A community solar plan would save Xcel customers money — but cost some cities and schools millions

The city of Winona signed up for Minnesota's community solar garden program mainly to save cash, taking advantage of bill credits from Xcel Energy in exchange for subscribing to a shared solar plot built by independent developers.

But as the state program faces criticism for its growing cost to Xcel's customers, utility regulators are grappling with a hotly debated proposal that would shrink those bill credits.

Winona's case is one reason the idea is controversial. The city could lose more than $2 million in expected savings.

"It will be a tough pill to swallow of unanticipated expense," said John Howard, Winona's natural resources and sustainability coordinator.

Winona is one of more than a dozen local governments and school districts subscribing to solar gardens that could see a budget hit from the proposed changes, according to filings made between November and January with the Minnesota Public Utilities Commission (PUC). Winona County and the local school district also will, as well as Minneapolis and St. Paul, St. Cloud, the University of Minnesota, the Metropolitan Council, Northfield, Sibley County and Sauk Rapids.

The PUC will decide in coming months if the $48 million in annual savings to Xcel ratepayers with the formula change is worth taking a bite out of credits for program subscribers.

Cost increases lead to friction

The solar garden program was created by the Legislature in 2013 and allows utility customers to subscribe to third-party solar operations. Subscribers then get a bill credit from Xcel for the energy the utility company must take from the solar gardens.

Those bill credit rates are determined by state law and policy, and they have changed over time. In May, the PUC asked Xcel Energy to come up with a plan to switch about 740 community solar gardens — the vast majority of the program's gardens — to a new formula. The change Xcel eventually proposed in September would save $48 million in bill credits each year.

Those savings would flow to Xcel's customers, which broadly shoulder the cost of the solar program whether or not they participate in it. But in turn, solar garden subscribers would end up paying more.

The PUC and others were interested in the idea because many argue power from community solar is more expensive than energy Xcel could generate or buy on its own — and is becoming pricier.

If there are no changes, the program is expected to cost $329 million in 2024, and 93% of that will be paid by Xcel ratepayers in Minnesota. The average residential customer would pay about $7 a month for community solar in 2024, compared with $4 in 2022.

Xcel officials are not the only ones complaining. The price tag also has drawn the ire of influential state lawmakers and PUC commissioners.

"Higher than necessary energy costs threaten our clean energy goals," said a letter to the PUC written by five DFL state senators on the chamber's energy committee, including chairman Nick Frentz of North Mankato.

Subscribers decry possible change in rules

The problem is most subscribers sign 25-year contracts based on the expected bill credit rate. That means they are still on the hook even if the state program changes.

Minneapolis officials said the city would lose $440,000 in the first year and owe money to operators that run 65 gardens for the next few years if the PUC adopts Xcel's plan. Most would be a loss for the remainder of long-term contracts. St. Cloud said it would lose more than $20 million over the next two decades. The U said it would get about $1.2 million less in credits every year.

Developers who run the gardens often take a fixed fee but some get a share of the credit, meaning they also stand to lose money from a formula switch.

Defenders of the program say community solar is the reason Minnesota has a large solar industry and supplies a significant amount of the energy on Xcel's grid. At the moment, community solar dwarfs solar Xcel has built on its own. And supporters say savings by local governments, school districts and others is a public good that has benefits for all.

The Minnesota Department of Commerce analyzed the solar gardens that would be switched to the newer bill credit formula under the Xcel plan. The agency found about 25% of bill credits from those gardens flow to governments, 16% benefit public schools, 13% go to hospitals, clinics, churches and private schools and 17% go to residential customers.

"The punch will land squarely on the subscribers whose participation in community solar the Legislature has sought to incent," Commerce analysts wrote to the PUC.

About 28% of bill credits benefit private businesses and other subscribers. Kwik Trip is one subscriber that wrote in to the commission urging it to reject the proposal.

Logan O'Grady, executive director of the Minnesota Solar Energy Industries Association, a trade group that represents developers, said the organization worries many subscribers will try to get out of contracts, resulting in a flood of lawsuits. O'Grady said smaller bill credits also will hurt developers' reputations by frustrating customers who won't get the savings they expected and chill new energy projects.

"What my developers and their financers tell me is, 'How can we do business in Minnesota and trust that if we sign a contract that's going to be honored for the entire term of the contract?'" O'Grady said.

A letter signed Monday by House Speaker Melissa Hortman of Brooklyn Park and 20 other DFL lawmakers urged the PUC to reject the proposal, writing it would have "economic and public interest consequences that the legislature would have never intended."

Some asked the PUC to find a middle ground. That includes Attorney General Keith Ellison's office, which said the program cost is a burden for Xcel customers who don't subscribe but suggested some alternatives, like modifying the old bill credit formula or exempting residential and small commercial subscribers from a change.

The nonprofit Fresh Energy also recommended not including residential and small business subscribers in the switch and suggested reducing the hit on larger subscribers. "Overall, costs of the [community solar] program are significant, growing and addressing them is in the public interest," Fresh Energy said in a letter to the PUC.

Xcel itself argued in a filing on Monday that the PUC has legal authority to change bill credit rates and said it would be in the public interest to reduce program costs for its customers, but didn't take a stance on whether the commission should approve the $48 million plan or alternatives proposed by Fresh Energy and the Attorney General's Office.

The Legislature this year froze the existing solar garden program to new projects and created a new one aimed more at residential and low-income subscribers with a separate new formula for bill credits. But the gardens in question will still operate for many years under the old system.

In Winona, Howard said the city's lost savings could come over a couple of decades, meaning the change would not be insurmountable. But in the near term, what Winona pays to community solar operators would suddenly be more than what the city gets back in bill credits.

"We'd be losing money for the next couple of years here," he said.