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Three Things State and Local Governments Could Do To Grow Midscale (100kW-2MW) Solar PV

December 07, 2016 by Jenny Heeter

The midscale market for solar photovoltaics (PV), defined as behind-the-meter systems between 100 kilowatt (kW) and 2 Megawatt (MW), has grown more slowly than other PV market segments in recent years. However, there is room for significant expansion of the midscale solar market, with a new NREL analysis showing that offices, hotels, and warehouses offer more than 100 Gigawatt (GW) of techno-economic potential (Figure 1).[1]

National PV demand curves for offices, hotels, warehouses

Figure 1. National PV demand curves for offices, hotels, and warehouses

A number of key barriers have impeded growth, including split incentives between tenants and landlords, contracting challenges, the mismatch in building lease and PV financing terms, and high transaction costs relative to project sizes. In addition, the per-kilowatt-hour energy savings from PV are significantly lower for commercial customers than for residential customers because of utility demand charge rate structures. For example, commercial customers may pay utility rates of 4¢/–6¢ per kilowatt-hour (kWh) or less for energy compared to the perhaps 10¢–12¢/kWh paid by residential customers.

While there are many barriers to midscale solar that could be addressed by other parties, this blog post focuses on the actions within control of state and local policymakers. State and local governments could promote midscale solar in their communities through:

1. Simplifying Interconnection Processes

Simplifying interconnection processes for midsized, behind-the-meter systems can remove a cost and transactional burden for midscale projects. In some states, interconnection processes for commercial-scale projects (roughly <2 MW) can be similar to that of larger utility scale (10+ MW) systems, which imposes a burden and cost for the substantially smaller systems.

Potential improvements include greater cost certainty, fast tracking of interconnection studies, shorter processing times, and adaptable interconnection forms that can be used with third-party financing approaches. For example, to address cost risks for projects seeking interconnection, California established a “cost envelope” approach, where developers have the option to get a ±25% binding cost estimate (CPUC 2016). In addition, California and some other states, have procedures to fast track impact studies for projects up to 2MW in size (Ardani et al. 2015). Adding transparency is also key: Hawaiian Electric (HECO) publishes its interconnection queue online so installers can see where their project is in the queue. This transparency ensures that installers know which of their projects are moving forward and when.

2. Enabling Property-Assessed Clean Energy (PACE) financing

Property-assessed clean energy (PACE) financing initiatives hold promise for enabling the expansion of midmarket solar by addressing a number of key concerns. PACE must be adopted at the state level and implemented at the local level. Under a PACE program, a property owner can purchase or contract for a PV system and repay the costs through a special assessment on their property taxes. PACE can be useful for both host-owned systems as well as third-party financed systems. One advantage of PACE for commercial-scale solar projects is that the PV repayment is tied to the property, rather than the occupant, providing a convenient mechanism for addressing differences in the PV system lifetime and shorter building lease terms.

3. Expanding access to Power Purchase Agreements (PPAs)

States could enable the use of power purchase agreements (PPAs). While PPAs are allowed or in use in 26 states and Washington, D.C., seven states disallow their use, and it remains unclear whether they can be used in the remaining states. Third-party PPAs can offer a number of other advantages in that they can result in positive cash flows immediately, costs are predictable over the lifetime of the agreement (which can reach 15–20 years), the third party takes responsibility for installation and operations and maintenance, risks of less than anticipated output are borne by the third party, and contracts with a third party are not on the company’s balance sheet. Expanding access to PPAs could grow the residential PV market as well.

In summary, state and local governments could enable midscale solar in their communities through simplifying interconnection processes, enabling PACE financing, and expanding access to PPAs. For more detail on these actions and other means to move the midscale solar market, see NREL’s new analysis.

[1] Techno-economic potential is an estimate of the total capacity that exists where system owners would break even on an investment in PV over the lifetime of the system.