How Does a Community Solar Project Make Money?

Community solar projects enable multiple participants to benefit from a single, larger solar installation. This model allows individuals, businesses, and non-profits to subscribe to a portion of a solar farm and receive credits on their electricity bills. Community solar expands access to renewable energy for those who cannot install panels on their own property, such as renters, those with unsuitable rooftops, or individuals facing high upfront installation costs.

Project Revenue Generation

Community solar project developers generate income primarily through the sale of electricity produced by the solar farm. This electricity is sold to the local utility grid, often under a long-term Power Purchase Agreement (PPA). Under a PPA, the utility agrees to purchase the power generated at a predetermined rate, ensuring a stable revenue stream. In some community solar models, the generated electricity credits subscriber accounts, with the utility compensating the project for its value.

Another revenue stream for community solar projects comes from the sale of Renewable Energy Credits (RECs). A REC is a tradable instrument representing the environmental attributes of one megawatt-hour of electricity generated from a renewable source. Project owners sell these RECs to utilities or other entities that need to meet renewable energy mandates or sustainability goals. This separation allows for additional monetization, supporting project viability.

Subscriber Financial Benefits

Subscribers realize financial savings primarily through bill credits applied to their monthly electricity statements. These credits are based on their share of the solar project’s electricity generation. They directly reduce a portion of their utility charges, decreasing overall electricity expenses. This mechanism, often called virtual net metering, allows subscribers to benefit from solar energy without having panels on their property.

Financial savings for subscribers arise because the value of solar credits received is typically set at a rate slightly higher than the cost of their subscription. Many community solar programs offer guaranteed savings, often ranging from 10% to 15% annually on their electricity bills. A common feature of these models is the minimal to no upfront investment required from subscribers.

Community solar removes a major barrier to solar participation, allowing a broader range of customers to benefit from clean energy. It also provides stability against the volatility of traditional utility rates. Subscribers enter agreements that lock in predictable energy costs for a portion of their consumption, offering a hedge against future price increases.

The Role of Incentives and Financing

The development of community solar projects relies on incentives and financing mechanisms. Federal and state tax incentives reduce the initial capital outlay required to build these projects. The Investment Tax Credit (ITC) for solar energy property, for instance, offers a 30% federal tax credit on eligible project costs. This credit directly reduces the tax liability for project owners or investors.

Tax credits are often monetized through financial structures, such as tax equity partnerships, where investors provide capital for tax benefits. This arrangement lowers the cost of capital for the project developer, making the project more attractive. Beyond tax credits, government grants and state-level rebates further reduce development costs, encouraging project construction.

Community solar projects also secure debt financing. Commercial banks, credit unions, and various government-backed loan programs provide capital for construction and operational costs. Lenders assess the project’s projected cash flows from electricity sales and REC revenue to determine loan terms, with debt often covering a large portion of the project’s capital needs.

Equity investment is a fundamental component, with private investors, private equity firms, or specialized clean energy funds contributing capital for an ownership stake and a share of future profits. Long-term contracts, such as Power Purchase Agreements with utilities and subscriber agreements, provide predictable revenue streams that are crucial for attracting both debt and equity investors. These stable income projections reduce investment risk, making community solar projects appealing for the capital required for their development and operation.