Complicated economics of community solar gardens subject of debate

Minnesota's mandated community solar garden program has blossomed over the past few years, but questions have arisen about its complicated economics.

In recent months, Xcel Energy, which administers the program, has been stressing the costs of community solar gardens, particularly compared to larger-scale solar projects.

"We were really concerned that this would turn out to be an expensive program," Xcel CEO Ben Fowke said in a recent interview. And it has become just that, with the costs flowing down to ratepayers, he said.

Clean-energy advocates and solar power developers say Xcel's calculations don't consider "avoided costs" derived from the solar gardens, including damage to the environment from fossil fuels. In other words, "How much is Xcel not spending?" said Gabriel Chan, an assistant professor at the University of Minnesota's Humphrey School of Public Affairs.

The Community Solar Garden program was created by the state Legislature in 2013, a pioneering effort that has produced the nation's largest effort of its kind. Fifty-eight percent of Minnesota's solar power comes from the solar gardens. Larger-scale "utility" solar projects make up most of the rest — with more coming online in the near future.

Community solar gardens are aimed at residents, businesses and governments that want solar energy without setting up their own panels. They are developed, marketed and owned by independent energy companies. Xcel buys power from solar gardens and administers the program but makes no profit, although it gets credits to meet state solar energy goals.

The community solar program was intended to kick-start solar power in Minnesota — and it has, said Allen Gleckner, director of energy markets at Fresh Energy, a renewable-energy research and advocacy group in St. Paul. "It has been very successful and it has driven a ton of solar installations."

There are nearly 160 community solar gardens in the program. Residential subscribers numbered 10,060 as of early December, while there were about 570 commercial and government subscribers, according to Xcel. Residents account for 11 percent of the electricity sold through the program, as commercial customers take bigger chunks of power.

Solar garden subscribers effectively buy the output of independent power producers, who in turn sell their electricity to Xcel, which then distributes it onto the grid. Solar garden subscribers receive a credit on their Xcel bill equal to the output from their share of the solar garden.

Essentially, Xcel and the solar gardens are scrambling after the same subscribers, Chan said. "Community solar gardens are by far [Xcel's] largest form of competition."

Xcel currently buys power from solar gardens at 13.5 cents per kilowatt hour on average. Solar power from Xcel's existing, single-site "utility-scale" projects costs 7.5 cents to 8.5 cents per kilowatt hour. Electricity from new large-scale solar projects would cost 3.5 cents to 4.5 cents per kilowatt hour, according to Xcel, as prices for solar equipment continue to fall.

A key difference between the power cost of solar gardens and utility-scale projects is economies of scale. Utility-scale projects often have a capacity of more than 100 megawatts. The community solar gardens can produce 1 to 5 megawatts of power — and future projects will be allowed only a 1-megawatt capacity. One megawatt of solar power capacity provides enough electricity for about 230 average homes in Minnesota, according to Xcel.

Under the solar garden program's design, Xcel passes down its power-buying costs to all Minnesota ratepayers. "We will socialize $85 million of the community solar garden program this year," Fowke said, referring to costs passed down to ratepayers. "Next year, it will be twice as much."

That $170 million in costs in 2019 is expected to translate into $39 per year for the average residential customer, according to Xcel. The charges run through the fuel rider on customers' bills, which primarily includes pass-through costs for natural gas and coal.

The 13.5 cents per kilowatt hour paid by Xcel for solar garden electricity is based on the company's "applicable retail rate (ARR)." The 2013 legislation creating the solar garden program set the ARR as a stopgap rate until state utility regulators could come up with a "value of solar" rate (VOS).

The VOS changes each year, and for solar gardens approved in 2017 and 2018, it's 12.75 and 12.02 cents per kilowatt hour, respectively. Minnesota is the first state to widely use a value-of-solar rate, which is intended to capture the "avoided costs" of using solar.

Xcel, and its customers, will avoid spending money on gas or coal for fuel since sun is free, Chan said. As the solar gardens grow, Xcel also can avoid costs of building new fossil-fuel power plants and maintaining old ones, he said. Some transmission costs are avoided because solar gardens tend to be close to power customers.

And with solar gardens, the societal costs of greenhouse gas emissions from fossil-fuel plants are also avoided.

"The value-of-solar rate is designed to essentially make Xcel neutral," Chan said. "It is a fair, unsubsidized rate."

The VOS rate is highly technical and complicated. The methodology was developed by the Minnesota Department of Commerce. Xcel annually proposes the rate, and it's then reviewed by the Commerce Department and must be approved by the Minnesota Public Utilities Commission (PUC).

Xcel's proposed rate for projects approved in 2019 has fallen to 10.46 cents per kilowatt hour, a value that has solar garden developers in an uproar. Several have filed objections with the PUC over Xcel's proposed rate, saying it's so low that they will have great difficulty securing financing for new projects.

"The precipitous drop in the 2019 VOS rate" threatens to "eliminate new [solar] garden applications altogether by making the projects unfinanceable," a group of solar developers said in a recent PUC filing.

Mike Hughlett • 612-673-7003