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As an Illinois agency considers final rules for a highly anticipated community solar incentive program, a developer’s recent misstep illustrates the intense competition developers face for a chance to participate.

A Minnesota solar developer sparked criticism from the industry last month when it told a central Illinois zoning board it didn’t plan to develop a contested local project but wanted a permit anyway in order to get a “lottery ticket” for the state’s solar renewable energy credit (SREC) program.

The company, Innovative Power Solutions, withdrew its application after the outcry, but some say the incident points to a potential pitfall with the way the state intends to award the credits. The company did not respond to interview requests.

Illinois is preparing to raffle off thousands of contracts for renewable credits as part of a 2016 legislative mandate to expand community solar. Industry leaders estimate demand will be ten times greater than the number of available contracts for credits, which will be make-or-break for many projects. The credits will be purchased by utilities, and procured by the Illinois Power Agency, which procures power for the state’s utilities.

All that demand is prompting a gold rush at local permitting boards across the state, which in many cases need to sign off on projects before they can be entered in the lottery. Under the program’s draft procedures, though, once a company receives a credit it could transfer it to another project in its portfolio.

Critics worry that clause is encouraging developers to initiate projects they don’t intend to or don’t have the ability to complete, which is why the Minnesota company’s comments to the Marshall County Zoning Board struck a nerve.

Lottery rules a work in progress

Under a process sparked by Illinois’ 2016 Future Energy Jobs Act, community solar projects of up to 2 megawatts are eligible for SREC contracts. Given the massive interest in the program, the Illinois Power Agency plans to hold a lottery to decide which projects will get SREC contracts. Applications for the lottery open in January.

In order to enter into the lottery, a project must have control of the proposed site (through a lease or ownership), must have a “non-ministerial” permit if one is required for the site and must have an interconnection agreement with the utility. A non-ministerial permit involves a discretionary judgment from local officials based on various factors, rather than an objective review of whether a given request meets established standards. Some jurisdictions would require such permits for solar, others would not.

Final procedures determining how SREC contracts for community solar will be awarded have not yet been released, but they are expected in coming days or weeks. Solar developers and entities seeking to develop community solar are basing their plans on a draft of rules released earlier this fall; the power agency is reviewing comments on those rules before issuing a final version.

The draft procedures allow developers to switch SREC contracts they are awarded for one project to another project. SRECs — which are bought by the power agency — aren’t actually paid out until the project is built and operating. Proponents of the ability to switch SREC contracts from one project to another argue that if a developer is proposing multiple projects, it makes sense to help them ultimately build the one with the best financial outlook, the quickest interconnection time or other factors that make it more beneficial than the project that received the SREC contracts through the random lottery.

Two long lines for projects

The long first-come-first-served line for interconnection — even after an interconnection agreement is signed — has a lot to do with it. If a project that is awarded an SREC contract is so far back in the line for interconnection that it can’t get built in the near future, the SREC contract may not be used, depriving the state of potential solar development.

“We now have two lines in Illinois for community solar projects,” said MeLena Hessel, a policy advocate for the Environmental Law & Policy Center. “You need to get through your interconnection to get connected to the system. Then you need RECs still to go forward. When we started getting a lot more interest in the Illinois market than there was capacity in the program, the IPA decided they would use a lottery to decide the folks who get the REC contracts. And the interconnection is a first-come-first-served line. So the result absent something being done is a mismatch” between projects awarded SREC contracts and projects assured of timely interconnection.

Critics of the ability to transfer SREC contracts also worry that since the requirements for entering the lottery are relatively easy to meet, developers with less impressive track records or less capital may be awarded SREC contracts over more experienced and financially stable developers. (This has not been publicly alleged against the Minnesota company, which is considered a veteran and respected solar developer in its home state.) In a worst case scenario, SREC contracts may be awarded to developers who don’t actually have the ability to develop the project, meaning more SRECs “go to waste.”

Hessel said she can see the logic behind allowing developers to shift SREC contracts, but the Environmental Law & Policy Center and other clean energy groups opposed the measure in part because of fears of developers submitting many proposals in hopes of increasing their chances of getting SRECs, making it a “developer lottery instead of a project lottery,” Hessel said.

Incentivizing the right thing

Sarah Wochos, director of policy and business development for Borrego Solar in the Midwest, recently told Greentech Media, “We want to incentivize people to do the right thing — the right thing being entering legit projects, as opposed to stuffing the program and the process with the kind of fake projects in order to get an extra shot at getting a lottery ticket.”

Borrego Solar however supports the ability for SREC contracts to be switched.

“With this rush on the program,” Hessel added, there’s also the concern that community organizations or groups of residents hoping to develop a community solar installation in “just one location could get squeezed out” by developers flooding the lottery with applications.

Hessel stressed that it is still unknown whether the final rules will indeed permit switching SREC contracts from one project to another; the power agency could still decide to disallow it.

The rules expected to be released soon will determine the way initial rounds of SREC contracts are awarded for community solar. Under the state’s 2016 energy law, a lottery will be used to determine what projects get SREC contracts if the demand for SREC contracts for a given type of solar exceeds capacity by more than 200 percent. Currently only community solar meets this criteria, but intense interest in developing commercial and industrial solar could also mean a lottery for that sector.

Solar industry representatives and advocates have proposed measures that they think would improve the community solar lottery system in future rounds. A key proposal is to require that collateral funds be required in order to make a bid. The collateral could be returned if the bid is not accepted, but being forced to put up money upfront would weed out less-established developers and less-serious proposals, as proponents see it.

The requirements for entering the lottery could also otherwise be more stringent, including a requirement that projects already be under development. Or the ability to switch could only be offered to projects that were proposed before it became known that switching might be allowed — thereby preventing proposals submitted largely in a bid for SREC contracts from being used that way.

Ultimately solar industry backers say the confusion caused by massive interest in SRECs for community solar is a good problem to have, and one they hope can be better-addressed in the future, avoiding the kind of speculation that has caused problems in community solar programs in other states.

“We’re going to have to go back to the drawing board,” Hessel said.

Kari Lydersen

Kari has written for Midwest Energy News since January 2011. She is an author and journalist who worked for the Washington Post's Midwest bureau from 1997 through 2009. Her work has also appeared in the New York Times, Chicago News Cooperative, Chicago Reader and other publications. Kari covers Illinois, Wisconsin and Indiana as well as environmental justice topics.