In the fall of 2013, Highland United Methodist Church (HUMC) in Raleigh, North Carolina, flipped the switch on a 50-kilowatt rooftop PV system. Installed by Atlanta-based Inman Solar, the system was developed using a unique public-private partnership model organized by the Appalachian Institute for Renewable Energy (AIRE, aire-nc.org), a nonprofit group based in Boone.
With assistance from AIRE, the church’s “green” committee sought congregation members willing to invest in the church’s PV system. Nine members stepped up, each contributing $10,000 to $30,000 to the project. The investor group formed a limited liability corporation (LLC) to capitalize on tax credits and incentives that are designed to promote renewable energy development but restricted to businesses and high-income individuals.
“As a nonprofit, the church could not qualify for the tax credits that make PV systems an affordable option. AIRE showed us that there is another way to achieve our solar energy goals,” says Carneal Downey, a congregation member who invested and helped organize the project.
The Highland United Methodist LLC members are leasing the system to the church, operating and managing the PV system for the next four years. During this time, the project investors will recoup their investment through accelerated depreciation, the federal investment tax credit, and the sale of produced electricity and renewable energy credits (RECs). Once the investors recover their investment, the LLC plans to donate the system to the church, generating a charitable tax deduction for the investor group. In the end, investors will walk away having recouped most, if not all, of their initial investment, and will have helped the Church protect against the rising cost of fossil fuel-based energy. While the investors could have profited from the investment, they chose to structure the deal to the church’s advantage.
AIRE executive director Steve Owen founded the group in 2007 as an outgrowth of his work to end mountaintop removal for coal mining in Appalachia. His goal, he says, was to start the renewable energy conversation in Appalachia and illuminate the importance of community-scale projects in reducing fossil fuel dependence. Recognizing that the upfront costs of PV systems are a barrier for most nonprofit and community organizations, Owen began researching financing options. He found inspiration in the John Deere Corp., which takes out loans to help farmers finance multimillion-dollar wind turbines. As the initial tax-equity investor, the corporation covered the upfront cost of the systems and then used tax write-offs to make a return on their investments. For a typical five-windmill deal, selling the electricity can generate between $1 million and $1.5 million per year in revenue. The federal production tax credit is worth about another $500,000 annually. After 10 years, when Deere paid off the loan and recouped its investment, plus profit, the ownership structure flips, with the farmers becoming majority owners of the systems.
Owen wondered if the model could work for nonprofits and community organizations. “Tax law is very complicated. The law allows a number of credits for companies and corporations, and for wealthier individuals who have a certain level of passive income from dividends and interest,” says Bob Olsen, a CPA and tax attorney who consults on AIRE projects. “While the average person cannot benefit from these credits, a group of average people united in a legal structure, such as an LLC, can.”
In 2009, Owen tested the model with a pilot project in downtown Boone: a 2.4-kilowatt PV system installed on the building where AIRE’s office is located. He organized the project as an LLC, with five investors who covered the upfront cost of $8.34 per watt. In this case, the group made a modest return on their investment through federal and state tax incentives (including North Carolina’s 35% income tax credit), and by selling the electricity produced under a power purchase agreement with the building’s owner.
Since then, AIRE has assisted with the development of seven projects, and has 10 others planned for the coming year, including its largest project so far—a 1-megawatt ground-mounted PV system, plus a 50 kW solar carport (with two EV charging stations), at the Salisbury campus of Rowan-Cabarrus Community College. AIRE covers its administration costs by collecting developer fees—typically 10% to 20% of the project cost—from the project investors. When possible, AIRE waives their fees or secures grant funding to cover their costs.
AIRE is helping community solar find its place in North Carolina, but with the predominance of coal and nuclear energy, Owens says that the state faces an uphill challenge with renewable energy. “There’s a lot of tension between the state’s key stakeholders over our energy future and what ought to be, but we’re getting there. While North Carolina may never be a California, Massachusetts, or New Jersey where renewables are concerned, we’re making strong headway for a southern state,” he says.
Helping drive the state’s RE development is its renewable portfolio standard—the only mandatory one in the Southeast. In 2012, North Carolina installed 124 MW of solar-electric capacity, ranking fifth nationally, but the momentum might slow if the state’s tax credit—equal to 35% of the cost of eligible RE systems—is not renewed in December 2015. Last spring, the legislature lowered marginal tax rates, making this credit less valuable to investors. Reductions in incentives—namely the expiration of the federal tax credit in 2016—could threaten the longevity of AIRE’s model, but Owen remains confident that rising costs of fossil-fueled electricity, paired with declining PV prices and growing demand for RECs, will keep AIRE’s approach viable for years to come.