects entirely composed of low-income subscribers, and market-rate loans for projects with no low-income subscribers. This would entice developers to take on the real or perceived financial risk associated with lowincome offtakers and strengthen the market for CDG projects. In addition, this program would generate data on projects that include low-income subscribers for use in the assessment of alternative creditworthiness criteria proposed in Recommendation 8. The 0% rate, without any additional incentivization, may be sufficient to generate 10% returns on Downstate projects; however, additional incentives may be required to ensure project viability, particularly for Upstate projects (Recommendation 6). To ensure that projects maintain their starting proportion of low-income customers, subscription bases would be assessed on a regular basis, and rates would increase if developers reduce the proportion of low-income customers included in their project. In addition, in order to receive this preferential interest rate, sponsors should be required to meet the contract standards outlined in Recommendation 7. Advantages: Improves project economics Builds a track record of successful projects to increase available market data Allows private sector to become more comfortable with low-income CDG projects Would be easy to phase out over time, as project returns increase 77

78 Challenges: Would require buy-in from NY Green Bank as existing low-cost debt programs are targeted to different actors and therefore administered by different financiers May require PSC intervention if NY Green Bank insists on market-rate interest Could incur additional monitoring costs to ensure low-income subscribership is maintained Takeaway: The PSC should encourage NY Green Bank to provide low-cost loans to low-income CDG projects in order to develop the market and prove the concept to the private sector From the March 2017 PSC order: The Commission therefore directs Staff to work with NYSERDA to continue to explore New York Green Bank options, including but not limited to developing solutions to lower the cost of capital and provide credit support for CDG projects that are either fully or proportionally comprised of low-income customers. In particular, the investigation of options through the Green Bank should include consideration of solutions that can support local community based investment into CDG projects. Page

79 Recommendation 6. NYSERDA should increase MW Block incentives for low-income CDG projects. Objective: Incentivize low-income CDG project in way that is cost-effective to NYS. While access to debt improves project economics, returns are more sensitive to increases in MW Block (Table 3.3). Our modeling results demonstrated that while projects are sensitive to MW Block, the current incentive levels are insufficient to generate financially viable projects that also provide 20% savings for low-income customers across the State. Currently, under NYSERDA s NY-Sun Affordable Solar program, single-family households earning up to 80% AMI are eligible for double the current MW Block incentive available in that region. 128 This program has had success in bringing low-income homeowners into the solar market, bringing over 125 projects online at an approximate total of ~ 1 MW installed capacity. 129 However, it is only available to homeowners and therefore leaves out a large portion of low-income New Yorkers. In order to understand the impact of a potential expansion of the Affordable Solar program to include CDG projects, we modeled the impact of the same 2x MW Block incentive on lowincome CDG project economics (Section 3.3). In Downstate areas, where MW Block incentives are high and therefore proportional increases are substantial, some projects were able to generate returns. This was not the case for Upstate projects, where the base rate is much lower. A proportional increase in MW Block rate therefore favors Downstate areas, where MW Block incentives are higher and where project economics tend to already be stronger, yet are impeded by siting and other barriers. We recommend that NYSERDA provide a MW Block adder for low-income CDG projects using resources from the Clean Energy Fund. NYSERDA should provide the same magnitude adder for all regions equal to the highest available MW Block in the State. This will provide equal access to incentives to low-income homeowners and renters alike and make projects financially viable across the State. Given the current blocks, the New York City metropolitan area has the highest MW Block rate. Currently, a NYC project would get the regional base incentive ($0.61 for large systems; $ Affordable Solar Program, New York State Energy Research and Development Authority (NYSERDA), NYSERDA database. 79

80 for small systems), then an additional $0.61 or $0.70 on top, to total $1.22 for a large system and $1.40 for a small system. An upstate project would get their base-rate, ($0.22 for a large system; $0.40 for a small system), plus the NYC Rate (because it is the highest available rate in the State), for a total of $0.83 for a large project and $1.10 for a small project. As blocks fill, these rates would decline accordingly. A magnitude increase has several advantages over a proportional increase: 1) It maintains the same differential between regions, as was in the original design of MW Block; 2) It is dynamic and responds to changes in installed capacity across the State, preventing one region from advancing faster than others and keeping in the spirit of the step-down feature of the MW Block by phasing-out over time as more solar is adopted and installation costs decline; 3) It treats Upstate and Downstate projects equally in terms of the amount of additional State funds available to low-income CDG developers in each region; 4) It will enable both Upstate and Downstate low-income CDG projects to become viable (Section 3.3). Figure 4.1. Proposed MW Block adder for low-income CDG Projects given current MW Block levels for large commercial systems. While Upstate projects receive a lower base rate, the increase in incentives proposed here would be of equal magnitude in the highest-mw Block region as in the lowest MW-Block region and should be sufficient to make projects financially viable, particularly when combined with low-cost debt (Recommendation 5). Finally, the MW Block was determined to be the highly cost-effective incentive for solar development Statewide. On a dollar-for-dollar basis, increased MW Block can generate financial value equal to double or even triple of the cost of the incentive itself (Section 3.4). Advantages: Improves project economics while using State funds effectively Reduces up-front project costs for low-income CDG developers Allows the private sector to become more comfortable with low-income CDG projects Provides parity with existing low-income solar program for homeowners Phases out automatically over time, as MW Blocks fill and installation costs decline 80