About half of all American rooftops are suited to solar installations and about 0.5% now have solar. That means solar could get up to 100 times bigger than it is now. But that’s not the big news in a just-released study.

The really big news is that community shared solar is poised to reproduce the sharp upward growth that the industry has seen over the last five to six years with solar leasing, according to researchers at the Department of Energy (DOE) National Renewable Energy Laboratories (NREL). That would give the other half of households and small businesses the opportunity to buy in.

“This business model opens solar up to something like 100% of the market. Everyone. It is really an equalizer,” explained NREL Senior Financial Analyst David Feldman. “Solar has a lot of benefits but not everyone can take advantage of them right now. This business model provides that.”

New data in Shared Solar: Current Landscape, Market Potential, and the Impact of Federal Securities Regulation makes it possible for a more accurate accounting of available roof space than the 23% to 29% estimate made in 2012, co-author Feldman said.

“A surprisingly large number of people and businesses can host a solar system,” Feldman said. “But there is a very large number who cannot.”

An estimated 49% of households and 48% of businesses are currently unable to host a PV system, the study finds. “By opening the market to these customers, shared solar could represent 32% to 49% of the distributed PV market in 2020, thereby leading to cumulative PV deployment growth in 2015 to 2020 of 5.5 GW to 11.0 GW, and representing $8.2–$16.3 billion of cumulative investment.”

The rooftop market

The main reasons households do not have solar-suitable roofs are (1) they are renters and/or (2) they have inadequate roof space.

To be solar-suitable, a residential roof has to have the minimum of 10 square meters of contiguous area needed for a 1.5 kilowatt system, meet appropriate shade and slope thresholds, and face flat, south, east, southeast, west, or southwest.

For businesses, the main reasons are multi-business buildings offer too little roof space for all tenants and/or inadequate roof space is available for a large enough PV system to cost-effectively produce enough solar energy-generated electricity to meet the business’s demand.

For a business roof to be considered solar-suitable, it must have enough space for a system that will generate at least 20% of the business’s electricity demand. That would be approximately 15% of the square footage the business occupies, according to the Energy Information Administration’s Commercial Building Energy Consumption Survey (CBECS).

There are also ways that roofs may be unsuited for solar that aren’t readily quantifiable, Feldman added. “There are reasons to think these numbers may under-represent the amount of businesses and homes that can’t go solar.”

Sector leader Clean Energy Collective’s Policy VP Tom Hunt called the assumptions that led to the study’s numbers “conservative.”

Shared solar is becoming “the ‘fourth vertical’ of the solar industry” and taking it “beyond what would have been thought possible just a few years ago,” added SunShare VP J.W. Postal.

The newness of 'shared solar'

Shared solar is so new that even the terminology is just beginning to be standardized.

Community solar is the familiar umbrella term, explained DOE Sunshot Fellow Anna Brockway. “The defining characteristic is that community members come together to enable greater deployment of solar energy.”

Community solar includes group purchasing models, crowdfunding, and donation-based models, she said.

Shared solar is a subset of community solar. “Multiple participants directly benefit from the energy produced from one solar array,” Brockway explained. “There is something being reflected on their electricity bill, a tangible connection to the system.”

The business models that create that tangible connection are still emerging, the study explains. “Shared solar arrays can be hosted and administered by a variety of entities, including utilities, solar developers, residential or commercial landlords, municipalities, community and nonprofit organizations, or a combination thereof,” it reads.

The array’s electricity is typically allocated to participants who can “own, lease, or subscribe to a specified number of panels or a portion of the system and typically receive electricity or monetary credits in proportion to their interest in or share of the project.”

Another way to participate is to purchase kilowatt-hour blocks of an array’s generation. “Depending on the regulatory framework, residential, commercial, nonprofit, and municipal entities may be able to participate,” the study explains.

Much remains to be clarified. Over half of all shared solar programs currently being tracked are less than two years old and many are just proposals or plans, the study reports. “Owing to the infancy of the market, there is also a lack of legal precedent, market research, and data on project successes.”

This uncertainty creates the impression of risk and makes it difficult to attract customers or investors. “Under these circumstances, investors may charge a higher rate of return, making project financing more challenging,” the study concludes. “Standardizing shared solar regulatory frameworks and contracts could create more transparency and consistency for investors and consumers and lower overall project development costs.”

Tax laws, state laws, and utilities

Use of the 30% federal investment tax credit (ITC) becomes more complicated in shared solar. Partnerships and sole proprietorships have limitations that “may exclude individuals, small developers, cooperative utilities, municipalities, and nonprofit entities.”

Single entities can take advantage of the ITC but shared solar projects involving multiple entities can face allocation challenges.

Utility ownership is disadvantaged by a regulation that limits the utility from passing on “the full advantage” of a solar project’s tax benefits to the rate base without “normalizing” it, the study explains. “Owing to this normalization issue, many utilities have not purchased solar assets.”

Nevertheless, utilities “see this as a better way of solar deployment because it gives them more flexibility in the way the billing mechanism is set up and where the system is located,” Feldman said.

A few states—most notably Colorado, Minnesota, and Massachusetts—have opened up participation by enacting parameter-setting laws.

But 23 of the 41 utility-offered shared solar programs are in states with community solar legislation, Brockway said. “Where utilities have offered these programs and there are no state laws, the utilities essentially are free to determine how they will do the project, create the offer to their customers, and see who participates.”

Securities laws

Because a shared solar program involves multiple parties investing in a single structure and deriving benefits, a shared solar program somewhat resembles a stock or a bond and may therefore be required to register with the Securities and Exchange Commission (SEC).

“If a shared solar program is set up to service the energy needs of the consumer, it is less likely to be treated as a security,” Feldman explained. However, if it is structured as a security and does not qualify for exemption, the developers have to register with the SEC.

“That unnecessary friction makes financing and development a lot more complicated and costly,” Feldman said. “We are not saying an SEC issue will stop shared solar. We are saying there are uncertainties.”

Most developers have relied on a landmark “no-action letter” from the SEC to CommunitySun, permitting it to continue selling “interests in shared solar installations via a ‘SolarCondo12’ framework,” the study reports.

“The U.S. Supreme Court identified four criteria for investment contracts in the case, Securities and Exchange Commission v. W.J. Howey Co. (1946),” NREL explains.

A SolarCondo purchase from CommunitySun met only three of the Howey Test investment contract criteria. It was an investment of money in a common enterprise based on the efforts of a promoter or a third party, but there was no “expectation of profits.”

Participants should understand, NREL warns, “the way a shared solar compensation framework is structured and marketed—that is, whether it could be seen or used as a financial play as opposed to simply providing a mechanism for the use of renewable energy or credits for that energy at an individual’s meter—can have an impact on whether an interest is viewed as a security under federal law.”

With more shared solar, there will be more no-action letters from the SEC, Feldman said. With enough no-action letters, the SEC could issue a staff legal bulletin, which will more broadly free-up developers. Ultimately, the courts must decide what is and is not a violation of federal securities laws.

Shared solar companies have needed to think about securities laws “since the founding of the industry in 2010,” said Sunshare Business and Communications Director Karen Gados. “For companies who do not register with the SEC, it's important to message carefully to customers, and not to promise 'returns' — they are simply choosing to purchase energy for their home and business consumption.”

The great equalizer

“In that it offers solar to the half of households that didn’t have access before, shared solar is a great equalizer,” Feldman said. “The real question isn’t so much whether shared solar can be put on the grid but how it is put on the grid and how it is compensated.”