Community Solar Collective Gives Member-Owners Power — Episode 127 of Local Energy Rules

Timothy DenHerder-Thomas:

Well, I think, I think we really need to think about investing in cooperative ownership of energy as the long game. I don’t think it’s going to dramatically change how much renewable energy we install nationwide in the next year or two, but I think it can dramatically transform both how communities can own energy on the scale of tens of gigawatts on the timeframe of five to 10 years from now. And even more importantly, I think it can transform how a critical mass of the American people think about renewable energy.

John Farrell:

The federal government recently extended solar tax incentives for two more years, but unfortunately the structure of these incentives continues to bias against renewable energy projects that capture the most financial value for ordinary Americans. Timothy DenHerder-Thomas, general manager of Cooperative Energy Futures, joined me in January, 2021 to talk about a new initiative, the People Solar Energy Fund, to make it easier for cooperative and community-owned renewable energy projects to receive the same financial federal solar benefits as private companies. I’m John Farrell, director of the Energy Democracy Initiative at the Institute for Local Self-Reliance, and this is Local Energy Rules, a bi-weekly podcast sharing powerful stories about local, renewable energy. Timothy, thanks so much for taking the time to join us.

Timothy DenHerder-Thomas:

Thanks for having me.

John Farrell:

I wanted to start off by giving people some background — you’ve been on the podcast before, and it’s been a delight to talk to you. Uh, and on those previous occasions, I realized I didn’t necessarily get a chance to ask you some kind of questions about how you got into this business, which I think a lot of folks might be curious about. I wanted to start off though, just by saying congratulations on being in Midwest Energy News is Top 40 Under 40. As an alum of that program and someone who’s no longer eligible, congratulations.

Timothy DenHerder-Thomas:

Thank you.

John Farrell:

Could you just tell a little bit for our listeners, what was it that got you into community-based renewable energy and why, why cooperative ownership was such an important part of that process for you?

Timothy DenHerder-Thomas:

Yeah, I was really involved in climate change activism as a student, and this was in the early two thousands and just continued to have a really strong sense that so much of the national conversation around addressing climate change was still, I think, hitting the issue… and this topic continues to this day as a conflict between action on climate change and jobs and economic development and opportunity for communities. And that’s always struck me as bizarre, given that fossil energy and big utilities and all of these, you know, dirty alternatives that are causing climate change are not creating very many jobs in our communities and are in fact extracting hundreds of millions or, you know, at a regional scale, billions of dollars of wealth out of communities. Whereas clean energy is an opportunity to do something different, but it also very clear to me that if we don’t focus on approaches to addressing climate change that are really putting people at the center, that are ensuring that there is wealth creation, job creation, and really a sense of like autonomy and ownership by people and by communities over this really massive transition, people aren’t going to be really bought in. And I think we’ve seen that play out in the federal political conversations around climate change again and again and again, when people don’t feel like they’re bought in, like they have a stake in this transition, like it’s a benefit for them, there’s opposition. So that’s really what got me into local ownership and community ownership of clean energy and the cooperative model. You know, as I began to learn more about it, about 10, 12 years ago, it just seemed like a really perfect fit for how do you create an entity that is a business and, you know, strives for success like a business, but has democracy at its heart in terms of member control and is generating profit and benefits, not for the welfare of one individual or, you know, elite shareholders, but really for the wealth of all the people that use it.

John Farrell:

Could you tell a little bit about how Cooperative Energy Futures has developed? So you came to this idea that the cooperative model is sort of merges this idea of like entrepreneurship and democracy. How is Cooperative Energy Futures doing, you know, how many projects have you developed, how many people are participating?

