Community Solar with Xcel Energy (NYSE: XEL)

We've been saying it for a couple of years already, but it bears repeating: Community solar projects just make sense.

When 85% of the residential market doesn't have appropriate space for a solar project, solar gardens are kind of a no-brainer. Pick a place that's good to build a solar farm, open it up to consumers who can't build their own, and massively multiply the market size.

However, it's really not that simple. The rollout of these types of projects has been anything but smooth.

In early December, First Solar (NASDAQ: FSLR) partnered with the Clean Energy Collective in its first move into community solar. At just around the same time, Xcel Energy (NYSE: XEL) launched its community solar program in its home state of Minnesota.

It was a follow-up to the company's community solar project in Colorado, which showed promise for the builders of solar gardens, but has consistently hit regulatory snags.

First, let's look at the Minnesota program.

Xcel Energy Community Solar in Minnesota

As of 2013, Xcel Energy provided approximately half of all of Minnesota's retail electricity sales and had 1.2 million customers.

Its portfolio is dominated by coal and natural gas, but in the last few years it's become a major provider of wind power, as seen in the chart below.

In the interest of increasing the amount of solar energy generation in Minnesota, the state legislature passed a bill that placed new solar requirements upon Xcel in 2013.

Part of the “Made in Minnesota” solar initiatives (Minn. Stat. § 216B.1641) required that Xcel begin operating solar gardens in the state. These gardens could be owned by a utility or any other entity, their capacity would be limited to 1 megawatt, and there would be no limit to the number of gardens that could be built within the state.

As in other places, subscribers to these solar gardens would receive energy bill credits “for the electricity generated in proportion to the size of their subscription.” The minimum subscription would be 200 Watts, and the maximum would be 120 percent of the average annual subscriber energy consumption.

The situation is nearly identical to Xcel's community solar incentive in Colorado which drew huge interest from developers in 2012. So far, that project has yielded five solar arrays around the Denver area.

It appears to have the same initial developer frenzy that the Colorado project had. Within one month of the program's beginning, Xcel received some 400 applications from developers who wanted to build the solar gardens.

Unsurprisingly, some of the companies that want a slice of the action are coming from Colorado.

Last week, Denver-based SunShare announced it had teamed up with construction company Mortenson to build solar gardens under Xcel Energy in Minnesota. SunShare is responsible for two solar gardens in Colorado Springs, and has five others in development in the Colorado Springs and Denver metro areas. It's already partnered with both Xcel Energy and Colorado Springs Utilities, and it's accepting subscriber reservations for its as-of-yet unbuilt Minnesota gardens.

But as I mentioned earlier, Xcel's move to actually offer solar energy to consumers has been a reluctant one.

Colorado Friction

Like Minnesota, Colorado voted to increase its renewable portfolio standard (RPS) in 2011. The goal was to have 30% of the state's electricity coming from renewables by 2020.

Xcel is Colorado's biggest publicly-owned utility, and it's been fighting tooth and nail to keep its energy incumbency.

This manifested itself in a proposal to restructure net metering credits. Net metering is the practice in 43 US states that gives consumers credit for generating their own solar electricity and feeding it into the grid. Xcel wanted to change the net metering policies, or else cut its solar rewards program by some 80%.

Meanwhile, the city of Boulder thought it could do better than 30% RPS if it could gather its own energy. Boulder's City Council voted to form its own municipal energy utility company several times, and it passed unanimously on May 6, 2014.

It was at that point that Xcel put its foot down, and it sued the city.

The problem was that the city needed to figure out where it would be acquiring its assets, and how its municipal grid would be separated from Xcel's.

Competiton is at the heart of all of Xcel's complaints.

But Xcel's competitive incumbency has come back to bite it in the ass. Xcel's Solar*Connect program was shot down by the Colorado Public Utilities Commission in December. The PUC said solar gardens would give Xcel an unfair competitive advantage over other rooftop solar and community solar projects in Colorado.

Even though community solar gardens open up the majority of Americans to solar power, they can still be anti-competitive when they're at the hands of a near-monopolistic energy company.

While they help encourage the adoption of clean energy, it stifles the market in a field where smaller companies actually stand a chance to compete.