Regarding whether what you are buying is a security (a security is when funds are invested with an expected return of those funds over time): We are selling you a qualified solar electric property (IRS’s definition). We sell you solar panels, and separately offer you a license for a place to put the panels. This ownership of your own asset and a separate license for you to place your asset on our solar farm are important to our presentation of what we are selling relative to the security registration question.
In the State of Vermont, the July 2014 “Sun Exemption” allows for community solar to be exempt from registration as a security provided that certain guidelines are met. Green Mountain Community Solar has made best efforts to comply with the SUN Exemption (July 21 2014). Guidelines in states other than VT have not been researched by GMCS. As such, it is incumbent on you as a potential purchaser to understand your state’s laws and any applicable federal investment and securities laws regarding purchase of solar assets and associated license in Vermont.
Regarding how shared solar purchases are viewed from the federal perspective (outside of Vermont), here is what our research shows. By far, the most widely used exemption from securities registration is Rule 506(b) of Regulation D. Rule 506(b) allows an entity to raise an unlimited amount of capital from an unlimited number of “accredited investors.” Up to 35 non-accredited individuals may also participate in a Rule 506(b) offering, so long as they have a certain amount of financial sophistication and are provided a disclosure document. No advertising is allowed, which may make finding interested investors problematic. The Rule 506(c) exemption is similar to Rule 506(b), but it allows an issuer to engage in general solicitation and general advertising to offer and sell their securities, so long as sales are made only to accredited investors and the issuer takes reasonable steps to verify that the investors are accredited investors. In short, GMCS advertises to sell solar panels and an associated license in VT, but not outside of its borders. If someone from outside VT wants in, they have to have found us by their own research.
The Federal Tax credit is based on Section 25D for residences and Section 48 for businesses of Title 26 of the Internal Revenue Code. It may be applied by all individuals and businesses who file federal taxes. It is set to expire for individuals at the end of 2016 and decline to 10% from 30% for businesses at the same time. To the extent that their federal taxes can be offset by this credit, the credit may have value to the panel purchaser. For Vermont LLC businesses it is possible to also take a 7.2% Vermont energy investment tax credit. In either case, your consultation with your tax adviser should be the source of your information on this subject. The IRS has shown in three separate areas the basis on which remotely-owned solar panels can be taken for the ITC.
Instructions for form 5695 – specifically as to what properties – primary and secondary homes, see page 1, second column, fifth paragraph
Additional Incentives: For businesses you can deduct 85% of the cost of the solar panels (a “renewable energy asset”) using the Modified Accelerated Cost Recovery System (MACRS). This accelerated deduction, for tax purposes, of investment lowers costs further for commercial customers. Our business investment Excel model that gives a granular look at these economics and may be made available to you.
As of November 6, 2015, Green Mountain Community Solar, and by extension, you if you do business with us, is (are) eligible to offer low cost Community Solar Loans via VSECU. For a limited time, Vermont residents can take advantage of this affordable, local financing for participation in group net-metered community solar systems. This new program is made possible by a grant from the Vermont Clean Energy Development Fund. Contact us to learn more or visit www.vsecu.com/communitysolarloan.
Vermont has its solar adder and mandated net meter tariff (utility dependent). Other states may offer Investment Tax Credits (ITC) and other incentives, please check your state here: http://www.dsireusa.org/
GM Community Solar’s July 2016 description/analysis of economics of community solar in Vermont:
Thank you for allowing context to why the proposed rules by the PSB will undermine the economic viability of the brand of community solar that our companies, Green Mountain Community Solar (GMCS) and Vermont Community Solar (VCS) offer. As you may or may not know, Soveren Solar, doing business as Vermont Community Solar (VCS) employs the a similar business model to that of GMCS. In fact, it is the principal of VCS, Peter Thurrell, who pioneered this ownership model of community solar in VT as noted in 2014 in Vermont Life Magazine and he was generous enough to share his research and practical experience with GMCS, allowing GMCS to independently develop its particular model and pricing. Both companies serve all of Vermont and operate independently. The economic model and data presented below represent average experiences for both company’s and have been presented as one case for convenience purposes only.