Timothy DenHerder-Thomas:

Yeah, so I’d say in the last three years or so, we’ve really emerged into a success at implementing our model really through Minnesota’s community solar garden program. Over the past three years, we’ve developed eight community solar gardens across the state. Total is just under seven megawatts of solar. These are majority residentially subscribed, community members are the primary people being subscribed. And we have about 800 households across Minnesota who are offsetting their full electricity use for the 25 year period through these projects. We’re also working on another set of similar size, actually a little bit larger volume of projects that we’re developing over the next couple of years. And we’re very excited about, you know, some of the business development and also state policy efforts that we think are going to allow us to expand even further.

John Farrell:

It’s been so great to hear about the success of Cooperative Energy Futures. You’ve probably noticed that I like to tell the story about your Shiloh Temple project in particular, as I think a really powerful illustration of what we can accomplish in a clean energy economy that is inclusive. You know, you’ve had to overcome a number of barriers though, in order to get there. I mean, the success of the past three years, you mentioned your first interest was 12 years ago in cooperatives, and it took nine years from there to actually get some stuff out there, generating electricity financing in particular. It sounds like as a problem, uh, and, and this People Solar Energy Fund is meant to address that problem and to help others to sort of pull others along behind you, I guess, in this experience of trying to do more community solar. How, how has this fund meant to help? How is it going to help overcome this barrier of financing? And could you explain a little bit more about why it’s difficult to finance community solar projects?

Timothy DenHerder-Thomas:

Sure. Historically in renewable energy finance, you need at minimum, a large, a large equity investor who can use all of the federal tax credits that are available and the way those tax credits are structured. You know, if you’re building solar on your own home as a homeowner, you can use those tax credits. But then again, you’re just generating probably a few thousand dollars worth of tax credits. If you’re building a community solar garden that maybe costs two and a half million dollars, you know, you’re generating somewhere in the range of $700,000 worth of tax credits. And once you get to that kind of private ownership level, you can only apply those tax credits to certain types of income. What’s called passive income, which usually investors or property owners have not even like high wealth working professionals, it’s not, it’s not earned income. And that essentially means that you have to have these large investors come in and agree to pay for a portion of the project in order to use these tax credits. Now because of IRS rules, those types of financing transactions are really legally complicated. And because only a small number of investors can actually take advantage of them, those investors have a lot of sway over how those deals are negotiated, basically because they can demand very favorable terms for themselves. Together that combines to create a situation where most investors only want to do very large financing packages. So what I’ve generally heard in the industry is that most private equity investors only want to finance a minimum of five megawatts. Some of them only want more than 10 megawatts or in some cases more than 50 megawatts, which if you’re a community-based organization that is just starting out to do this in your community, especially if you’re also running into the various barriers that exist with utilities and connecting to the grid, it’s really hard to get to that scale if you don’t have millions of dollars to play with.

So that that situation has really made it hard for communities to reach the scale to access financing. And additionally communities rarely have the balance sheet or financial track record to appear credible to a lot of these larger private investors who also tend to want to own the system long-term or really capture all of those benefits for their private investment, as opposed to sharing that control and revenue with the community so that the community can really maximize the long-term benefit. We figured out how to do this for Cooperative Energy Futures by, you know, kind of that very long effort of figuring out how we get to scale. And there’s a handful of other co-ops around the country, particularly co-op power in the, in the Northeast that are on very much the same trajectory of getting to scale. There’s also many dozens of other grassroots and community-based groups who are starting to work on this in their communities, but aren’t yet at a place where they can build five megawatts at a time. Maybe they’re doing one megawatt, or maybe they’re doing 200 kilowatts, which in and of itself is really not going to lead to a sustainable or scalable model for financing because you’re kind of cut off from all of the major players and you don’t really have any power in that relationship. So what we’ve done by forming the People’s Solar Energy Fund is effectively created an alliance of all of these local groups around the country who can, number one, pool their projects. So you’re financing projects in many different states together, which is very attractive to financers. It allows us to get a larger overall scale. Um, and it allows us to, because we have partners at the table, um, like CEF, like Co-op Power, like some of our others who have our other members who have more experience in the process, it allows us to have kind of a, a much stronger negotiating position in the structuring of those relationships.

