Executive summary
The power and utility industry is witnessing an unprecedented wave of transformational changes. The rise of solar power is one of the biggest sources of disruption. Driven by a combination of technological advances, increasing customer demands for distributed generation, supportive legislation, and new market entrants, solar power is challenging existing utility business models and driving key market players to find effective solutions to meet changing customer demands.
Community solar is one of the more intriguing components of this burgeoning industry. Historically, if individual residential and commercial customers wanted to use solar energy, they needed to install solar systems on their roofs. With community solar, individual consumers can purchase a piece of a large solar installation built offsite or subscribe to its electricity output. By eliminating the need for a roof and allowing individuals to tap into the benefits of scale, community solar has opened up the solar market to many new residential and commercial customers.
If utilities and other market players are to take advantage of the growth opportunity that community solar presents, they must comprehend how community solar fits into the emerging competitive landscape, grasp key business drivers and challenges, gain a solid understanding of regulatory actions impacting the market, and figure out how to redefine their operational and marketing strategies.
Community solar begins to shine
Technology is disrupting the business models of a group of traditionally conservative companies, many of which have been operating for well over a century: utilities. According to the most recent PwC Global Power & Utilities Survey, 97 percent of utility executives across the globe expect a medium to high level of disruption in their main home markets by 2020. “Today, change is happening faster than ever,” said Tony Earley, executive chair of the board at PG&E Corporation. “Utilities need to take action today to prepare for a future where more of our customers want and have access to these [clean] technologies.”
The rise of distributed generation — i.e., the production of electricity at or close to the point of consumption — is one of the chief sources of disruption. Utility executives in PwC’s survey anticipate that distributed generation — which may harness energy from wind, solar, small hydro, geothermal, or biomass — will account for as much as 30 percent of total global generation by 2030, a significant jump from less than 3 percent in 2012. This growth will impact the business model of utilities, which have historically held monopolies on the provision of power to their customers. In fact, in PwC’s survey, nearly half of utility executives agreed that the growth of distributed generation could shrink the role of power utility companies to providers of backup power.
Notwithstanding the expected broad-based growth, there is a significant limit to the potential for traditional rooftop solar systems. Residential and commercial customers in multi-tenant buildings have limited access to rooftops. Even for those that own roof space, roofs cannot always support solar panels and are often shaded by trees or buildings. With the growing urbanization and expected rise in renting, the addressable market for traditional rooftop solar is capped and may even be decreasing. This development will force utilities and solar companies to adopt alternative solutions to meet the increasing customer demand for solar.
Community solar has emerged as an attractive and increasingly popular solution precisely because it eliminates the need for rooftops. With community solar, developers construct medium- to large-scale solar installations on offsite locations that may be distant from the point of consumption. Individual retail customers can either subscribe to blocks of electricity or purchase a portion of the solar panels in such installations and receive credits on their bills. As a result, a broader range of customers can benefit from solar energy without installing solar panels on their own rooftops.
Propelled by strong customer demand, technological development, and regulatory support, community solar is expected to grow rapidly in the years to come. To take advantage of the opportunities it presents, as well as to confront the challenges associated with it, utilities must define a clear strategy, establish differentiating capabilities and new operating models, and develop a tight network of partners that can help them harness this new source of power.
Bright opportunities ahead
Community solar presents a large growth opportunity for utilities, empowering them to engage and serve customers in a new way. The market is expected to expand quickly: NREL projects that, by 2020, community solar will account for 32 to 49 percent of the annual U.S. distributed photovoltaic market demand.
We see utilities of various sizes across the nation at three stages of community solar development: exploring different models to enhance renewable portfolios; evaluating community solar programs; and operating active community solar programs.
To successfully launch and operate community solar programs, utilities must carefully assess and address key questions around strategy, operations, and finance/regulations that are specific to where they are in the journey.
Exploring. Utilities in the exploratory mode must understand what the community solar market is, what its value propositions are, how it could enable their own growth objectives, and how it would impact their go-to-market strategy. They should assess which models and programs would produce the most favorable financial returns and sustainable value for their organizations. They must also consider how community solar will affect their operations. More specifically, they should aim to understand how their business models can be adapted to meet increasing customer demands for renewable energy. At the same time, they need to understand key legislation impacting renewable portfolios and targets as well as explore potential initiatives such as community solar to meet those targets.
Evaluating. Beyond understanding how the market works, utilities must understand what the key differentiating capabilities are that will enable them to execute programs successfully. As they contemplate community solar, they must consider the key design factors (e.g., rate designs, capacities, locations), think through how to procure systems and with whom they should partner, and develop a cohesive sales and marketing strategy. Concurrently, they should actively engage with regulatory bodies to receive the approvals required to initiate a community solar program, determine the level of financing needed, and decide how to structure ownership of the program.
Operating. Once programs are up and running, utilities must devise strategies to enhance customer value by incorporating new technologies (e.g., more efficient panels, storage systems), determine the systematic methodology for evaluating an expansion, and accelerate customer acquisition and improve retention. From an operational perspective, they should develop a practical framework and mechanism to evaluate value realization from the program, identify and address key pain points, and work to improve operational efficiencies. All the while, they must keep an eye on the regulatory landscape to understand how legislative actions might affect community solar programs and the broader renewable energy ecosystem as well as define appropriate future financing plans.
Though still in its infancy, community solar has gained critical mass and is poised for growth. In the past decade, we have seen, time and again, that sectors of the renewable energy industry have been able to gain scale and acceptance with rapid speed. Thanks to rising consumer demand, improved technologies, favorable regulatory frameworks, and growing sophistication in marketing and operations, that same process is now beginning to happen in community solar.
As that process evolves, utilities must strategize about how they will harness this rising source of power and allow their customers to share the benefits of the sun rooflessly.