Our community solar model is one of solar panel ownership by numerous Vermont residences and small businesses and non-profits in off-site 150 kW scale photovoltaic arrays. Placement of these owned panels is governed by licenses, which establish for the panel owner how the value their share of the output of the solar farm is returned to them. Electric credits generated by the panels are allocated to the owners through a net-meter group administered by a new operating LLC. The choice of licensing their panels for placement at a remote site is done by these Vermonters because they can’t or choose not to place panels on their roof or in their yard. This model is specifically designed to make the benefit/cost equation of participation comparable to if the participant could place panels at their place and those panels had good solar access. Think person who lives in a condo, apartment, village center, has mature trees surrounding their house, or wants to have the option to fix a roof in the near future, or perhaps move without concern over the value of a rooftop array.
Based on a recent poll of our participants (GMCS: 80 Vermont residents and 10 businesses VCS: ____ residents and ___ businesses for a total of ____ residents and ___ businesses) we understand that about 75% made their investment decisions based primarily on economics, and secondarily on the environmental attributes of the technology. Our license agreements estimate value (under current 5.100 rules) for the owners as follows: the productivity of the panels (how many kWhs they generate per year) multiplied by the credit rate paid by the utility (currently 19 cents for 10 years, then 15 cents thereafter for 20 more years (under proposed rules, this rate certainty would be truncated in year 21 with uncertain rates for years 21 through 30)). The upfront cost against this stream of estimated value yields an 11 year payback and a 9% return on investment. Based on the uptake for our businesses, folks in Vermont have found this to be a competitive alternative investment and have chosen to make what for many is a material investment. The scale of our average customer’s buy is $20,000. Probably in fourth place of major purchases in one’s life after: house, college tuitions, and car. Furthermore, the investor does not make any additional payments for the life of the license. The taxes, insurance and operations and maintenance costs of the array are covered by the operating LLC.
The operating LLC purchases for itself approximately 50% of the panels in the array.
These two components (the retail purchaser’s investment choice and the developer’s purchase of the other 50% of the array’s panels) come together allowing the operating LLC to have the funds to permit, enter into a lease, purchase property, enter into a PPA, and construct the array.
The financing source for the initial construction costs comes first from the 50% of the panels sold to retail panel purchasers at retail market rates (~$4.00/watt) and second through a combination of internal cash and local bank borrowings by the operating LLC. Once the array is constructed and operational, the net-meter credit value generated is shared between the 50% of the panels owned by residential/small business owners (“retail panel owners”) whose utility accounts are credited each month and the operating LLC which owns the other 50% of the panels (and thereby the rights to those panels’ net-meter credits). The developer generally keeps all of the RECs, but importantly, retail panel owners have the option to purchase and retire theirs.
To operate a photovoltaic array for the 30-year license agreement term the developer must monetize its 50% share through PPA credit sales and REC sales. The credits produced by its share are assigned, through a Power Purchase Agreement (PPA), to a municipality, school district or other “bankable” entity. The PPA calls generally for 90% of the credit value to be paid to the LLC. The sale of the Renewable Energy Credits (RECs) from all panels in the array whose RECs are allocated to the LLC (we have found that approximately 95% of the RECs are not purchased by panel owners and are left for sale by the operating LLC) are currently monetized at based on three year future’s sales price and volume contracts is $.37/kWh ($37/unit in REC sales parlance). The price after that is unknown. These RECs are certified as Mass. Class 1 RECs.
The cost of the typical 150 kW solar farm is nearly $500,000 or about $2.36/watt all in. This all-in cost includes, engineering, permitting, construction management, land acquisition, site preparation, posts, racks, panels, conduit, wires, meter, panels, breakers, inverters, revenue-grade meter, and utility interconnect. An array of this scale has approximately 212,000 watts of DC capacity. According to PV Watts, in VT, this will produce about 225,000 kWhs per year. Given that our companies collectively operate (GMCS 4, VCS ___x#_ ) of solar farms in VT, actual productivity is more like 250,000 kWhs per year. Take this volume and multiply it by 22.7 cents (19 cents plus 3.7 cents) and you get $57k per year of value. Since the retail panel owners take their share (approximately $24k per year) of this value, the operating LLC is left with $33k pay property & liability insurance, lease payments, internet connection, GMP interconnection monthly charges, escrow for scheduled inverter replacement, debt service, management and administrative, REC verification fees, municipal and state taxes and annual LLC registration fees to the VT Secretary of State.