It’s also attractive to more like, social impact or friendly capital investors, for example, foundations that are making investments out of their endowments or, you know, other socially responsible investing companies to agree to put in much lower interest debt to capital, which effectively allows us to get better financial performance on the projects overall, as we’re relating to those larger equity investors. So it’s a combination of getting to scale, having the expertise and the kind of technical assistance and how to make a project ready for financing and having more leverage because we’re kind of organizing a market.

John Farrell:

I want to reference and talk to you a little bit about a blog post I wrote. I now have, about four and a half years ago after one of our conversations about the tax equity investor, I had been doing some analysis in 2016. It was just at the time when the federal solar tax credit was going to be expiring along with the wind tax credit. And there was a fairly significant negotiated effort to extend them — the extension of which actually just ran out at the end of 2020 for wind and solar was stepping down and then they’ve been extended a little bit, but the piece I want to talk about is this question, and I should reference the name of the post. So that is on our website. We’ll link to it in the show notes called “further thoughts on the economics of losing the federal solar tax credit.” And what it really looks at in this analysis is this sort of twofold issue. One is the one that you referenced already about most of the time with these kinds of projects, the amount of tax credit you’re talking about like $700,000 is way more than community institutions could use, even if they were taxable entities. And, and that there are restrictions on the kind of income. So generally you don’t have the opportunity to finance locally in a way that you would. And, and so we did a comparison of that showing very significant difference in the cost of energy from a solar array that could be locally financed versus one that requires, or rather that for an, you know, based on how much of that tax credit could be captured sort of natively by that community solar project. But then we also have with these tax equity partners, sort of a range of return on investment that these folks are interested in.

And this gets to that question about leverage that you were talking about. So in our chart in this post, we sort of talked about how at a 6% return on investment for a tax equity investor and based on the numbers that we had at the time, a community solar project might cost like 8 cents a kilowatt hour for the energy it produces. But if it’s, if the investor is demanding an 11% annual return on investment, that rises to 9 cents. So like their demand, that negotiation, isn’t just one about how you finance the project on the front end. It also really affects the competitiveness of the electricity from the project on the backend. It sounds like this is part of your goal, right, is not just to address this issue of actually being able to capture the tax credit, but being able to cut a better deal with tax equity investors so that these projects, uh, can be more competitive.

Timothy DenHerder-Thomas:

Yeah. And you know, the interesting thing with the cooperative model is that you can really structure the rates you’re offering to subscribers to create a combination of front end and backend benefits and negotiating around tax equity kind of gives you the space to decide how you’re going to allocate it on the front end. You can try and capture the benefit by offering subscribers a lower subscription price. Like you’re saying, you know, instead of charging 9 cents, you’re charging 8 cents or whatever the rate pencils out to be. And that’s a direct savings to community members through lower energy bills or lower net energy costs. However, it also creates space if you’re, you’re already delivering what your subscribers feel as enough upfront savings by offering a rate at 9 cents, that’s essentially generating more long-term profit in the cooperative that can then either be distributed as cash distributions down the road, or reinvested in future community infrastructure, which is basically building equity for members that is investing in other things that are saving energy, which could be, you know, home insulation or micro grid upgrades, or, you know, district heating or any, anything else that we want to invest in. So again, the kind of the, the opportunity of a co-op is that you kind of get to ask this question of how much of the benefit are you going to distribute to members immediately on an individualized basis through their lower energy bills, and how much of that value are you going to distribute to members through long-term investment in future solutions that benefit members and member communities, but yes, the, the negotiation around tax equity, it gives you more space to do either of those things.

