Governor Andrew Cuomo has announced a legislative goal to achieve a 100% carbon-neutral electricity supply for New York State by 2040, and recent regulatory initiatives have given a much-needed boost to developing community solar in the state.

However, by mid-2018 only 10MW of community solar projects had been commissioned in New York. So what’s holding the market back, and what can we do about it?

Subscription risk

Financiers prefer long-term offtake contracts with creditworthy counterparties and stable cash flows. Currently, New York’s community solar programme provides certainty on none of those. A customer’s option to terminate their contract early creates subscription risk that must be addressed.

Community solar projects – local deployments of PV serving clusters of consumers – need flexibility to quickly and seamlessly replace customers, and safety measures to ensure they are providing cash flow certainty to investors.

Creating waitlists to replace customers who terminate their contracts, hiring third parties who specialise in customer aggregation, or entering into partnerships to assign customers from local Community Choice Aggregators (CCAs) can significantly reduce the customer acquisition cost, decrease potential revenue loss, and increase the bankability of the project.

Unexpected customer terminations and limited demand may result in projects with unassigned generation credits. New York currently allows the project owner two years to allocate unassigned excess generation, and uncertainty of the project’s main revenue stream hurts the bankability. Illinois, for example, requires utilities to purchase unassigned energy generation from qualified community solar projects, improving flexibility and providing cash flow certainty.

Some utilities or developers allow customers to assign their contract when moving to a different utility region. Developers such as NRG use this policy, thus reducing pressure to find replacements, expand the customer base, and provide investors with a degree of revenue certainty, improving financing prospects.

Finance risk

Certain features of the programme, such as variable pricing, short-term contracts, and unrated customer credit scores, contrast with the preferences of institutional and tax equity investors.

New York has replaced its traditional net energy metering policy with the Value of Distributed Energy Resource (VDER) system, a monetary crediting system based on location, congestion, time of generation, environmental impact, and “market transition”. VDER is criticised as being overly complex and has a variable pricing component that creates uncertainty in any financing.

Cash flow uncertainty stemming from VDER and short-term contracts presents challenges for investors and has the potential to force developers to agree to out-of-market rights and indemnifications to investors. Jake Carney, managing partner at 38 Degrees North, has noted that some developers have been successful at structuring tax equity by aligning tax investors’ cash returns with contracted revenue streams, including NY-Sun incentives.

Fixed cash flows such as NY-Sun incentives, which are provided as a $/kW of solar generated, or the sale of Renewable Energy Credits (RECs) via long-term contracts can establish a consistent cash flow profile for projects.

Given the customer credit risk, the insurance industry may provide a solution. Alexandra Mertens, partner at Stoel Rives, has stated they are “starting to see insurance backed credit enhancement products being developed that may mitigate subscriber concerns”.

In response to the challenges produced by VDER’s variable credit value, New York Green Bank (NYGB) started offering an innovative underwriting approach called 'borrowing base methodology'. NYGB uses an expert third-party consultant to forecast VDER credit values and uses this as the baseline for underwriting.

New products may take some time to be adopted by the project finance market, and New York policymakers will likely continue supporting the development of innovative products as solar continues to bolster the job market and local economy.

Customer engagement

Adoption of community solar projects by the general public will require a fundamental shift in how consumers think about energy procurement.

Consumers receive separate statements for their utility bill and community solar credit. New York policy does not require utilities to integrate the two bills together, something we have seen succeed in Minnesota.

Customer understanding and enthusiasm towards community solar will improve as developers create user-friendly platforms that build deep-rooted relationships between project owners and customers beyond basic energy procurement.

CRC is actively engaged with stakeholders to address these shortcomings. Policymakers have expressed strong support for the growth of New York’s community solar market. The state has a unique opportunity to use distributed generation to reduce pressure on the grid, expand customer reach, support local economies, and reduce greenhouse emissions.

The future is promising, but the issues above must be tackled for this programme to achieve the success we have seen in other regions.

Britta von Oesen is a managing director and Goksenin Ozturkeri a senior associate at CohnReznick Capital, a boutique investment bank specialising in renewables. Eric Krostich, an associate, also contributed.