The operating LLC carries risk and thereby makes its choice to exist based on whether the rewards justify the risks. This risk includes operating cost changes, reimbursement rate changes (this appears to be the case with the recent draft of the 5.100 rules), income taxes on passed through on-paper gains, weather risk, interest rate fluctuations and typical business operation mechanics (compliance, employees).
The current 5.100 rules provide a functional balance that allows the price charged to the retail panel purchaser to be kept consistent with other on-site alternatives while providing sufficient monthly cash flow for the business to function over the 30-year term of the solar array. To wit, VCS has build ___x#___ and GMCS has built 4 of these farms to serve this segment of the VT solar panel owner market that otherwise could not be served. Change one or more components of this and the functional balance is upset.
Inputting the new elements of the economics of solar in VT as they apply to our business model going forward cause the metrics for the retail panel owner and the operating LLC to change. If the rewards for the operating LLC of choosing to operate a 150 kW community solar array are to justify the risks, the developer of that operating LLC must derive the same economic returns under the new rules as under the old. In an effort to make an apples to apples comparison, the following assumptions have been made. The cost of installation does not change. While we understand it may decline with experience and component prices, it may also increase due to increasingly stringent environmental and siting requirements. The productivity of a given solar farm in Vermont stays the same. What does change is the loss of REC revenue over the long term, the solar adder goes away, replaced by a siting incentive. And, for the sake of an average case, the mix of new 150 kW solar farms in VT going forward is 50/50 preferred and non-preferred, therefore the reimbursement siting incentive as written in the new 5.100 rules averages 2 cents/per kWh for 10 years. The REC donation to the utility provides 3 cents per kWh for 10 years. For years 11 and thereafter, it is assumed that the retail rate only is paid. All operating costs remain unchanged when comparing current rules to prior rule economics. The intent of holding all capital and operating costs the same for the old vs new 5.100 rule comparison case is to isolate the effect of the rule-based reimbursement rate changes.
To keep the rewards justifying the risk for the developer of the community solar farm in VT, the price to the retail panel purchaser must rise from $4.00 per watt to $5.00 per watt, a 25% increase. The effect of this price increase is to lengthen the payback to 16 years from 11 years and lower the rate of return to 6% from 9%. In polling current retail panel owners, the majority have said this return is not acceptable.
So, to sweeten the deal for the retail purchaser to incent them to be able to rationalize an investment insolar, the community solar farm operating LLC could keep its prices consistent with the alternative (panels at your shade-free house or business or apartment) at $4.00/watt. In this scenario, the solar farm operator LLC’s economic incentive declines materially and financing from banks is no longer possible. The operator then must consider internal funds, and other investment options available are more attractive, therefore there is not reason to put funds into a lower investment return option.
The net result is few solar farms of this scale for these type investors will be built under the pricing of the new rules.
What is the solution? If the issue with solar growth in VT is that it has occurred too fast and the utilit(ies) run the risk of having too much of their electric supply be intermittent and priced high, then the components of the growth must be analyzed. According to GMP, 85% of the growth came from 150 kW + sized arrays financed not by VT residences and small businesses, but out-of-state tax-equity investors. The community solar model works for the 150 kW and smaller array as its a manageable size to finance and it doesn’t affect the VT viewscape as much (they occupy approximately 1.2 acres). What is the percent that this scale represents going forward? Probably 1.5 mW per year (10 150 kW AC projects per year).
If the reimbursement rates for projects whose ownership was at least 50% virtual “retail panel owners” who can’t put panels up on site was increased to between 20 and 22 cents per kWh for the life of the project, then the returns would be adequate to incent both the retail panel purchaser and the developer to take the risk of permitting, building and operating.
The siting rules must also be changed. Please consider making the load criteria be that 50% of the load must be from small retail panel owners and 50% from a PPA purchaser who can be anywhere in the state. The current criteria under 8652 eliminate many potential community solar farms because they tend to be in gravel pits, brown fields or other sites where the load is not on site.Act 260 in section x, y, z legislated ____________. The current rules do not follow the direction of the legislation. The LRC will be notified of this when they take public comments.