John Farrell:

Intriguing too, because of what it means in terms of choosing as a customer between a cooperatively owned community solar developer, like Cooperative Energy Futures, and a just another private company that could provide you a subscription is that if that private company looks at this and says, Hey, we could do a subscription and sell enough of them at 9 cents, rather than 8 cents. They’re the ones that are going to pocket that profit as a private company. Whereas in the cooperative model, I’m going to win either way. I’m either getting a better deal on my bill, or I’m going to see a return in terms of the way the co-op can reinvest that money in the future, because I’m a part owner of the system. I think, I think it’s so interesting. Cause you know, there’s nothing, like, there’s nothing wrong with the idea of these private companies doing this. I mean, it’s a fundamentally American and capitalist thing, but it’s really, I think, important to this notion about how we more broadly share the economic benefits of a clean energy transition to talk about how cooperative models are so important to this. And they’re democratic, too. I mean, that’s the other thing, why don’t you just talk a little bit about that? Like how are decisions made in the cooperative?

Timothy DenHerder-Thomas:

So, and it’s different in different co-ops so I’m speaking mostly about Cooperative Energy Futures, but it’s, it’s different for other co-ops. But for us, I would say right now we have a pretty conventional board based organizational structure. So most of the key policy decisions are made by a board of directors and that board of directors is elected by the membership. So most of our members day-to-day are not very involved in decision-making. I’d say we’re still at a stage where most of them are just kind of like getting used to the process of being part of a co-op, but they, they vote for the board of directors. So it’s democratically elected and they can also run as a member of the board of directors. And we’ve had many of our members run and our board is made up of members over time. We’re really interested in figuring out how we can support more and more kind of local clusters and members creating, envisioning, and using the co-op to launch more projects in their communities so that there is more of that like direct participation, direct decision-making. But I wouldn’t say we’re not there yet as a, as a co-op just in terms of how involved members are, but it’s very much a, you know, anyone who wants to get more involved is very welcome to it’s just how much can we invest in, in actively equipping and supporting members to do that. There are the co-ops that have much more of a direct democracy model. And I think over time, that’s where a lot more, this trend is going to go.

John Farrell:

I feel like you sell the democracy element of Cooperative Energy Futures a little short though, because in contrast, if I’m an investor in a private company like Apple or Tesla or something, I get to vote on the board of directors. But my vote share is based on how much stock I own.

Timothy DenHerder-Thomas:

Definitely that’s a key difference in a co-op, is in a co-op all of the voting for the board is one member, one vote. It’s not based on your investment or your size of your purchases, right?

John Farrell:

We’re going to take a short break. When we come back, I ask about the impact if the People’s Solar Energy Fund succeeds, what policies would help, and how you can be involved. You’re listening to a Local Energy Rules interview with Timothy Den-Herder Thomas, general manager at Cooperative Energy Futures, about making community owned, renewable energy easier for everyone.

MIDWAY PITCH

John Farrell:

So I want to come back, I love all of these different elements of the discussion about cooperative, clean energy development, but want to come back to the People Solar Energy Fund for a minute. It of, to two questions I’m thinking about one is sort of broadly, what’s the impact if you’re successful here, how does this improve the shift to clean energy in terms of the speed at which we can deploy more clean energy, the kinds of folks that can benefit from it? And, and also how quickly can it scale up? Because while it’s really exciting that Cooperative Energy Futures has like eight megawatts in the ground and eight megawatts in the pipeline, you know, we’re talking about, I’m obviously involved in this federal project and I think you’ve weighed in on a little bit called 30 million solar homes. We want to do 150 gigawatts of solar. And we are very equity focused in that project – thinking about how do we make sure that the dollars are spread very widely and especially folks who have been left out of the clean energy transition so far, but I’d love to see more cooperatively owned community solar as part of that. How can that scale up faster?

