Minnesota utility regulators on Thursday set limits on a new consumer-driven solar energy program in response to Xcel Energy Inc.'s complaint that it had ballooned beyond what a state law intended.

In a contentious, retroactive clarification of the rules, the state Public Utilities Commission restricted independent energy companies to clusters of five community solar gardens, each with a maximum output of one megawatt. A megawatt is 1 million watts of electricity.

The decision, after two days of hearings, removes a major uncertainty for the solar industry, but it undercuts some companies' plans for cost-saving clusters of 10 or more projects. It was unclear how it will affect some large power users' plans to offset all or part of their electricity needs with power from multiple community solar gardens.

"It is good for the program and the state to get back on track," said Martin Morud, CEO of TruNorth Solar of Minneapolis.

TruNorth was one of six solar developers to reach a compromise with Xcel on solar garden size, and its terms were adopted by the PUC. SolarStone, another Minneapolis company, also signed the deal even though it will force it to scale back 30 percent of its proposed projects, said CEO Joe DeVito.

Solar gardens are designed to offer solar power to people and businesses who want it but are unable or don't want to install panels on their property. Instead, customers can subscribe to solar complexes built by independent solar energy companies, often on land at the urban fringe. The power goes on Xcel's distribution grid, and the customer is credited at solar-friendly rates, resulting in savings of 5 percent or more on their bills.

Only Xcel is required to offer the program under a 2013 state law that also requires investor-owned utilities to get 1.5 percent of their electricity from the sun by 2020. Xcel has supported the concept, and launched a smaller version in Colorado in 2012.

But since December, Xcel's Minnesota program has had a flood of applications from solar companies. The number climbed to more than 1,000 proposed solar gardens this week. Half to two-thirds of them may never get built because of financing and other hurdles, industry officials say.

Some energy companies had proposed clusters of 10 or more projects to gain economies of scale. The rules crafted last year by the PUC opened the door to the practice even though the law set a limit of 1 megawatt per garden.

In April, Xcel said it would reject such side-by-side projects, triggering a review by regulators who set the rules.

Even under the revised size limit, Minnesota likely will have the nation's largest solar garden program in the nation, with 200 megawatts or more likely to be generated, said Laura McCarten, a regional vice president for Xcel.

"Minnesota really is the swing state for making community solar relevant," said Cory Honeyman, senior analyst for GTM Research, which issued a report this week projecting major growth in this emerging, customer-driven approach to solar.

Honeyman said Thursday's decision "does not provide 100 percent clarity to how Minnesota's community solar market will be rolled out." But the 5-megawatt cap is still big enough to make it a major market, possibly the largest in the nation, he said.

If 200 megawatts of solar gardens are developed, it would represent $400 million in investment based on a $2-per-installed-watt cost.

Only the first crop of solar gardens can be built in five-unit clusters. Later this year, the limit drops to 1 megawatt. Holly Lahd, director of electricity markets for the St. Paul-based nonprofit Fresh Energy, said that could mean an end to solar garden development unless the rules are revised.

TruNorth's Morud said Xcel, under the negotiated agreement approved by regulators, is required to more rapidly review the engineering aspects of connecting solar gardens to the grid. Most developers are eager to build projects by the end of next year to capture an expiring federal tax benefit.

The major losers in Thursday's decision are large solar development companies, including SolarCity, SunEdison and SunShare, that had proposed clusters of five or more gardens. They will be forced to revise their business plans and possibly find other sites.

So far, just one solar garden has been approved, in Le Sueur, Minn. It's a small project proposed by Novel Energy Solutions, founded by St. Charles cattle rancher Ralph Kaehler and his family.

Braden Solum, the company's vice president of business development, said construction will start this summer, the first of a series of solar gardens that could mean $70 million to $100 million investment by that company alone.

David Shaffer • 612-673-7090