Timothy DenHerder-Thomas:

I think about these sort of questions very much from an entrepreneur’s mindset. So I think about this question, looking at a situation right now, where there are very, very few players that have the capacity and skills and resources to develop and make community-based clean energy. And the players that do are still pretty under-resourced and small. I think of this work as the continuous process, both through building projects and building businesses, but also through the policy and advocacy work of creating the capacity and tools for those groups that are already in the running to scale up quickly and simultaneously getting far more groups to a place where they can build and develop projects. I think also as Cooperative Energy Futures with the right resources could easily be doing 30 megawatts a year, or 50 megawatts a year, or something on that order of magnitude. I also think with the right investments in technical assistance and training and financing, we could have a hundred or 200 other similar groups across the country like Cooperative Energy Futures. It’s probably going to take us three or four years to get to that point. So I think, I think we really need to think about investing in cooperative ownership of energy as the long game. I don’t think it’s going to dramatically change how much renewable energy we install nationwide in the next year or two, but I think it can dramatically transform both how communities can own energy on the scale of tens of gigawatts on the timeframe of five to 10 years from now. And even more importantly, I think it can transform how a critical mass of the American people think about renewable energy. And I think that that starts to change the political dynamic and it starts to change how we talk at state and federal levels about the need to act on climate change and the need to advance renewable energy from something that is controversial and politically polarized to something that is just a good deal for our whole community. And I think that’s, that’s really the key shift that allows us to set different priorities for how utilities are regulated for how the grid is built out and for how communities have rights in that.

John Farrell:

I want to wrap up, I mean, first of all, just say thank you for your work. I should say I’m not only a delighted fan of Cooperative Energy Futures, but also an investor and ended up getting solar put on my own house through another cooperative model, a group purchase model through Solar United Neighbors, but also I’m an investor in Cooperative Energy Futures, just because I think that it is such a great model. So it’s nice to be able to participate in a way even when I’m not a community solar subscriber. And maybe that can get to my last question here about how folks can help. I want to ask you about it. Two ways, sort of one is like the personal way. Are there things that folks can do, whether it’s joining a project or being an investor in a cooperative enterprise, but also like what are the policy things? We’ve got a new president being inaugurated today. In fact, just in the last hour, at the time of this conversation. What are the policies at the federal or state or even local level that would make this kind of model easier to do relative to what it is today and how can individuals help not just on that policy front by of course supporting that kind of policy, but what can they do individually as well?

Timothy DenHerder-Thomas:

I’ll start with the individual level. You know, if you are, if you’re here in, in Minnesota, you can work with us as Cooperative Energy Futures, and there’s a number of ways you can participate. If you’re currently an Xcel Energy customer, you can be, become a subscriber and become a member. You can become a member, even if you’re not a subscriber. And we do currently offer investment opportunities. Like the one that you’ve, you’ve participated in John, you know, where people can actually invest and earn a dividend from helping provide capital to this effort, which allows us to kind of maintain that community ownership, stake. So people can invest. People can subscribe, you can become member owners of, of cooperative energy futures. If you’re in a different state, there’s a lot of other existing or depending on your region, maybe emerging groups that are doing similar things. I mentioned Co-op Power in the Northeast and there’s a co-op in the Bay area called People Power Solar Co-op, there’s dozens of others in different communities. I’m not going to go through a whole list, but groups that are working to, to make these sorts of things happen, and those are ways to plug in in your own community, right.

John Farrell:

I’ll interrupt really quick and ask, is there a list somewhere of those kinds of organizations?

Timothy DenHerder-Thomas:

It’s a growing list. We don’t yet have a member list, um, on a public website for People’s Solar Energy Fund, but we are in the process of kind of pulling together, how do we, how do we want to publicly display that information, given that there’s a wide range of different groups at different stages in their, in their work, but to get to the second half of your question at the policy level? Yeah, I think there’s a lot of very important things that we need to push for at state, on state and federal policy to make this sort of model happen. I’d say first and foremost is just state rules or theoretically, we could even do this through a federal law that says utilities are required to offer virtual net metering, meaning providing bill credits for customers when the system is not on their own roof and allowing projects to connect to the grid with a compensation rate that is adequate for projects to pencil. Sometimes that’s explicitly called a community solar model. It could offer, you know, other types of clean energy as well, but state authorizations that authorize virtual net metering and allow projects to connect to the grid with clear pricing that enables the projects to go forward.

Second at the federal level, I think is really reforming and restructuring this federal tax incentive approach, both so that it can be a direct cash incentive, you know, equivalent amounts of dollars, but not just limited to those, those investors who have the certain type of tax equity, so that individuals, co-operatives, non-profits, cities can all make these sorts of investments and get the same benefit that a private corporation does. And you could also start to look at how do you start to scale those incentives so that there’s higher incentives for projects that are community-based community owned, support low-income communities and communities of color really start to, uh, in fact, I think of it as almost like level the playing field, given the long histories of economic and racial injustice in this country. So that it’s, it’s not just all flowing towards the big corporate players.

There’s a bunch of other things that we need to do at the state and federal level around changing how interconnection works, making it easier for cooperative businesses to form and raise capital because there’s all of these securities exchange commission restrictions that are intended to protect people, but a lot of the time prevent people from investing in the local economy. There’s, there’s a number of different things that we need to do, but I would, I would really name that state-based or potentially federal based community solar policy and transforming the, the federal incentives around clean energy as the top two.

John Farrell:

If folks wanted to learn more about these kinds of things, obviously ILSR has written a lot about some of these reforms, especially around the tax credit and community solar laws. In fact, we’re going to be releasing our annual community power scorecard, which has focuses specifically on state policy and kind of lists these suites of state policies that make community level decision-making around renewable energy, easier. Do you, does Cooperative Energy Futures have anything like that, kind of a list of like key policies that we could reference?

Timothy DenHerder-Thomas:

Yeah. I mean, honestly, we, we mostly use resources including the ones ILSR provides, but also the shared solar. Um, I’m gonna forget the name of the website. You probably know what I’m talking about, that tracks those laws to just kind of track what’s going on. I think more of what we have to contribute alongside other members of the People Solar Energy Fund is starting to track where are these community-based efforts taking place and starting to come up with more of the policy recommendations that are kind of more on the cutting edge of where federal policies should be going. I did release some policy memos in conjunction with Johanna Bozuwa at the Democracy Collaborative on the next system project that it talks about some of these incentive redesigns and, and national community solar policy as well. But yeah, I mean, this is very much an emerging space in an emerging sector that is dozens of groups coming together. All of whom are also doing a ton of things in the local community. So having supportive organizations like ILSR that can help knit together some of the information and data at the national scale is a key contribution to making that all work.

John Farrell:

And I was going to say, if you have ways that you want us to help map where some of these community led efforts are happening, we not only be happy to do some conversations with them on the podcast, but also to put them on our community power map, because that’s another purpose of that map is not just to highlight the policies that allow this stuff to succeed, but to also try to draw out those projects and let people see that it’s happening. Timothy, thank you so much.

Timothy DenHerder-Thomas:

Thanks for the invitation, we’ll follow up.

John Farrell:

It’s always a pleasure to talk to you and to share the great work that you’re doing. And I’m so glad to hear how it’s expanding across the country.

Timothy DenHerder-Thomas:

Thank you for having me and, uh, again, thanks for all the work that you do.

John Farrell:

Thank you so much for listening to this episode of Local Energy Rules with Cooperative Energy Futures General Manager, Timothy Den-Herder Thomas, about the People’s Solar Energy Fund. On the show page, look for links to Cooperative Energy Futures, Co-op Power, the People’s Power Solar Co-op, as well as ILSR’s analysis of the federal tax incentives and some policy recommendations to level the playing field for community owned, clean energy. You can also find previous podcast interviews with Timothy and Lynn Benander of Co-op Power. At our website, you can also find the community power scorecard ranking States based on their renewable energy policies and an interactive community power toolkit for examples of how cities and communities have accelerated solar deployment. Local Energy Rules is produced by myself and Maria McCoy with editing provided by audio engineer Drew Birschbach. Stay tuned back into Local Energy Rules every two weeks to hear more powerful stories of communities taking on concentrated power to transform the energy system. Until next time, keep your energy local and thanks for listening.